<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996
REGISTRATION NO. 33-
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
NORTH CAROLINA 8731 56-1640186
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
115 NORTH THIRD STREET, 5TH FLOOR
WILMINGTON, NORTH CAROLINA 28401
(910) 251-0081
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
FREDRIC N. ESHELMAN, PHARM.D.
CHIEF EXECUTIVE OFFICER
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
115 NORTH THIRD STREET, 5TH FLOOR
WILMINGTON, NORTH CAROLINA 28401
(910) 251-0081
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
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DONALD R. REYNOLDS, ESQ. CRAIG E. CHASON, ESQ.
WYRICK, ROBBINS, YATES & PONTON L.L.P. SHAW, PITTMAN, POTTS & TROWBRIDGE
4101 LAKE BOONE TRAIL, SUITE 300 2300 N STREET, N.W.
RALEIGH, NORTH CAROLINA 27607 WASHINGTON, D.C. 20037
(919) 781-4000 (202) 663-8758
</TABLE>
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the registration statement becomes effective and upon consummation of the
transaction described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instructions, please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.10 per share............. 11,970,784 shares $27.75 $332,189,256.00 $114,548.02
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</TABLE>
(1) Represents the maximum number of shares of PPD Common Stock issuable in the
Merger. See footnote 3.
(2) The closing price per share of PPD Common Stock on July 15, 1996.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(i) based upon the 29,528,329 shares of APBI
Common Stock outstanding as of July 1, 1996 being exchanged for PPD Common
Stock pursuant to the Merger at the maximum Exchange Ratio of 0.4054.
---------------------
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- JULY 16, 1996
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
115 N. THIRD STREET, 5TH FLOOR
WILMINGTON, NORTH CAROLINA 28401
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1996
---------------------
Dear Shareholders of Pharmaceutical Product Development, Inc.:
You are cordially invited to attend a Special Meeting of Shareholders of
Pharmaceutical Product Development, Inc., a North Carolina corporation ("PPD"),
to be held at .m., local time, on September , 1996, at
to consider and vote upon the approval of an Agreement and Plan of
Reorganization, dated as of June 20, 1996, among PPD, Wilmington Merger Corp., a
North Carolina corporation and a wholly owned subsidiary of PPD ("Merger Sub"),
and Applied Bioscience International Inc., a Delaware corporation ("APBI"), (the
"Merger Agreement"), pursuant to which, among other things, Merger Sub will be
merged with and into APBI (the "Merger"), Merger Sub will cease to exist as a
separate legal entity, and each outstanding share of APBI Common Stock will be
converted into the right to receive shares of PPD Common Stock based upon a
ratio (the "Exchange Ratio") computed as follows: (i) if the Average PPD Stock
Price (as defined below) is equal to or less than $48.00 per share, then the
Exchange Ratio shall be equal to the quotient of $15.00 divided by the Average
PPD Stock Price, provided, however, that in such event the Exchange Ratio shall
not be less than 0.3125 nor greater than 0.4054; and (ii) if the Average PPD
Stock Price is greater than $48.00 per share, then the Exchange Ratio shall be
equal to the quotient of (x) divided by (y), where (x) is $15.00 per share and
where (y) is the Average PPD Stock Price less the product of 0.5 and the
difference between the Average PPD Stock Price and $48.00. The "Average PPD
Stock Price" means the average of the last sale prices of a share of PPD Common
Stock for the 10 most recent days that PPD Common Stock has traded ending on the
day which is five days immediately prior to the effective date of the Merger, as
reported on the Nasdaq National Market, rounded to the nearest cent. The average
of the last sale prices of a share of PPD Common Stock for the 10 most recent
trading days ended July 15, 1996 was $31.65. It is anticipated that as a result
of the Merger, the former stockholders of APBI will own a majority of the
outstanding stock of PPD.
You are also being asked to consider and vote upon the following
transactions related to the Merger (the "Merger Transactions"): (i) an amendment
to PPD's Articles of Incorporation to increase the number of authorized shares
of PPD Common Stock from 30,000,000 to 95,000,000; (ii) an increase of the
number of authorized directors of PPD from eight to nine; (iii) an amendment to
PPD's Bylaws to provide for the annual election of directors; (iv) an amendment
to PPD's 1995 Equity Compensation Plan to increase the number of shares of PPD
Common Stock reserved for issuance thereunder from 750,000 shares to 1,500,000
shares; and (v) an amendment to PPD's 1995 Stock Option Plan for Non-Employee
Directors to increase the number of shares of PPD Common Stock reserved for
issuance thereunder from 50,000 to 100,000.
The Board of Directors of PPD has unanimously determined that the Merger
and the Merger Transactions are in the best interests of the shareholders of PPD
and recommends that you vote FOR approval of the Merger Agreement and the Merger
Transactions. See "The Merger -- Recommendation of the Board of Directors of
PPD" for a discussion of the factors considered by the PPD Board. The directors
and executive officers of PPD and their affiliates have the right to vote, in
the aggregate, 6,938,351 shares of PPD Common Stock (approximately 75.1% of the
shares outstanding). These directors and executive officers of PPD have
announced to PPD that they intend to vote their shares FOR approval of the
Merger Agreement and the Merger Transactions. In addition, certain of these
individuals, who own, in the aggregate, 6,803,539 shares of PPD Common Stock
(approximately 73.6% of the shares outstanding), have contractually agreed to
vote their shares in favor of the Merger Agreement and the Merger Transactions.
Therefore, it is probable that the
<PAGE> 3
Merger Agreement and the Merger Transactions will be approved by the requisite
PPD shareholder vote. See "Voting and Proxy Information" and "Certain
Information Concerning PPD -- Principal Shareholders".
A copy of the Merger Agreement (without exhibits or schedules) is attached
to the accompanying Joint Proxy Statement and Prospectus as Annex A. The Joint
Proxy Statement and Prospectus forms a part of this Notice.
All PPD shareholders, whether or not they expect to attend the PPD Special
Meeting in person, are requested to complete, sign, date and return the enclosed
form of proxy in the accompanying envelope (which requires no additional postage
if mailed in the United States). Your proxy will be revocable, either in writing
or by voting in person at the PPD Special Meeting, at any time prior to its
exercise.
By Order of the Board of Directors
of Pharmaceutical Product Development,
Inc.
August , 1996
<PAGE> 4
SUBJECT TO COMPLETION -- JULY 16, 1996
APPLIED BIOSCIENCE INTERNATIONAL INC.
4350 NORTH FAIRFAX DRIVE
ARLINGTON, VIRGINIA 22203
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1996
---------------------
Dear Stockholders of Applied Bioscience International Inc.:
You are cordially invited to attend a Special Meeting of Stockholders of
Applied Bioscience International Inc., a Delaware corporation ("APBI"), to be
held at : .m., local time, on September , 1996, at to
consider and vote upon the approval of an Agreement and Plan of Reorganization,
dated as of June 20, 1996, among Pharmaceutical Product Development, Inc., a
North Carolina corporation ("PPD"), Wilmington Merger Corp., a North Carolina
corporation and a wholly owned subsidiary of PPD ("Merger Sub"), and APBI (the
"Merger Agreement"), pursuant to which, among other things, Merger Sub will be
merged with and into APBI (the "Merger"), Merger Sub will cease to exist as a
separate legal entity, and each outstanding share of APBI Common Stock will be
converted into the right to receive shares of PPD Common Stock based upon a
ratio (the "Exchange Ratio") computed as follows: (i) if the Average PPD Stock
Price (as defined below) is equal to or less than $48.00 per share, then the
Exchange Ratio will be equal to the quotient of $15.00 divided by the Average
PPD Stock Price, provided, however, that in such event the Exchange Ratio will
not be less than 0.3125 nor greater than 0.4054; and (ii) if the Average PPD
Stock Price is greater than $48.00 per share, then the Exchange Ratio will be
equal to the quotient of (x) divided by (y), where (x) is $15.00 per share and
where (y) is the Average PPD Stock Price less the product of 0.5 and the
difference between the Average PPD Stock Price and $48.00. The "Average PPD
Stock Price" means the average of the last sale prices of a share of PPD Common
Stock for the 10 most recent days that PPD Common Stock has traded ending on the
day which is five days immediately prior to the effective date of the Merger, as
reported on the Nasdaq National Market, rounded to the nearest cent. The average
of the last sale prices of a share of PPD Common Stock for the 10 most recent
trading days ended July 15, 1996 was $31.65. It is anticipated that as a result
of the Merger, the former stockholders of APBI will own a majority of the
outstanding stock of PPD.
The Board of Directors of APBI has unanimously determined that the Merger
is in the best interests of the stockholders of APBI and recommends that you
vote FOR approval and adoption of the Merger Agreement. See "The
Merger -- Recommendation of the Board of Directors of APBI" for a discussion of
the factors considered by the APBI Board. The Merger will not be effected unless
approved by the holders of a majority of the outstanding shares of APBI Common
Stock entitled to vote and present or represented by proxy at the APBI Special
Meeting.
A copy of the Merger Agreement (without exhibits or schedules) is attached
to the accompanying Joint Proxy Statement and Prospectus as Annex A. The Joint
Proxy Statement and Prospectus forms a part of this Notice.
All APBI stockholders, whether or not they expect to attend the APBI
Special Meeting in person, are requested to complete, sign, date and return the
enclosed form of proxy in the accompanying envelope (which requires no
additional postage if mailed in the United States). Your proxy will be
revocable, either in writing or by voting in person at the APBI Special Meeting,
at any time prior to its exercise.
By Order of the Board of Directors
of Applied Bioscience International
Inc.
August , 1996
<PAGE> 5
SUBJECT TO COMPLETION -- JULY 16, 1996
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
11,970,784 SHARES
COMMON STOCK, PAR VALUE $.10 PER SHARE
PROSPECTUS
---------------------
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND
APPLIED BIOSCIENCE INTERNATIONAL INC.
JOINT PROXY STATEMENT FOR
SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD SEPTEMBER , 1996
This Joint Proxy Statement and Prospectus (the "Proxy Statement") is being
furnished to the shareholders of Pharmaceutical Product Development, Inc., a
North Carolina corporation (unless the context otherwise requires, together with
its subsidiaries, "PPD"), and to the stockholders of Applied Bioscience
International Inc., a Delaware corporation (unless the context otherwise
requires, together with its subsidiaries, "APBI"), in connection with the
solicitation of proxies by the Board of Directors of PPD from holders of PPD's
outstanding shares of Common Stock, par value $.10 per share ("PPD Common
Stock"), and the solicitation of proxies by the Board of Directors of APBI from
holders of APBI's outstanding shares of Common Stock, par value $.01 per share
("APBI Common Stock"), for use at a special meeting of shareholders of PPD and a
special meeting of stockholders of APBI, respectively (together with any
adjournments and postponements thereof, the "Special Meetings"). At the Special
Meetings, the shareholders of PPD and APBI will be asked to consider and vote
upon a proposal to approve and adopt that certain Agreement and Plan of
Reorganization, dated as of June 20, 1996 (the "Merger Agreement"), a copy of
which (without exhibits or schedules) is attached hereto as Annex A and
incorporated herein by reference, providing for the merger (the "Merger") of
Wilmington Merger Corp., a North Carolina corporation and a wholly owned
subsidiary of PPD ("Merger Sub"), with and into APBI on the terms described in
this Proxy Statement. This Proxy Statement has been filed with the Securities
and Exchange Commission (the "Commission") as part of a Registration Statement
on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of PPD Common Stock which will be issued to holders
of APBI Common Stock pursuant to the Merger. This Proxy Statement also
constitutes the Prospectus of PPD filed as part of such Registration Statement.
In the Merger, each outstanding share of APBI Common Stock will be converted
into the right to receive shares of PPD Common Stock based upon a ratio (the
"Exchange Ratio") computed as follows: (i) if the Average PPD Stock Price (as
defined below) is equal to or less than $48.00 per share, then the Exchange
Ratio shall be equal to the quotient of $15.00 divided by the Average PPD Stock
Price, provided, however, that in such event the Exchange Ratio shall not be
less than 0.3125 nor greater than 0.4054; and (ii) if the Average PPD Stock
Price is greater than $48.00 per share, then the Exchange Ratio shall be equal
to the quotient of (x) divided by (y), where (x) is $15.00 per share and where
(y) is the Average PPD Stock Price less the product of 0.5 and the difference
between the Average PPD Stock Price and $48.00. The "Average PPD Stock Price"
means the average of the last sale prices of a share of PPD Common Stock for the
10 most recent days that PPD Common Stock has traded ending on the day which is
five days immediately prior to the effective date of the Merger, as reported on
the Nasdaq National Market, rounded to the nearest cent. The average of the last
sale prices of a share of PPD Common Stock for the 10 most recent trading days
ended July 15, 1996 was $31.65. It is anticipated that as a result of the
Merger, the former stockholders of APBI will own a majority of the outstanding
stock of PPD.
The shareholders of PPD are also being asked to consider and vote upon the
following transactions related to the Merger (the "Merger Transactions"): (i) an
amendment to PPD's Articles of Incorporation to increase the number of
authorized shares of PPD Common Stock from 30,000,000 to 95,000,000; (ii) an
increase in the number of authorized directors from eight to nine; (iii) an
amendment to PPD's Bylaws to provide for the annual election of directors; (iv)
an amendment to PPD's 1995 Equity Compensation Plan to increase the number of
shares of PPD Common Stock reserved for issuance thereunder from 750,000 shares
to 1,500,000 shares; and (v) an amendment to PPD's 1995 Stock Option Plan for
Non-Employee Directors to increase the number of shares of PPD Common Stock
reserved for issuance thereunder from 50,000 to 100,000.
The Board of Directors of PPD has unanimously determined that the Merger
and the Merger Transactions are in the best interests of the shareholders of PPD
and recommends that they vote their PPD shares FOR approval of the Merger
Agreement and the Merger Transactions. The Board of Directors of APBI has
unanimously determined that the Merger is in the best interests of the
stockholders of APBI, and recommends that they vote their shares FOR approval of
the Merger Agreement.
SEE "INVESTMENT CONSIDERATIONS" ON PAGE 17 FOR A DISCUSSION OF CERTAIN
FACTORS TO BE CONSIDERED BY SHAREHOLDERS IN CONNECTION WITH THEIR VOTE.
NEITHER THE MERGER NOR THE SECURITIES COVERED BY THIS PROXY STATEMENT HAVE
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement is dated, and was first mailed to the shareholders of
PPD and the stockholders of APBI, on or about, August , 1996.
<PAGE> 6
AVAILABLE INFORMATION
PPD has filed a Registration Statement on Form S-4 (as amended, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the shares of PPD Common Stock to be issued by it
in the Merger. This Proxy Statement constitutes the Prospectus of PPD that is
filed as a part of the Registration Statement. As permitted by the rules and
regulations of the Commission, this Proxy Statement omits certain information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement for further information with respect to PPD and the PPD
Common Stock.
Each of PPD and APBI is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy and information statements, and other
information with the Commission. Reports, proxy statements and other information
filed by PPD and APBI with the Commission pursuant to the informational
requirements of the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available for
inspection and copying at the regional offices of the Commission located at the
14th Floor, 75 Park Place, New York, New York 10007, and Room 3190, 230 South
Dearborn Street, Chicago, Illinois 60604. Copies of such material may also be
obtained from the Public Reference Section of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy
statements and other information concerning PPD and APBI may also be inspected
at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE MATTERS
DESCRIBED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PPD, MERGER SUB OR APBI. NEITHER
THE DELIVERY HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
OFFERED BY THIS PROXY STATEMENT OR A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
For purposes hereof, the following sections of APBI's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, as filed with the Commission,
are incorporated herein by reference: Item 10. Directors and Executive Officers
of the Company; Item 11. Executive Compensation; Item 12. Security Ownership of
Certain Beneficial Owners and Management; and Item 13. Certain Relationships and
Related Transactions.
2
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
SUMMARY............................................................................... 5
The Parties......................................................................... 5
The Special Meetings; Purposes of the Meetings...................................... 5
Principal Terms of the Merger....................................................... 6
Background of the Merger............................................................ 7
Recommendation of PPD's Board of Directors.......................................... 7
Recommendation of APBI's Board of Directors......................................... 7
Opinions of Financial Advisors...................................................... 7
Board of Directors and Management of PPD After the Merger........................... 8
Interests of Certain Persons in the Merger.......................................... 8
Conditions to Consummation of the Merger............................................ 8
Effective Time of the Merger........................................................ 8
Exchange of Share Certificates...................................................... 9
Termination......................................................................... 9
Certain Federal Income Tax Consequences............................................. 9
Accounting Treatment................................................................ 9
Regulatory Approvals................................................................ 9
Appraisal Rights.................................................................... 10
The Merger Transactions............................................................. 10
Market Prices and Dividend Policies................................................. 10
Selected Historical and Unaudited Pro Forma Combined Financial Data................. 11
INVESTMENT CONSIDERATIONS............................................................. 17
Considerations with Respect to PPD's Business....................................... 17
Considerations with Respect to APBI's Business...................................... 20
Considerations with Respect to the Merger........................................... 22
Factors for Forward-Looking Information............................................. 22
INTRODUCTION.......................................................................... 23
VOTING AND PROXY INFORMATION.......................................................... 24
THE MERGER............................................................................ 26
General............................................................................. 26
Background of the Merger............................................................ 26
Recommendation of the Board of Directors of PPD..................................... 28
Recommendation of the Board of Directors of APBI.................................... 29
Opinions of Financial Advisors...................................................... 30
The Merger Agreement................................................................ 43
Certain Federal Income Tax Consequences............................................. 49
Accounting Treatment................................................................ 51
Restrictions on Resale of PPD Common Stock.......................................... 52
Interests of Certain Persons in the Merger.......................................... 52
Regulatory and Other Legal Matters.................................................. 53
</TABLE>
3
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THE MERGER TRANSACTIONS............................................................... 54
Approval of Amendment to PPD's Articles of Incorporation to Increase Authorized
Shares........................................................................... 54
Approval of Increase in the Authorized Number of Directors.......................... 54
Approval of Amendment to PPD's Bylaws to Provide for the Annual Election of
Directors........................................................................ 55
Approval of Amendment to PPD's 1995 Equity Compensation Plan........................ 55
Approval of Amendment to PPD's 1995 Stock Option Plan for Non-Employee Directors.... 59
PRO FORMA COMBINED FINANCIAL STATEMENTS............................................... 61
CERTAIN INFORMATION CONCERNING PPD.................................................... 67
Business............................................................................ 67
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 80
Management.......................................................................... 83
Principal Shareholders.............................................................. 87
Certain Transactions................................................................ 88
Description of Capital Stock........................................................ 88
CERTAIN INFORMATION CONCERNING MERGER SUB............................................. 91
CERTAIN INFORMATION CONCERNING APBI................................................... 92
Business............................................................................ 92
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 104
COMPARISON OF THE RIGHTS OF HOLDERS OF PPD COMMON STOCK AND APBI COMMON STOCK......... 113
LEGAL MATTERS......................................................................... 117
EXPERTS............................................................................... 117
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
ANNEX A -- Merger Agreement........................................................... A-1
ANNEX B -- Opinion of Furman Selz..................................................... B-1
ANNEX C -- Opinion of Lehman Brothers................................................. C-1
</TABLE>
4
<PAGE> 9
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. The summary is not intended to be a complete statement
of all material features of the Merger and related transactions and is qualified
in its entirety by reference to the more detailed information contained
elsewhere in this Proxy Statement and the Annexes attached hereto. Shareholders
of PPD and stockholders of APBI should read all such information in its
entirety.
This Proxy Statement contains certain forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements as a result of many factors, including, but not limited to, those
discussed under "Investment Considerations".
THE PARTIES
Pharmaceutical Product Development, Inc., a North Carolina corporation
("PPD"), is a leading contract research organization ("CRO") which provides a
broad range of development services to the pharmaceutical and biotechnology
industries in the U.S. and abroad. Wilmington Merger Corp., a North Carolina
corporation and a wholly owned subsidiary of PPD ("Merger Sub"), is a
corporation recently organized in connection with the Merger, and has not
conducted any other business. The principal executive offices of PPD and Merger
Sub are located at 115 North Third Street, 5th Floor, Wilmington, North Carolina
28401, and their telephone number at that address is (910) 251-0081. See
"Certain Information Concerning PPD" and "Certain Information Concerning Merger
Sub".
Applied Bioscience International Inc., a Delaware corporation ("APBI"), is
a holding company providing financial and operational support for its
subsidiaries which include Pharmaco International Inc. (together with
subsidiaries, "Pharmaco"), Clinix International Inc., operating under the trade
name of the Chicago Center for Clinical Research ("CCCR"), and APBI
Environmental Sciences Group, Inc., operating under the trade name ENVIRON.
Pharmaco is also a leading CRO. Together these companies provide a broad range
of research and consulting services in the life and environmental sciences to
clients in the pharmaceutical, general chemical, agrochemical, biotechnology and
other industries throughout the world. The principal executive office of APBI is
located at 4350 North Fairfax Drive, Arlington, Virginia 22203, and its
telephone number at that address is (703) 516-2490. See "Certain Information
Concerning APBI".
THE SPECIAL MEETINGS; PURPOSES OF THE MEETINGS
Time, Date and Place of the Special Meetings
The special meeting of shareholders of PPD will be held at : .m. (local
time) on September , 1996 at (the "PPD Special Meeting").
The special meeting of stockholders of APBI will be held at : .m. (local
time) on September , 1996 at (the "APBI Special Meeting").
Purpose of the Special Meetings
The PPD Special Meeting will be held to permit the holders of shares of PPD
Common Stock to consider and vote upon proposals to approve: (i) the Merger
Agreement; (ii) an amendment to PPD's Articles of Incorporation to increase the
number of authorized shares of PPD Common Stock from 30,000,000 to 95,000,000;
(iii) an increase in the number of authorized directors from eight to nine; (iv)
an amendment to PPD's Bylaws to provide for the annual election of directors;
(v) an amendment to PPD's 1995 Equity Compensation Plan (the "PPD Equity Plan")
to increase the number of shares of PPD Common Stock reserved for issuance
thereunder from 750,000 shares to 1,500,000 shares; and (vi) an amendment to
PPD's 1995 Stock Option Plan for Non-Employee Directors (the "Non-Employee
Director Plan") to increase the number of shares of PPD Common Stock reserved
for issuance thereunder from 50,000 to 100,000.
The APBI Special Meeting will be held to permit the holders of shares of
APBI Common Stock to consider and vote upon a proposal to approve the Merger
Agreement.
5
<PAGE> 10
Record Date and Outstanding Shares
Only holders of record of PPD Common Stock as of the close of business on
July 31, 1996 (the "Record Date") will be entitled to notice of and to vote at
the PPD Special Meeting. On the Record Date, shares of PPD Common Stock
were outstanding. PPD shareholders of record on such record date are entitled to
one vote per share on any matter which may properly come before the PPD Special
Meeting.
Only holders of record of APBI Common Stock as of the close of the business
on the Record Date will be entitled to notice of and to vote at the APBI Special
Meeting. On the Record Date, shares of APBI Common Stock were
outstanding. APBI stockholders of record on such Record Date are entitled to one
vote per share on any matter which may properly come before the APBI Special
Meeting.
Vote Required
The affirmative vote of the holders of a majority of the shares of PPD
Common Stock entitled to vote and present or represented by proxy at the PPD
Special Meeting is required to approve the Merger Agreement, to amend the PPD
Articles of Incorporation as proposed in the Merger Transactions and to amend
each of the PPD Equity Plan and the Non-Employee Director Plan as proposed in
the Merger Transactions. The PPD Bylaws may be amended and the number of
authorized directors of PPD increased, as proposed in the Merger Transactions,
by an affirmative vote of 75% all eligible voters present in person or by proxy
at the PPD Special Meeting. The directors and executive officers of PPD and
their affiliates have the right to vote, in the aggregate, 6,938,351 shares of
PPD Common Stock (approximately 75.1% of the shares outstanding). These
directors and executive officers of PPD have announced to PPD that they intend
to vote their shares FOR approval of the Merger Agreement and the Merger
Transactions. In addition, certain of these individuals (Ernest Mario, Fredric
Eshelman, John A. McNeill, Jr. and Ronald B. McNeill), who own, in the
aggregate, 6,803,539 shares of PPD Common Stock (approximately 73.6% of the
shares outstanding), have contractually agreed to vote their shares in favor of
the Merger Agreement and the Merger Transactions. Therefore it is probable that
the Merger Agreement and the Merger Transactions will be approved by the
requisite PPD shareholder vote. See "Voting and Proxy Information" and "Certain
Information Concerning PPD -- Principal Shareholders".
The affirmative vote of the holders of the majority of the outstanding
shares of APBI Common Stock entitled to vote and present or represented by proxy
at the APBI Special Meeting is required to approve the Merger Agreement.
The obligations of APBI and PPD to consummate the Merger are subject, among
other things, to the condition that such affirmative votes shall have been
obtained. See "The Merger -- The Merger Agreement -- Conditions to Consummation
of the Merger" and "-- Amendments and Termination of the Merger Agreement".
PPD, as the sole shareholder of Merger Sub, has approved the Merger
Agreement.
PRINCIPAL TERMS OF THE MERGER
Under the terms of the Merger Agreement, Merger Sub will be merged into
APBI (the "Merger") and Merger Sub will cease to exist as a separate legal
entity. Upon consummation of the Merger, each outstanding share of APBI Common
Stock will be converted into the right to receive shares of PPD Common Stock
based upon a ratio (the "Exchange Ratio") computed as follows: (i) if the
Average PPD Stock Price (as defined below) is equal to or less than $48.00 per
share, then the Exchange Ratio shall be equal to the quotient of $15.00 divided
by the Average PPD Stock Price, provided, however, that in such event the
Exchange Ratio shall not be less than 0.3125 nor greater than 0.4054; and (ii)
if the Average PPD Stock Price is greater than $48.00 per share, then the
Exchange Ratio shall be equal to the quotient of (x) divided by (y), where (x)
is $15.00 per share and where (y) is the Average PPD Stock Price less the
product of 0.5 and the difference between the Average PPD Stock Price and
$48.00. No fractional shares of PPD Common Stock will be issued but, in lieu
thereof, each holder of APBI Common Stock, the conversion of whose shares
results in a fractional share of PPD Common Stock, shall receive from PPD an
amount of cash (rounded to the nearest whole cent) equal to the product of such
fraction multiplied by the Average PPD Stock Price. The shares of PPD Common
Stock and cash to be paid in lieu of fractional shares are sometimes referred to
collectively herein as
6
<PAGE> 11
the "Merger Consideration". The "Average PPD Stock Price" means the average of
the last sale prices of a share of PPD Common Stock for the 10 most recent days
that PPD Common Stock has traded ending on the day which is five days
immediately prior to the effective date of the Merger, as reported on the Nasdaq
National Market, rounded to the nearest cent. The average of the last sale
prices of a share of PPD Common Stock for the 10 most recent trading days ended
July 15, 1996 was $31.65. It is anticipated that as a result of the Merger, the
former stockholders of APBI will own a majority of the outstanding stock of PPD.
PPD has agreed that in the case of each unexpired option granted under or
outside of the APBI Stock Incentive Program (1990), as amended (the "APBI Stock
Program"), the holder will receive from PPD either an amount payable in shares
of PPD Common Stock equal to the difference between the closing market price of
APBI Common Stock on the trading day immediately preceding the closing of the
Merger and the purchase price of each share of APBI Common Stock covered by the
option, or substituted options to purchase PPD Common Stock. As required by the
APBI Stock Program, this form will depend upon the election of the option
holder. PPD has agreed under the Merger Agreement to assume the APBI Employee
Stock Purchase Plan and each outstanding subscription to purchase shares of APBI
Common Stock thereunder. Each assumed APBI purchase right will be exercisable
for shares of PPD Common Stock.
BACKGROUND OF THE MERGER
Following extensive negotiations, due diligence and Board deliberations,
PPD, APBI and the Merger Sub entered into the Merger Agreement on June 20, 1996.
The Merger Agreement provides for the merger of the Merger Sub with and into
APBI, such that APBI will be the surviving corporation and a wholly-owned
subsidiary of PPD. Upon consummation of the Merger, each outstanding share of
APBI Common Stock will be converted into the Merger Consideration. See "The
Merger -- Background of the Merger".
RECOMMENDATION OF PPD'S BOARD OF DIRECTORS
The Board of Directors of PPD has unanimously determined that the Merger
and the Merger Transactions are in the best interests of the shareholders of PPD
and approved the Merger Agreement and the Merger Transactions, and recommends
that the PPD shareholders vote FOR approval of the Merger Agreement and the
Merger Transactions. See "The Merger -- Recommendation of the Board of Directors
of PPD".
RECOMMENDATION OF APBI'S BOARD OF DIRECTORS
The Board of Directors of APBI has unanimously determined that the Merger
is in the best interests of the stockholders of APBI and approved the Merger
Agreement, and recommends that the APBI stockholders vote FOR approval of the
Merger Agreement. See "The Merger -- Recommendation of the Board of Directors of
APBI".
OPINIONS OF FINANCIAL ADVISORS
Furman Selz LLC ("Furman Selz") has delivered to the PPD Board of Directors
its written opinion dated June 20, 1996 to the effect that the consideration to
be paid to APBI's stockholders in the Merger is fair, from a financial point of
view, to PPD as of the date of such opinion. A copy of Furman Selz' opinion,
which sets forth the assumptions made and the matters considered therein and the
limitations thereto, is attached to this Proxy Statement as Annex B and should
be read carefully in its entirety. For financial advisory services to PPD,
including the rendering of its opinion, Furman Selz has received from PPD fees
of $775,000 and, contingent upon the consummation of the Merger, will receive a
fee of 0.8% of the aggregate merger consideration (net of the $775,000 referred
to above).
Lehman Brothers Inc. ("Lehman Brothers") has delivered to the APBI Board of
Directors its written opinion dated June 20, 1996 to the effect that the
consideration offered to APBI's stockholders in the Merger is fair from a
financial point of view as of the date of such opinion. A copy of Lehman
Brothers' opinion, which sets forth the assumptions made and the matters
considered therein and the limitations thereto, is attached to this Proxy
Statement as Annex C and should be read carefully in its entirety. For certain
financial advisory
7
<PAGE> 12
services to APBI, including the rendering of its opinion, Lehman Brothers has
received from APBI a fee of $600,000 and, contingent upon the consummation of
the Merger, Lehman Brothers will receive from APBI a fee of 0.8% of the
aggregate merger consideration (net of the $600,000 referred to above). See "The
Merger -- Opinions of Financial Advisors".
BOARD OF DIRECTORS AND MANAGEMENT OF PPD AFTER THE MERGER
At and after the Merger the Board of Directors of PPD shall consist of
Ernest Mario, Fredric N. Eshelman, John A. McNeill, Jr., Stuart Bondurant, John
D. Bryer, Kirby L. Cramer, Frederick Frank and Frank E. Loy. Drs. Mario,
Eshelman and Bondurant and Mr. McNeill are currently members of the Board of
Directors of PPD and Messrs. Bryer, Cramer, Frank and Loy are currently members
of senior management or the Board of Directors of APBI. Subsequent to the
Merger, if not previously agreed to by APBI and PPD, one additional outside
director who has significant knowledge and experience regarding PPD's and APBI's
existing and/or prospective businesses shall be appointed by PPD's then existing
Board. It is currently expected that at and after the Merger, the executive
officers of PPD shall consist of the following persons, who shall serve until
the earlier of their death, resignation or removal or until their successors are
duly elected and qualified: Ernest Mario, Chairman; Fredric N. Eshelman, Chief
Executive Officer and Rudy C. Howard, Chief Financial Officer. It is also
currently expected that at and after the Merger, John D. Bryer will serve as
chief operating officer of PPD's CRO operations and Joseph H. Highland will
continue as ENVIRON Chief Executive Officer. See "The Merger -- The Merger
Agreement -- Board of Directors and Management of PPD After the Merger".
INTERESTS OF CERTAIN PERSONS IN THE MERGER
APBI's senior management are the holders of a significant number of stock
options granted under the APBI Stock Program, all of which options will either
be bought out by PPD for shares of PPD Common Stock or exchanged for substitute
stock options to acquire shares of PPD Common Stock. In addition, APBI's chief
executive officer and one of its senior vice presidents were awarded restricted
stock grants in 1995 with vesting of such grants conditional on APBI Common
Stock trading above $10.00 per share for a prescribed period of time or on a
change of control of APBI. The restricted stock grants made to such executives
have vested based on the trading price of shares of APBI Common Stock following
the announcement of the Merger. APBI has also entered into additional employment
arrangements with certain severance provisions. Also, in approving the Merger
Agreement, certain members of the APBI Board of Directors may be deemed to have
certain conflicts of interest. See "The Merger -- Interests of Certain Persons
in the Merger".
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to a number of conditions, including
the approval of the Merger Agreement by the shareholders of PPD and stockholders
of APBI. Conditions to each party's obligations to consummate the Merger may be
waived by such party, subject to applicable law and certain limitations imposed
by the Merger Agreement. Neither PPD nor APBI presently intends to waive any
such conditions although each of them reserves the right to do so. See "The
Merger -- the Merger Agreement -- Conditions to Consummation of the Merger" and
"-- Amendment and Termination of the Merger Agreement".
EFFECTIVE TIME OF THE MERGER
The Merger will become effective at such time as Articles of Merger setting
forth the principal terms of the Merger provided for in the Merger Agreement are
duly filed in accordance with Delaware and North Carolina law (the "Effective
Time"). Under the Merger Agreement, the required filings are expected to be made
as soon as practicable after the satisfaction or waiver of all conditions to the
Merger, including the approval of the Merger Agreement by the shareholders of
PPD and the stockholders of APBI. It is anticipated that if the Merger Agreement
is approved at the Special Meetings and all other conditions to the Merger have
been fulfilled or waived, the Effective Time will occur on the date of the
Special Meetings or as soon as practicable thereafter. See "The Merger -- The
Merger Agreement -- Effective Time of the Merger".
8
<PAGE> 13
EXCHANGE OF SHARE CERTIFICATES
As soon as practicable following the Effective Time, notice of consummation
of the Merger, together with a letter of transmittal for use in surrendering
certificates representing shares of APBI Common Stock in exchange for
certificates representing shares of PPD Common Stock, will be mailed to holders
of shares of APBI Common Stock. At the time of issuance of certificates for such
PPD Common Stock, cash will be paid in lieu of issuing any fractional shares of
PPD Common Stock. APBI STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR
CERTIFICATES OF APBI COMMON STOCK UNTIL THEY RECEIVE SUCH A LETTER OF
TRANSMITTAL. See "The Merger -- The Merger Agreement -- Exchange of Shares".
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the
shareholders of PPD and the stockholders of APBI: (i) by the mutual written
consent of PPD and APBI; (ii) by either party if the Merger is not consummated
by December 31, 1996; (iii) by either PPD or APBI if any permanent injunction or
other order of a court or other competent authority preventing consummation of
the Merger shall have become final and nonappealable; (iv) by either party, in
the event of a material breach by the other party of any representation,
warranty or agreement contained in the Merger Agreement which has not been cured
within 10 days of written notice thereof (and which breach would have a material
adverse effect on the non-breaching party); (v) by either PPD or APBI, if the
Board of Directors of APBI following receipt of an Acquisition Proposal in the
exercise of its good faith judgment, after consultation with its legal counsel,
withdraws its approval and recommendation of this Agreement and the transactions
contemplated hereby after determining that to cause APBI to proceed with the
transactions contemplated hereby would not be consistent with the Board of
Directors' fiduciary duty to the stockholders of APBI; or (vi) by either PPD or
APBI, if the Average PPD Stock Price is less than $30.00 per share.
In the event of termination under certain circumstances, the terminating
party will be liable to the other party for a termination fee in the amount of
$10,000,000. See "The Merger -- The Merger Agreement -- Amendment and
Termination of the Merger Agreement".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
As a condition to the obligation of APBI to consummate the Merger, APBI is
to receive an opinion of Shaw, Pittman, Potts & Trowbridge, counsel to APBI,
that no gain or loss will be recognized by the holders of APBI Common Stock to
the extent they receive shares of PPD Common Stock in the Merger in exchange for
their shares of APBI Common Stock, and that the basis in the shares of PPD
Common Stock received by such APBI stockholders in the Merger will be the same
as their basis in the shares of APBI Common Stock exchanged. APBI stockholders
should consult with their own tax advisers regarding the tax consequences of the
Merger with respect to their own particular circumstances, including the
applicability of various state and local tax laws. See "The Merger -- Certain
Federal Income Tax Consequences".
ACCOUNTING TREATMENT
It is intended that the Merger will be treated as a pooling of interests
for financial accounting purposes in accordance with generally accepted
accounting principles. As a condition to the obligations of PPD and APBI to
consummate the Merger they must receive, on the closing date under the Merger
Agreement, from Coopers & Lybrand L.L.P. and Arthur Andersen LLP, respectively,
opinions to the effect that each of PPD and APBI is eligible to be a participant
in a transaction to be accounted for as a pooling of interests and, in the case
of the Coopers & Lybrand L.L.P. opinion, that such accounting method is
appropriate. See "The Merger -- Accounting Treatment".
REGULATORY APPROVALS
PPD and APBI each submitted filings required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act") on July 15, 1996, and
9
<PAGE> 14
each has requested early termination of the requisite waiting period under the
HSR Act with respect to the Merger. PPD and APBI anticipate that the waiting
period will terminate on or about August 1, 1996. PPD and APBI are aware of no
other governmental or regulatory approvals required for consummation of the
Merger, other than compliance with applicable "blue sky" laws of the various
states. See "The Merger -- Regulatory and Other Legal Matters".
APPRAISAL RIGHTS
Neither holders of shares of PPD Common Stock nor holders of shares of APBI
Common Stock will have appraisal or dissenters' rights in connection with the
Merger.
THE MERGER TRANSACTIONS
The shareholders of PPD are also being asked to approve the following
transactions related to the Merger (the "Merger Transactions"): (i) an amendment
to PPD's Articles of Incorporation to increase the number of authorized shares
of PPD Common Stock from 30,000,000 to 95,000,000; (ii) an increase in the
number of authorized PPD directors from eight to nine; (iii) an amendment to
PPD's Bylaws to provide for the annual election of directors; (iv) an amendment
to PPD's 1995 Equity Compensation Plan to increase the number of shares of PPD
Common Stock reserved for issuance thereunder from 750,000 shares to 1,500,000
shares; and (v) an amendment to PPD's 1995 Stock Option Plan for Non-Employee
Directors to increase the number of shares of PPD Common Stock reserved for
issuance thereunder from 50,000 to 100,000. If the Merger is approved but not
actually consummated, the Merger Transactions will, nonetheless, be implemented.
MARKET PRICES AND DIVIDEND POLICIES
The shares of PPD Common Stock are listed and traded on the Nasdaq Stock
Market ("Nasdaq") under the symbol PPDI. The shares of APBI Common Stock are
listed and traded on Nasdaq under the symbol APBI. Set forth below are the high
and low closing prices, as reported on Nasdaq, of shares of PPD Common Stock,
and shares of APBI Common Stock in each case for the calendar quarters indicated
and based on published financial sources.
<TABLE>
<CAPTION>
PPD APBI
----------------- ----------------
CALENDAR QUARTER HIGH LOW HIGH LOW
- --------------------------------------------------------- ------ ------ ------ -----
<S> <C> <C> <C> <C>
1994
First Quarter.......................................... $ 6.63 $4.88
Second Quarter......................................... 7.38 5.31
Third Quarter.......................................... 6.50 5.25
Fourth Quarter......................................... 6.13 4.63
1995
First Quarter.......................................... 6.25 4.13
Second Quarter......................................... 6.13 4.75
Third Quarter.......................................... 7.88 4.38
Fourth Quarter......................................... 7.75 6.00
1996
First Quarter.......................................... $37.25(1) $22.75(1) 9.63 6.38
Second Quarter......................................... 47.75 33.25 13.25 7.75
Third Quarter (through July 15, 1996).................. 34.50 27.75 11.00 8.50
</TABLE>
- ---------------
(1) From January 23, 1996, the effective date of PPD's initial public offering.
APBI has never paid any cash dividends on APBI Common Stock. APBI has no
present plans to pay cash dividends to its stockholders and, for the foreseeable
future, intends to retain all of its earnings, if any, for use in its business.
APBI's credit facilities currently prohibit or restrict the payment of cash
dividends on its Common Stock. The declaration of any future dividends by APBI
is within the discretion of its Board of Directors and is dependent upon the
earnings, financial condition and capital requirements of APBI, as well as
10
<PAGE> 15
any other factors deemed relevant by the Board of Directors of APBI and subject
to the prior written consent of certain of APBI's lenders.
Except for dividends when it was a Subchapter S corporation prior to its
initial public offering in January 1996, PPD has never paid dividends on PPD
Common Stock. PPD intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
decision whether to pay dividends will be made by the PPD Board of Directors of
the Company in light of conditions then existing, including PPD's results of
operations, financial condition and requirements, business conditions and other
factors.
On June 20, 1996, the last full trading day prior to the announcement that
PPD and APBI had entered into the Merger Agreement, the reported closing sales
price per share of PPD Common Stock on Nasdaq was $39.50 and the reported
closing sales price per share of APBI Common Stock on Nasdaq was $9.125. On
August , 1996, the last full trading day prior to the date of this Proxy
Statement, the reported closing sales price per share of PPD Common Stock on
Nasdaq was $ and the reported closing sales price per share of APBI
Common Stock on Nasdaq was $ .
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Selected Financial Data of PPD
The selected consolidated financial data presented below for each of the
years ended December 31, 1992 through December 31, 1995 have been derived from
financial statements of PPD audited by Coopers & Lybrand L.L.P., independent
accountants. The selected consolidated financial data presented below as of and
for the year ended December 31, 1991 and as of and for the three-month periods
ended March 31, 1995 and 1996 have been derived from PPD's unaudited internal
financial statements and reflect all adjustments PPD's management considers
necessary for a fair and consistent presentation of the financial position and
results of operations for those periods. The following selected financial data
are qualified by reference to, and should be read in conjunction with, "Certain
Information Concerning PPD -- Management's Discussion and Analysis of Financial
Condition and Results of Operations", the financial statements of PPD, the notes
thereto and the audit report thereon included elsewhere in this Proxy Statement.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ------- ------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenue........................... $11,953 $ 8,752 $38,263 $28,862 $20,835 $13,748 $9,342
Operating expenses.................... 10,679 7,456 34,152 25,310 17,253 11,747 8,578
----------- ----------- ------- ------- ------- ------- ------
Income from operations................ 1,274 1,296 4,111 3,552 3,582 2,001 764
Other income (expense), net........... 284 (47) 200 (33) (10) (100) 0
----------- ----------- ------- ------- ------- ------- ------
Net income before taxes............... 1,558 $ 1,249 $ 4,311 $ 3,519 $ 3,572 $ 1,901 $ 764
=========== ======== ======== ======== ======== ======
Income tax expense.................... 639
-----------
Net income............................ $ 919
===========
Weighted average number of shares
outstanding......................... 8,673
===========
Net income per share.................. $ 0.11
===========
Pro Forma Data(1):
Net income............................ $ 1,249 $ 4,311 $ 3,519 $ 3,572 $ 1,901 $ 764
Pro forma income tax expense.......... 547 1,775 1,498 1,445 771 306
----------- ------- ------- ------- ------- ------
Pro forma net income.................. $ 702 $ 2,536 $ 2,021 $ 2,127 $ 1,130 $ 458
=========== ======== ======== ======== ======== ======
Pro forma weighted average number of
shares outstanding(2)............... 7,279 7,279 7,268 6,955 6,757 6,757
=========== ======== ======== ======== ======== ======
Pro forma net income per share(2)..... $ 0.10 $ 0.35 $ 0.28 $ 0.31 $ 0.17 $ 0.07
=========== ======== ======== ======== ======== ======
</TABLE>
11
<PAGE> 16
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ------- ------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 5,012 $ 2,843 $ 2,261 $ 1,860 $ 4,305 $ 2,871 $1,180
Working capital....................... 33,108 5,228 3,929 4,112 2,278 725 (1,017)
Total assets.......................... 59,320 22,269 27,504 21,093 14,252 7,961 2,498
Long-term debt........................ 76 4,906 2,899 4,736 1,143 1,459 870
Long-term debt including current
portion............................. 4,112 5,792 4,778 5,880 1,471 1,774 1,603
Shareholders' equity.................. 41,674 6,780 9,421 5,490 2,475 374 (871)
</TABLE>
- ---------------
(1) Following termination of its status as an S corporation prior to completion
of its initial public offering in January 1996, PPD became subject to
federal and state income taxes. The pro forma data reflect the application
of corporate income taxes to PPD's net income at the statutory combined
federal and state tax rate as if the termination of PPD's S corporation
status had occurred on January 1, 1991.
(2) Pro forma weighted average shares outstanding assumes the occurrence of
events pursuant to PPD's initial public offering and the issuance of
sufficient shares at $18.00 per share to provide net proceeds, after
aggregate offering expenses and underwriting discounts, to repay the $5.5
million debt incurred by PPD in making the final S corporation distribution.
See "Certain Information Concerning PPD -- Business -- Prior S Corporation
Status and Reorganization".
Selected Financial Data of APBI
The selected consolidated financial data presented below for each of the
years ended December 31, 1991 through December 31, 1995 have been derived from
the audited consolidated financial statements of APBI, which have been audited
by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data presented below for the three-month periods ended
March 31, 1995 and 1996 have been derived from APBI's unaudited internal
financial statements and reflect all adjustments APBI's management considers
necessary for a fair and consistent presentation of the financial position and
results of operations for those periods. The data presented below are qualified
by reference to, and should be read in conjunction with "Certain Information
Concerning APBI -- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with APBI's consolidated financial statements,
the notes thereto and the audit report thereon included elsewhere in this Proxy
Statement.
On February 28, 1992, a wholly owned subsidiary of APBI was merged with and
into Pharmaco International Inc., pursuant to which transaction Pharmaco
International Inc. became a wholly owned subsidiary of APBI. The transaction was
accounted for as a pooling of interests. APBI's financial results for the year
ended December 31, 1991 have been restated to reflect such transaction, using
Pharmaco International Inc.'s financial statements for its year ended December
31, 1991. The financial statements of Pharmaco International Inc. for the year
ended December 31, 1991 have been audited by Arthur Andersen LLP, independent
public accountants.
12
<PAGE> 17
APBI's consolidated financial data reflects certain of its former
Environmental Sciences Group divisions as discontinued operations. See Note 4 of
Notes to APBI Consolidated Financial Statements.
APPLIED BIOSCIENCE INTERNATIONAL INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------
1996 1995 1995(2)(4) 1994 1993(1) 1992(2)(3) 1991(2)
------------ ------------ ---------- -------- -------- ---------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenue(5)............... $37,389 $45,773 $183,253 $174,862 $155,344 $159,007 $145,091
----------- ----------- ---------- -------- -------- ---------- --------
Operating expenses........... 35,453 44,306 177,609 167,429 162,125 134,662 123,835
Loss on sale of business,
special charges and
restructuring costs........ -- -- 24,290 -- 9,365 7,623 --
----------- ----------- ---------- -------- -------- ---------- --------
35,453 44,306 201,899 167,429 171,490 142,285 123,835
----------- ----------- ---------- -------- -------- ---------- --------
Income (loss) from
operations................. 1,936 1,467 (18,646) 7,433 (16,146) 16,722 21,256
Other income (expense),
net........................ 43 (714) (2,816) (2,695) (1,173) (3,522) 312
----------- ----------- ---------- -------- -------- ---------- --------
Income (loss) from continuing
operations before provision
for income taxes........... 1,979 753 (21,462) 4,738 (17,319) 13,200 21,568
Provision (benefit) for
income taxes............... 752 317 (16,134) 1,873 (3,446) 6,165 8,120
----------- ----------- ---------- -------- -------- ---------- --------
Income (loss) from continuing
operations(1)(3)(4)........ 1,227 436 (5,328) 2,865 (13,873) 7,035 13,448
Discontinued operations...... -- -- (1,716) (12,873) (12,133) (521) 1,349
Extraordinary loss from early
extinguishment of debt..... -- -- (897) -- -- -- --
----------- ----------- ---------- -------- -------- ---------- --------
Net income (loss)............ $ 1,227 $ 436 $ (7,941) $(10,008) $(26,006) $ 6,514 $ 14,797
=========== =========== ========== ========= ========= ========== =========
Weighted average number of
shares outstanding......... 29,685 28,430 28,457 28,129 28,254 29,999 28,908
Earnings (loss) per share:
Continuing operations...... $ 0.04 $ 0.02 $ (0.19) $ 0.10 $ (0.49) $ 0.23 $ 0.47
Discontinued operations.... -- -- (0.06) (0.46) (0.43) (0.01) 0.04
Extraordinary loss......... -- -- (0.03) -- -- -- --
----------- ----------- ---------- -------- -------- ---------- --------
Net income (loss).......... $ 0.04 $ 0.02 $ (0.28) $ (0.36) $ (0.92) $ 0.22 $ 0.51
=========== =========== ========== ========= ========= ========== =========
</TABLE>
13
<PAGE> 18
APPLIED BIOSCIENCE INTERNATIONAL INC.
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------- --------------------------------------------------------
1996 1995 1995(2)(4) 1994 1993(1) 1992(2)(3) 1991(2)
----------- ----------- ---------- -------- -------- ---------- --------
(UNAUDITED) (UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $ 8,683 $ 4,467 $ 11,304 $ 7,944 $ 10,549 $ 12,829 $ 18,349
Working capital.............. 37,818 13,083 33,391 23,683 (2,843) 36,595 29,856
Total assets................. 113,592 176,788 115,157 181,680 181,240 190,840 167,762
Long-term debt............... 552 32,145 572 42,884 14,268 13,678 10,204
Long-term debt including
current portion............ 829 35,404 894 45,290 18,472 14,114 11,931
Redeemable preferred
stock(6)................... -- -- -- -- -- -- 11,183
Shareholders' equity......... 71,927 69,065 67,879 68,708 76,590 111,920 84,942
</TABLE>
- ---------------
(1) The loss from continuing operations for 1993 was affected by (i) a charge
against operating income of $9,365,000 in connection with restructuring
APBI's former toxicology services division and planned improvements in
APBI's corporate management information systems and (ii) an increase in
reserves for accounts receivable of $5,857,000. See "Certain Information
Concerning APBI -- Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(2) The acquisition of CCCR in August 1995, the acquisition by ETC of certain
assets of Southeastern Capital Corporation in June 1992 and the acquisition
of ETC in September 1991 were accounted for as purchase transactions.
(3) Income from continuing operations for 1992 was affected by (i) a charge
against operating income of $7,623,000 in connection with the restructuring
of APBI's business following the acquisition of Pharmaco, (ii) the
incurrence of $4,296,000 of merger costs in connection with the acquisition
of Pharmaco, (iii) a gain of $338,000 constituting a discount for early
payment of a mortgage, (iv) the acquisition of certain assets of EDI in July
1992, which was accounted for as a purchase transaction, and (v) an increase
in APBI's effective tax rate as a result of the fact that certain merger
costs incurred in connection with the acquisition of Pharmaco were not
deductible for tax purposes.
(4) Income from continuing operations for 1995 was affected by (i) the sale of
APBI's toxicology business which resulted in a pre-tax loss of $19,308,000
charged against operating income, (ii) a special charge against operating
income of $4,982,000 primarily related to the impairment of APBI's available
for sale investment (see Note 1 of Notes to Consolidated Financial
Statements), and (iii) an increase in APBI's tax benefit as a result of the
reversal of certain tax liabilities recorded in prior years for which APBI
will not be liable for payment. (See Note 11 of Notes to Consolidated
Financial Statements.) See "Certain Information Concerning APBI --
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
(5) Net of subcontractor costs. See "Certain Information Concerning
APBI -- Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(6) Reflects shares of preferred stock of Pharmaco which were converted into
Common Stock of APBI in connection with the Pharmaco merger.
14
<PAGE> 19
Selected Unaudited Pro Forma Combined Financial Data
Set forth below are selected unaudited pro forma combined financial data of
PPD and APBI, as adjusted to give effect to the Merger using the pooling of
interests method of accounting. This information is not necessarily indicative
of the results that would have actually occurred and should be read in
conjunction with the pro forma combined financial statements included elsewhere
in this Proxy Statement.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue................................. $ 49,342 $ 54,525 $221,516 $203,724 $176,179
-------- -------- -------- -------- --------
Operating expenses.......................... 46,132 51,762 211,761 192,739 179,378
Loss on sale of business, special charges
and restructuring costs................... -- -- 24,290 -- 9,365
-------- -------- -------- -------- --------
46,132 51,762 236,051 192,739 188,743
-------- -------- -------- -------- --------
Income (loss) from operations............... 3,210 2,763 (14,535) 10,985 (12,564)
Other income (expense), net................. 327 (761) (2,616) (2,728) (1,183)
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes......... 3,537 2,002 (17,151) 8,257 (13,747)
Provision (benefit) for income taxes........ 1,391 864 (14,359) 3,371 (2,001)
-------- -------- -------- -------- --------
Income (loss) from continuing operations.... 2,146 1,138 (2,792) 4,886 (11,746)
Discontinued operations..................... -- -- (1,716) (12,873) (12,133)
Extraordinary loss from early extinguishment
of debt................................... -- -- (897) -- --
-------- -------- -------- -------- --------
Net income (loss)........................... $ 2,146 $ 1,138 $ (5,405) $ (7,987) $(23,879)
======== ======== ======== ======== ========
Weighted average number of shares
outstanding............................... 21,322 19,433 19,443 19,164 18,796
Earnings (loss) per share:
Continuing operations..................... $ 0.10 0.06 $ (0.14) $ 0.25 $ (0.62)
Discontinued operations................... -- -- (0.09) (0.67) (0.65)
Extraordinary loss........................ -- -- (0.05) -- --
-------- -------- -------- -------- --------
Net income (loss)......................... $ 0.10 $ 0.06 $ (0.28) $ (0.42) $ (1.27)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 13,695 $ 7,310 $ 13,565 $ 9,581 $ 14,718
Working capital............................. 70,926 18,311 37,320 27,906 (565)
Total assets................................ 172,912 199,057 142,661 202,773 195,492
Long-term debt.............................. 628 37,051 3,471 47,620 15,411
Long-term debt including current portion.... 4,941 41,196 5,672 51,170 19,943
Shareholders' equity........................ 113,601 75,845 77,300 74,198 79,065
</TABLE>
15
<PAGE> 20
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
APPLIED BIOSCIENCE
PHARMACEUTICAL PRODUCT INTERNATIONAL INC.
DEVELOPMENT, INC. ------------------------------
------------------------------ EQUIVALENT
HISTORICAL PER PRO FORMA PER HISTORICAL PER PRO FORMA PER
SHARE DATA(1) SHARE DATA(1) SHARE DATA SHARE DATA(2)
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1996
Net income............................... $ 0.11 $ 0.10 $ 0.04 $ 0.04
Book value............................... 4.51 5.24 2.44 2.12
Three months ended March 31, 1995
Net income............................... 0.10 0.06 0.02 0.02
Book value............................... 0.98 4.00 2.45 1.62
Year ended December 31, 1995
Net income............................... 0.35 (0.28) (0.28) (0.11)
Book value............................... 1.36 4.01 2.34 1.62
Year ended December 31, 1994
Net income............................... 0.28 (0.42) (0.36) (0.17)
Book value............................... 0.79 3.91 2.44 1.59
Year ended December 31, 1993
Net income............................... 0.31 (1.27) (0.92) (0.51)
Book value............................... 0.36 4.21 2.73 1.71
</TABLE>
- ---------------
(1) Pro forma weighted average shares outstanding assumes the issuance of
sufficient shares at $18.00 per share, after aggregate estimated offering
expenses and underwriting discounts, to pay the final S corporation
distribution as of December 31, 1995.
(2) The weighted average number of shares used in calculating equivalent pro
forma per share data is the sum of the historical weighted average number of
APBI shares plus the weighted average shares attributable to the conversion
of the value of APBI stock options plus the historical weighted average
number of PPD shares after the conversion of the PPD shares to APBI share
equivalents which is obtained by dividing the historical weighted average
number of PPD shares by the maximum Exchange Ratio of 0.4054.
16
<PAGE> 21
INVESTMENT CONSIDERATIONS
This Proxy Statement contains certain forward-looking statements,
including, but not limited to, under the headings "Certain Information
Concerning PPD -- Business -- Trends Affecting the CRO Industry", "-- Company
Strategy", "-- Backlog", "-- Competition", "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Certain Information
Concerning APBI -- Business -- Industry Overview", "-- Backlog",
"-- Competition" and "-- Management's Discussion and Analysis of Financial
Condition and Results of Operations". Actual results could differ materially
from those projected in the forward-looking statements as a result of many
factors, including, but not limited to, those set forth below.
In analyzing the Merger, shareholders of PPD and stockholders of APBI
should consider, among other factors, the following:
CONSIDERATIONS WITH RESPECT TO PPD'S BUSINESS
Dependence on and Effect of Government Regulation
PPD's business depends on the continued strict government regulation of the
drug development process, especially in the United States. Changes in
regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, could materially and
adversely affect the demand for the services offered by PPD.
The failure on the part of PPD to comply with applicable regulations could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. Furthermore, the issuance of a notice
of finding by the United States Food and Drug Administration (the "FDA") to PPD
or its clients based upon a material violation by PPD of Good Clinical Practice
("GCP"), Good Laboratory Practice ("GLP") or Good Manufacturing Practice ("GMP")
requirements could materially and adversely affect PPD. See "Certain Information
Concerning PPD -- Business -- CRO Industry Overview" and "-- Government
Regulation".
Dependence on Certain Industries and Clients
PPD provides services to the pharmaceutical and biotechnology industries
and its revenues are highly dependent on expenditures on research and
development by clients in these industries. Accordingly, PPD's operations could
be materially adversely affected by general economic downturns in these
industries, the current trend toward consolidation in these industries or other
factors resulting in a decrease in research and development expenditures.
Furthermore, PPD has benefited to date from the increasing tendency of
pharmaceutical and biotechnology companies to outsource large clinical research
projects. Should this trend be reversed, the revenues of PPD could be materially
and adversely affected.
PPD believes that concentration of business in the CRO industry is not
uncommon. PPD has experienced such concentration in the past and may experience
such concentration in the future. During 1994, two of PPD's clients, both major
international pharmaceutical companies, accounted for 10% or more (approximately
23% and 10%, respectively) of PPD's net revenue. During 1995, only the larger of
such clients accounted for more than 10% (approximately 13%) of PPD's net
revenue. However, there can be no assurance that PPD's business will not
continue to be dependent on a limited number of major customers. The loss of
business from a significant client could have a material adverse effect on PPD.
See "Certain Information Concerning PPD -- Business -- Trends Affecting the CRO
Industry" and "-- Clients and Marketing".
Loss of Large Contracts
Most of PPD's contracts for the provision of its services, including
contracts with governmental agencies, are terminable by the client upon 30 to 90
days' notice under certain circumstances, including the client's unilateral
decision to terminate the development of the product or end the study. Contracts
may be terminated for a variety of reasons, including the failure of products to
satisfy safety requirements, unexpected or undesired results of the product, the
client's decision to forego a particular study, or insufficient patient
enrollment or investigator recruitment. The loss of a large contract or the loss
of multiple contracts could
17
<PAGE> 22
materially and adversely affect PPD. See "Certain Information Concerning
PPD -- Business -- Contractual Arrangements".
Fixed Price Nature of Contracts
Most of PPD's contracts for the provision of its services are fixed price,
with some variable components. Since PPD's contracts are predominantly fixed
price, PPD bears the risk of cost overruns. Under-pricing of contracts or
significant cost overruns could have a material adverse effect on PPD. See
"Certain Information Concerning PPD -- Business -- Contractual Arrangements".
Volatility of Quarterly Operating Results
PPD's quarterly operating results are subject to volatility due to such
factors as the commencement, completion or cancellation of large contracts,
progress of ongoing contracts, acquisitions, the timing of start-up expenses for
new offices and changes in the mix of services. Since a large percentage of
PPD's operating costs are relatively fixed, variations in the timing and
progress of large contracts can materially affect quarterly results. To the
extent PPD's international business increases, exchange rate fluctuations may
also influence these results. PPD believes that comparisons of its quarterly
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. However, fluctuations in quarterly
results could affect the market price of the Common Stock in a manner unrelated
to the longer term operating performance of PPD. See "Certain Information
Concerning PPD -- Management's Discussion and Analysis of Financial Condition
and Results of Operations".
Dependence on Personnel
PPD, like many CROs and other companies, relies on a number of key
executives. In addition, PPD's performance depends on its ability to attract and
retain qualified management and professional, scientific and technical operating
staff. The loss of the services of any one or more of PPD's key executives could
have a material and adverse effect on PPD. There also can be no assurance that
PPD will be able to continue to attract and retain qualified staff. See "Certain
Information Concerning PPD -- Business -- Employees".
Management of Growth; Need for Improved Systems; Pressures to Attract and
Retain Personnel
PPD has experienced rapid growth over the past five years. PPD believes
that sustained growth places a strain on operations and on human and financial
resources. In order to manage its growth, PPD must continue to improve its
operating and administrative systems and attract and retain qualified management
and professional, scientific and technical personnel. Failure to manage growth
effectively could have a material adverse effect on PPD's business.
Potential Liability from Risks of Conducting Clinical Trials
Clinical research services involve the testing of new drugs on human
volunteers pursuant to a study protocol. Such testing exposes PPD to the risk of
liability for personal injury or death to patients resulting from, among other
things, possible unforeseen adverse side effects or improper administration of
the new drug. Many of these patients are already seriously ill and are at risk
of further illness or death. PPD 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 indemnification agreements that may exist
with clients, if any such indemnification agreement, although applicable, is not
performed in accordance with its terms or if PPD's liability exceeds the amount
of applicable insurance. PPD currently does not maintain liability insurance
with respect to these risks. See "Certain Information Concerning
PPD -- Business -- Potential Liability and Insurance".
Competition; CRO Industry Consolidation; Few Barriers to Entry
The CRO industry is highly fragmented, with several hundred small,
limited-service providers, several medium-sized CROs and a few full-service CROs
with international capabilities. PPD primarily competes
18
<PAGE> 23
against in-house research departments of pharmaceutical and biotechnology
companies, universities and teaching hospitals, and other full-service CROs,
some of which possess substantially greater capital, technical and other
resources than PPD. As a result of competitive pressures, the CRO industry is
consolidating. This trend is likely to produce competition among the larger CROs
for both clients and acquisition candidates. In addition, there are few barriers
to entry for small, limited-service entities considering entering the CRO
industry. These entities may compete against larger CROs for clients.
Furthermore, the CRO industry has attracted the attention of the investment
community, which could lead to increased competition by increasing the
availability of financial resources for CROs. Increased competition may lead to
price and other forms of competition that may adversely affect PPD's operating
results. See "Certain Information Concerning PPD -- Business -- Competition".
Risks Associated with Acquisitions; Integration of Acquired Operations
PPD reviews many acquisition candidates in the ordinary course of its
business. In addition to the Merger, PPD has recently announced that it has
entered into letters of intent to purchase four international companies with
combined 1995 revenues of approximately $4,000,000: Depha Team (Milan, Italy);
Medisys (Barcelona, Spain); TriLife (Nurnberg, Germany); and Q&Q (Sao Paulo,
Brazil). Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent assimilation
of operations and products, the diversion of management's attention from other
business concerns, and the potential loss of key employees of the acquired
company. Acquisitions of foreign companies also may involve the additional risks
of, among others, assimilating differences in foreign business practices and
overcoming language barriers. If PPD consummates any acquisitions in the future,
there can be no assurance that such acquisitions will be successfully integrated
into PPD's operations. See "Certain Information Concerning PPD -- Business --
Company Strategy".
Uncertainty in Healthcare Industry and Proposed Healthcare Reform
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the pharmaceutical and biotechnology
industries. During 1994, several comprehensive healthcare reform proposals were
introduced in the United States Congress. The intent of the proposals was,
generally, to expand healthcare coverage for the uninsured and reduce the growth
of total healthcare expenditures. While none of the proposals was adopted,
healthcare reform may again be addressed by the United States Congress.
Implementation of government healthcare reform may adversely affect research and
development expenditures by pharmaceutical and biotechnology companies which
could decrease the business opportunities available to PPD. PPD is unable to
predict the likelihood of such or similar legislation being enacted into law or
the effects such legislation would have on PPD.
Potential Adverse Effect of Exchange Rate Fluctuations on Results of
Operations
PPD's business derived from operations outside the United States is
expected to grow in future years. Since the revenues of PPD's foreign operations
are generally denominated in local currencies, exchange rate fluctuations
between such local currencies and the United States dollar will subject PPD to
currency translation risk with respect to the reported results of its foreign
operations. See "Certain Information Concerning PPD -- Management's Discussion
and Analysis of Financial Condition and Results of Operations".
No Historical Market; Volatility of Stock Price
Prior to PPD's initial public offering in January 1996, there had been no
public market for PPD's Common Stock, and there can be no assurance that an
active public market will be sustained after the Merger. The market price of
PPD's Common Stock could be subject to wide fluctuations in response to
variations in operating results from quarter to quarter, changes in earnings
estimates by analysts and market conditions in the CRO, pharmaceutical and
biotechnology industries and general economic conditions. Furthermore, the stock
market has experienced significant price and volume fluctuation unrelated to the
operating performance
19
<PAGE> 24
of particular companies. These market fluctuations may have an adverse effect on
the market price of PPD's Common Stock.
Certain Anti-Takeover Provisions; Possible Issuance of Preferred Stock
PPD's Restated Articles of Incorporation and Bylaws contain certain
provisions that may have the effect of deterring a future takeover of PPD. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of PPD's Common Stock. In addition, shares of PPD's
Preferred Stock may be issued in the future without further shareholder approval
and upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors of PPD may determine. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could adversely affect the
market price of PPD Common Stock and could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of PPD. See "Certain
Information Concerning PPD -- Description of Capital Stock".
CONSIDERATIONS WITH RESPECT TO APBI'S BUSINESS
Effect of Government Regulation
The services offered by APBI involve, directly or indirectly, assisting
clients in complying with domestic and foreign governmental regulation of
product safety and of hazards in the environment. APBI's clinical testing
services are to a large extent dependent upon the applicability of government
regulations to the drug approval process. While the trend historically has been
in the direction of increased regulation in the pharmaceuticals area, a
relaxation in the scope of regulatory requirements or the introduction of
expedited procedures to the drug approval process could decrease the business
opportunities available to APBI. Similarly, APBI's environmental risk management
services derive in large part from the significant federal and state
environmental legislation that has been enacted in the past decade. Recently,
the environmental industry has experienced a slowdown in the enforcement of such
government regulation at the federal and state level based upon a number of
factors, including available funding. Although APBI believes that the
environmental industry will find continued, but more limited opportunities to
grow if the trend towards decreased actual enforcement of such regulations
continues, the business of APBI could be adversely affected. See "Certain
Information Concerning APBI -- Business -- Industry Overview -- Regulatory
Environment" and "-- Government Regulations".
Dependence on Certain Industries
APBI's business, in particular its clinical testing operations, has been
affected in the past, and could be affected adversely in the future, by general
economic downturns in the industries in which certain of its major clients
operate, which include the pharmaceutical and chemical industries. See "Certain
Information Concerning APBI -- Business -- Clients".
Potential Liability and Insurance
APBI's services involve significant risk of liability for negligence and
professional malpractice. APBI's business could be adversely affected if it were
required to pay material damages, or to incur significant defense costs, in
connection with a lawsuit for which it did not have adequate insurance coverage
and for which it was not indemnified by the client for whom it performed
services. In particular, APBI's clinical research operations and its
environmental risk management services each involve engagements with significant
risks of liability for personal injury, environmental and property damage and
economic loss.
There can be no assurance that APBI's operating units will be able to
maintain their current insurance coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
all potential claims. Furthermore, ENVIRON's ability to obtain contracts could
be adversely affected if it were unable to maintain adequate insurance coverage,
because such coverage is frequently a prerequisite to certain types of projects
in ENVIRON's industry.
20
<PAGE> 25
Pharmaco carries errors and omissions liability insurance for the conduct
of its clinical business, which involves a significant risk of liability related
to potential adverse reactions experienced by human subjects' participation in
clinical research trials. Pharmaco also relies upon agreements from the sponsors
for whom it performs drug research to indemnify it against certain claims and
losses of third parties with respect to drug-related adverse reactions sustained
in connection with the studies that it undertakes. Pharmaco also typically
enters into indemnity arrangements with independent physicians who act as
investigators and who perform services in connection with Pharmaco's
multi-center studies. However, although Pharmaco attempts in all cases to
protect itself by obtaining adequate indemnities from sponsors and clinical
investigators, these are contractual arrangements that are subject to individual
negotiation, and the terms and scope of such indemnities can vary. In addition,
the indemnities do not protect Pharmaco from claims attributable to Pharmaco's
negligence, nor would such indemnities protect Pharmaco if Pharmaco's actions
were outside the scope of such indemnities.
In an effort to reduce their potential exposure, APBI's other subsidiaries
also seek to obtain contractual agreements from their clients to indemnify them
against certain claims and losses of third parties. However, such other
subsidiaries of APBI are not always successful in obtaining such
indemnification. In addition, APBI sometimes agrees to indemnify clients for
losses and expenses they may incur as a result of APBI's services. See "Certain
Information Concerning APBI -- Business -- Potential Liability and Insurance".
Dependence Upon and Retention of Key Personnel
APBI relies heavily on the services of certain highly skilled individuals
with established reputations in their fields. In addition, in view of the nature
of APBI's business, APBI must maintain a scientific staff with technical and
professional qualifications appropriate to the services offered by APBI. APBI's
employment contracts with four of the original founders of ENVIRON expired in
September 1995 and their current employment arrangements, as well as those of
most ENVIRON senior management, are terminable at will. APBI's ability to
continue to grow in the future will be largely dependent upon its ability to
retain the services of such key individuals and scientific staff and to attract
other qualified personnel. APBI's failure to retain such key personnel or to
attract and hire other qualified personnel would have a material adverse effect
on APBI.
Dependence on Volunteer Subjects
APBI's clinical research studies conducted by Pharmaco and CCCR rely upon
the ready accessibility and willing participation of volunteer subjects. These
subjects generally include volunteers from the communities in which the studies
are conducted, including the major Phase I center in Austin, Texas, where
Pharmaco is headquartered, which has provided a substantial pool of potential
subjects for research studies, and Pharmaco's new Phase I center located in
Leicester, England. APBI's business could be adversely affected if either
Pharmaco or CCCR were unable to attract suitable and willing volunteers.
Nature of Contracts
A significant portion of Pharmaco's and CCCR's contracts are either fixed
price or subject to ceilings which cannot be exceeded without the approval of
the sponsor. With respect to these contracts Pharmaco or CCCR bears the risk of
cost overruns. Underpricing of contracts or unforeseen events leading to
significant cost overruns could have a material adverse effect on APBI. See
"Certain Information Concerning APBI -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Revenue Recognition".
Exchange Rate Fluctuations and Exchange Controls
Contracts between APBI's European subsidiaries and their clients are
generally denominated in the currency of the country in which the subsidiary is
located. Because substantially all of such subsidiaries' expenses, such as
salaries, services, materials and supplies, are paid in such local currency,
such subsidiaries' earnings are not materially affected by fluctuations in
exchange rates. However, APBI's consolidated financial
21
<PAGE> 26
statements are denominated in dollars and, accordingly, changes in the exchange
rate between the local currency and the dollar affect the translation of such
subsidiaries' financial results into dollars for purposes of reporting APBI's
consolidated financial results. See "Certain Information Concerning
APBI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Exchange Rate Fluctuations and Exchange Controls".
CONSIDERATIONS WITH RESPECT TO THE MERGER
Risks Associated With Acquisitions
Acquisitions involve numerous risks, including difficulties in the
assimilation of the operations and services of the acquired companies, the
expenses incurred in connection with the acquisition and subsequent assimilation
of operations and products, the diversion of management's attention from other
business concerns, and the potential loss of key employees of the acquired
company. The Merger is a significant transaction, and is therefore particularly
subject to such risks. See "Investment Considerations -- Considerations with
Respect to PPD's Business -- Risks Associated with Acquisitions; Integration of
Acquired Operations".
FACTORS FOR FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves without fear of litigation so long as
those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, PPD and APBI hereby identify the following as being certain of the
important factors which could cause PPD's and APBI's actual results to differ
materially from any such results which might be projected, forecasted, estimated
or budgeted by PPD or APBI in forward-looking statements. In analyzing the
Merger, shareholders of PPD and stockholders of APBI should consider the
following factors, in addition to the other factors listed under "Investment
Considerations":
(i) adverse state and federal legislation and regulation, including a
relaxation in regulatory requirements or the introduction of simplified
drug approval procedures;
(ii) heightened competition, including specifically the
intensification of price competition, the entry of new competitors and the
formation of new service offerings by new and existing competitors;
(iii) loss of large contracts or costs overruns associated with
fixed-price contracts;
(iv) failure to retain existing customers or obtain new customers;
(v) higher operating expenses occasioned by the need for additional
advertising, marketing, administrative or management information systems
expenditures;
(vi) integration difficulties associated with acquisitions, including
the Merger, the pending acquisitions of four international companies by PPD
and any other acquisitions that the combined company may complete in the
future;
(vii) loss or retirement of key executives;
(viii) adverse results in any significant litigation matters;
(ix) changes in interest rates or exchange rates, causing a reduction
of investment income or in the market value of interest rate-sensitive
investments;
(x) changes in the healthcare industry, due to a variety of factors,
including proposed healthcare reform, which could adversely affect research
and development expenditures by pharmaceutical and biotechnology companies;
and
(xi) other integration difficulties, including uncertainty associated
with integration of the PPD and APBI management information systems in a
timely manner, elimination of duplicative administrative functions and
enhanced utilization of Phase I and analytical laboratory service units
through increased capacity.
The foregoing review of factors pursuant to the Private Securities
Litigation Reform Act of 1995 should not be construed as exhaustive.
22
<PAGE> 27
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of PPD in
connection with the solicitation of proxies by the Board of Directors of PPD for
use at the PPD Special Meeting to be held on September , 1996, at : .m.,
local time, at
and all adjournments and postponements thereof, and is being furnished to the
stockholders of APBI in connection with the solicitation of proxies by the Board
of Directors of APBI for use at the APBI Special Meeting to be held on September
, 1996, at : .m., local time, at
and all adjournments and postponements thereof.
As set forth more fully below, at the Special Meetings the holders of PPD
Common Stock and the holders of APBI Common Stock will be asked to consider and
vote upon a proposal to approve the Merger Agreement. A copy of the Merger
Agreement (without exhibits or schedules) is attached as Annex A to this Proxy
Statement. The Merger Agreement provides for, among other things, upon
satisfaction of certain conditions set forth therein, the merger of Merger Sub
with and into APBI, Merger Sub ceasing to exist as a separate legal entity and
conversion of each share of APBI Common Stock into the right to receive shares
of PPD Common Stock based upon a ratio (the "Exchange Ratio") computed as
follows: (i) if the Average PPD Stock Price (as defined below) is equal to or
less than $48.00 per share, then the Exchange Ratio shall be equal to the
quotient of $15.00 divided by the Average PPD Stock Price, provided, however,
that in such event the Exchange Ratio shall not be less than 0.3125 nor greater
than 0.4054; and (ii) if the Average PPD Stock Price is greater than $48.00 per
share, then the Exchange Ratio shall be equal to the quotient of (x) divided by
(y), where (x) is $15.00 per share and where (y) is the Average PPD Stock Price
less the product of 0.5 and the difference between the Average PPD Stock Price
and $48.00. No fractional shares of PPD Common Stock will be issued, but, in
lieu thereof, each holder of APBI Common Stock, the conversion of whose shares
results in a fractional share of PPD Common Stock, shall receive from PPD an
amount of cash (rounded to the nearest whole cent) equal to the product of such
fraction multiplied by the Average PPD Stock Price. The "Average PPD Stock
Price" means the average of the last sale prices of a share of PPD Common Stock
for the 10 most recent days that PPD Common Stock has traded ending on the day
which is five days immediately prior to the effective date of the Merger, as
reported on the Nasdaq National Market, rounded to the nearest cent. The average
of the last sale prices of a share of PPD Common Stock for the 10 most recent
trading days ended July 15, 1996 was $31.65. It is anticipated that as a result
of the Merger, the former stockholders of APBI will own a majority of the
outstanding stock of PPD.
The shareholders of PPD are also being asked to consider and vote upon the
following transactions related to the Merger (the "Merger Transactions"): (i) an
amendment to PPD's Articles of Incorporation to increase the number of
authorized shares of PPD Common Stock from 30,000,000 to 95,000,000; (ii) an
increase in the number of authorized directors from eight to nine; (iii) an
amendment to PPD's Bylaws to provide for the annual election of directors; (iv)
an amendment to PPD's 1995 Equity Compensation Plan to increase the number of
shares of PPD Common Stock reserved for issuance thereunder from 750,000 shares
to 1,500,000 shares; and (v) an amendment to PPD's 1995 Stock Option Plan for
Non-Employee Directors to increase the number of shares of PPD Common Stock
reserved for issuance thereunder from 50,000 to 100,000.
No business will be presented, or be in order for consideration, at the
Special Meetings other than the proposals described above and such matters as
may be necessary in connection therewith.
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VOTING AND PROXY INFORMATION
The Boards of Directors of PPD and APBI, respectively, have fixed the close
of business on July 31, 1996, as the record date for determining the holders of
PPD Common Stock and APBI Common Stock, respectively, entitled to receive notice
of and to vote at the Special Meetings (the "Record Date"). At the close of
business on the Record Date, there were outstanding shares of PPD Common
Stock, the only outstanding voting securities of PPD, and shares of APBI
Common Stock, the only outstanding voting securities of APBI.
For each share of PPD Common Stock held on the Record Date, a holder of PPD
Common Stock is entitled to one vote on all matters properly brought before the
PPD Special Meeting. For each share of APBI Common Stock held on the Record
Date, a holder of APBI Common Stock is entitled to one vote on all matters
properly brought before the APBI Special Meeting. Such votes may be cast in
person or by proxy.
Under the rules of the Nasdaq Stock Market, on which the PPD Common Stock
is traded, the affirmative vote of the holders of a majority of the shares of
PPD Common Stock entitled to vote and present or represented by proxy at the PPD
Special Meeting is necessary to approve the Merger Agreement. A similar vote is
required to amend the PPD Articles of Incorporation, the PPD Equity Plan and the
Non-Employee Director Plan, as proposed in the Merger Transactions. The PPD
Bylaws may be amended and the number of authorized directors of PPD increased,
as proposed in the Merger Transactions, by an affirmative vote of 75% of all
eligible votes present in person or by proxy at the PPD Special Meeting.
At the Record Date, the directors and executive officers of PPD and their
affiliates had the right to vote in the aggregate shares of PPD Common
Stock (approximately % of the shares outstanding on the Record Date). These
directors and executive officers of PPD have announced to PPD that they intend
to vote their shares in favor of approving the Merger Agreement and the Merger
Transactions. In addition, certain of these individuals (Ernest Mario, Fredric
Eshelman, John A. McNeill, Jr. and Ronald B. McNeill), who own, in the
aggregate, shares of PPD Common Stock (approximately % of the
shares outstanding), have contractually agreed to vote their shares in favor of
the Merger Agreement and the Merger Transactions. Therefore it is probable that
the Merger Agreement and the Merger Transactions will be approved by the
requisite PPD shareholder vote. See "Certain Information Concerning
PPD -- Principal Shareholders".
All shares of PPD Common Stock that are represented at the PPD Special
Meeting by properly executed proxies received by PPD prior to or at the PPD
Special Meeting and not revoked will be voted at the PPD Special Meeting in
accordance with the instructions indicated in such proxies. Unless instructions
to the contrary are specified in the proxy, each such proxy will be voted FOR
the proposals to approve the Merger Agreement and the Merger Transactions. Any
PPD proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. PPD proxies may be revoked by filing
with the Secretary of PPD before the vote is taken at the PPD Special Meeting a
written notice of revocation bearing a date later than the date of the proxy, by
duly executing and delivering a subsequent proxy relating to the same shares, or
by attending the PPD Special Meeting and voting in person (although attendance
at the PPD Special Meeting will not in and of itself constitute a revocation of
a proxy). Any written notice of revocation should be sent to: Corporate
Secretary, Pharmaceutical Product Development, Inc., 115 North Third Street, 5th
Floor, Wilmington, North Carolina 28401.
Under Delaware law and APBI's Certificate of Incorporation, the affirmative
vote, either in person or by proxy, of the holders of a majority of the
outstanding shares of APBI Common Stock entitled to vote thereon is necessary to
adopt the Merger Agreement.
At the Record Date, the directors and executive officers of APBI and their
affiliates had the right to vote, in the aggregate, shares of APBI Common
Stock (approximately % of the shares outstanding on the Record Date). All
directors and executive officers of APBI have indicated that they intend to vote
their shares of APBI Common Stock in favor of the Merger Agreement.
All shares of APBI Common Stock that are represented at the APBI Special
Meeting by properly executed proxies received by APBI prior to or at the APBI
Special Meeting and not revoked will be voted at the APBI Special Meeting in
accordance with the instructions indicated in such proxies. Unless instructions
to
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<PAGE> 29
the contrary are specified in the proxy, each such proxy will be voted FOR the
proposal to approve the Merger Agreement. Any APBI proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before it is
voted. APBI proxies may be revoked by filing with the Secretary of APBI before
the vote is taken at the APBI Special Meeting a written notice of revocation
bearing a date later than the date of the proxy, by duly executing and
delivering a subsequent proxy relating to the same shares, or by attending the
APBI Special Meeting and voting in person (although attendance at the APBI
Special Meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation should be sent to: Corporate Secretary, Applied
Bioscience International Inc., 4350 North Fairfax Drive, Arlington, Virginia
22203.
Proxies are being solicited from PPD's shareholders by and on behalf of the
Board of Directors of PPD, and from APBI's stockholders by and on behalf of the
Board of Directors of APBI. PPD and APBI have retained Shareholder Communication
Corporation ("Shareholder Communication") to assist in the solicitation of
proxies and have agreed to pay Shareholder Communication a fee of $6,500 (plus
expenses) for its services in connection herewith. Shareholder Communication
will not receive any incremental compensation based on the number or percentage
of votes cast in favor of any of the matters to be voted on. Each of PPD and
APBI will bear its own expenses of the solicitation, including the costs of
preparing and mailing this Proxy Statement, except that it is anticipated that
one-half of the cost of printing the Proxy Statement will be borne by each of
PPD and APBI. In addition to solicitation by use of the mail, proxies may be
solicited by directors, officers, and employees of PPD and APBI, respectively,
in person or by telephone, telegram or other means of communication. Such
directors, officers and employees will not be additionally compensated for such
services but may be reimbursed for out-of-pocket expenses incurred by them in
connection with such solicitation. Arrangement will also be made with
custodians, nominees and fiduciaries for the forwarding of proxy solicitation
materials to beneficial owners of PPD and APBI Common Stock held of record by
such persons.
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THE MERGER
The following information with respect to the Merger, insofar as it relates
to matters contained in the Merger Agreement, is qualified in its entirety by
reference to the Merger Agreement, a copy of which is attached hereto as Annex A
and is incorporated herein by reference.
GENERAL
The Merger Agreement provides that, following the satisfaction or, to the
extent permitted, waiver of all conditions to the Merger and the filing of
Articles of Merger conforming to the requirements of Delaware and North Carolina
law setting forth the principal terms of the Merger provided for in the Merger
Agreement with the Secretaries of State of the States of Delaware and North
Carolina, respectively (the time of such filings being hereinafter referred to
as the "Effective Time"), Merger Sub will merge into APBI. At the Effective
Time, the separate corporate existence of Merger Sub shall cease, and APBI will
be the surviving corporation and a wholly-owned subsidiary of PPD. In the
Merger, each outstanding share of APBI Common Stock outstanding immediately
prior to the Effective Time will be converted into shares of PPD Common Stock
based upon the Exchange Ratio. Cash will be paid in lieu of fractional shares of
PPD Common Stock.
The Merger Agreement provides that the Certificate of Incorporation and
Bylaws of APBI, in each case as in effect at the Effective Time, will be the
Certificate of Incorporation and Bylaws of the surviving corporation. The Merger
Agreement also provides that the directors of Merger Sub at the Effective Time
will be the directors of the surviving corporation and the officers of APBI will
be the officers of the surviving corporation (except that Fredric N. Eshelman,
PPD's Chief Executive Officer, will be the President and Chief Executive Officer
of APBI), in each case, until their successors have been duly elected.
Each outstanding share of Merger Sub Common Stock will remain outstanding
as Common Stock of the surviving corporation after the Effective Time. The
rights of PPD shareholders, including the former stockholders of APBI who will
become holders of PPD Common Stock, will be governed by the Articles of
Incorporation and Bylaws of PPD and the laws of the State of North Carolina. See
"Comparison of the Rights of Holders of PPD Common Stock and APBI Common Stock".
BACKGROUND OF THE MERGER
On February 20, 1996, a meeting was held between Drs. Eshelman and Harper,
the chief executive officers of PPD and APBI, respectively, to explore a
possible transaction between the two companies. Drs. Eshelman and Harper agreed
to discuss the merits of a possible business combination with the senior
management teams of their respective businesses. After such discussions, in
early March 1996, Drs. Eshelman and Harper held a telephone discussion to
further consider a possible transaction between PPD and APBI. At this time, Dr.
Harper recommended pursuit of further discussions, including valuation
discussions.
Thereafter and throughout March 1996, representatives of PPD and APBI met
and engaged in a series of telephone discussions regarding preliminary due
diligence matters and other matters. On March 25, 1996, Dr. Eshelman made a
proposal to representatives of Lehman Brothers (APBI's financial advisor)
outlining a number of items, including strategic and operating reasons for a
business combination between PPD and APBI, in addition to preliminary merger
terms.
At a meeting on April 2, 1996, the APBI Board of Directors reviewed the
status of discussions with PPD. The APBI Board of Directors authorized Dr.
Harper and Mr. Frederick Frank to continue to discuss a possible combination
with PPD.
During April and May 1996, various members of management of both companies
met to review a variety of due diligence, structural, operational and other
issues, including the composition of the Board of Directors and executive
officers for the combined company.
On May 6, 1996, Drs. Eshelman and Harper and representatives from Furman
Selz (PPD's financial advisor) and Lehman Brothers met to discuss a number of
issues, including, among other things, the valuation
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<PAGE> 31
and structure of a potential transaction between PPD and APBI. The potential
Board of Directors and executive officers of the combined company were discussed
and it was determined that Dr. Eshelman would be the Chief Executive Officer of
the combined company and that Mr. John D. Bryer would be the chief operating
officer of the combined Company's CRO Operations, assuming that a decision was
subsequently made to engage in a business combination. It was also determined
that the combined company's Board of Directors would consist of nine members.
On May 31, 1996, at a regularly scheduled meeting of the Board of Directors
of PPD, the PPD Board discussed the strategic merits of a potential merger with
APBI, the structure of such a transaction and a variety of due diligence issues.
In addition, representatives of Furman Selz discussed with PPD's Board of
Directors certain preliminary valuation models.
On June 3, 1996, at a special meeting of the Board of Directors of APBI,
the APBI Board discussed the strategic merits of a potential merger with PPD,
the proposed pricing and structure of such a transaction and a variety of due
diligence issues. A preliminary draft of the Merger Agreement was reviewed with
the APBI Board. In addition, representatives of Lehman Brothers discussed with
APBI's Board of Directors certain preliminary valuation models as they related
to the pricing of the transaction and Lehman Brothers' fairness opinion. In
addition, on June 3, 1996, Dr. Eshelman met with several members of the APBI
Board of Directors. That same day representatives of both companies, Furman Selz
and Lehman Brothers met to discuss a variety of issues relating to the Merger
Agreement. On June 4, 1996, representatives from PPD, APBI, Furman Selz and
Lehman Brothers met to continue discussion of issues relating to the Merger
Agreement.
During June 1996, representatives of PPD, APBI, Furman Selz and Lehman
Brothers met to discuss a number of issues relating to the merger, including
pricing, timing of an announcement, employee benefits, transition planning,
director and officer insurance coverage, registration rights and Board of
Directors composition, among other issues.
On June 18, 1996, PPD's Board of Directors met to review and discuss the
terms of the draft Merger Agreement in the form negotiated to that point. At the
meeting, representatives of Furman Selz made a presentation to PPD's Board with
respect to its financial analyses of such possible Merger. On June 20, 1996,
PPD's Board of Directors reconvened via telephonic conference with
representatives of Furman Selz in which the Board discussed the terms of the
draft Merger Agreement and other outstanding issues. In this conference call,
Furman Selz rendered orally its opinion to the Board, subsequently confirmed in
writing that, as of June 20, 1996, the Merger Consideration to be paid to APBI's
stockholders was fair, from a financial point of view, to PPD. Following the
presentation, the Board voted unanimously to approve the Merger and the Merger
Transactions. For a further discussion of the Furman Selz opinion, see the
discussion set forth under "The Merger -- Opinion of Financial
Advisors -- Opinion of Furman Selz".
On June 19 and June 20, 1996, APBI's Board of Directors met with their
legal and financial advisors to review and consider the final proposed pricing
of the transaction and the terms of the draft Merger Agreement and other
agreements in the forms negotiated to that point. At this meeting,
representatives of Lehman Brothers made a presentation to APBI's Board with
respect to its financial analyses of such possible Merger. In addition, Lehman
Brothers rendered orally its opinion to the Board, subsequently confirmed in
writing that, as of June 20, 1996, the Merger Consideration was fair, from a
financial point of view to the stockholders of APBI. For a further discussion of
the Lehman Brothers presentation and opinion, see the discussion set forth under
"The Merger -- Opinion of Financial Advisors -- Opinion of Lehman Brothers". On
June 20, 1996, following this presentation and further discussion with the
Board, the Board voted unanimously to approve the Merger.
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<PAGE> 32
RECOMMENDATION OF THE BOARD OF DIRECTORS OF PPD
THE BOARD OF DIRECTORS OF PPD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT. PPD'S BOARD OF DIRECTORS BELIEVES THE MERGER IS
FAIR TO AND IN THE BEST INTERESTS OF PPD SHAREHOLDERS.
The Board of Directors of PPD believes that the Merger is favorable for the
following reasons, among others:
(i) The combination of PPD and APBI will create the third largest
company in the CRO industry. The Board of Directors believes that
continuing consolidation among pharmaceutical companies, as well as the
desire of many pharmaceutical companies to decrease the number of CROs with
whom they contract, suggest that larger CROs will benefit
disproportionately in the sector's future growth. Therefore, the Board is
seeking to position PPD among the largest companies in the sector.
(ii) A merger with APBI offered the opportunity to expand PPD's areas
of therapeutic expertise and client relationships, as there is relatively
little overlap in such areas between the two companies. As a result, the
Board also believes that the Merger may lower the risk associated with
client concentration with respect to either company individually.
(iii) The opportunity to expand upon PPD's international operations
through APBI's existing international operations and the ability of the
combined company to expand even more broadly geographically, as demanded by
the pharmaceutical industry's desire to complete global drug development
projects through the conduct of simultaneous clinical trials in multiple
jurisdictions.
(iv) The ability to leverage investments in information systems and
software, and to realize economies of scale through centralization of
general management and administrative functions over a larger revenue base.
(v) The ability to enhance utilization of Phase I and analytical
laboratory service units through improved management of capacity.
(vi) The terms and conditions of the Merger Agreement, including a
provision limiting the maximum number of shares of PPD Common Stock to be
issued to APBI stockholders to approximately 12,000,000 shares and the fact
that PPD would receive a $10,000,000 termination fee if the Merger
Agreement is terminated based upon a determination of APBI's Board of
Directors to entertain or accept any offer or proposal for a merger or
other business combination involving APBI or any of its subsidiaries, other
than the transactions contemplated by the Merger Agreement (an "Acquisition
Proposal"), and APBI's Board of Directors accepts a written, binding
agreement with respect to any such Acquisition Proposal either prior to or
within two years after the termination of the Merger Agreement.
(vii) The fact that the Merger is expected to be treated as a pooling
of interests for accounting purposes under generally accepted accounting
principles and a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
(viii) The opinion of the Board of Directors of PPD that the
consummation of the Merger is likely to be accretive to earnings for 1997.
(ix) The fact that the issuance of additional shares of PPD Common
Stock to APBI stockholders will increase PPD's publicly traded float from
approximately 2,000,000 shares to approximately 14,000,000 shares, which
the Board of Directors believes will be likely to enhance the trading
volume and liquidity of PPD's Common Stock.
(x) The oral opinion of Furman Selz (subsequently confirmed in
writing) to the Board of Directors of PPD to the effect that as of June 20,
1996, and based upon and subject to certain matters, the Merger
Consideration was fair, from a financial point of view, to PPD.
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<PAGE> 33
In the course of its deliberations, the Board of Directors of PPD reviewed
with PPD's management a number of other factors relevant to the Merger. In
particular, the PPD Board considered, among other things: (i) information
concerning PPD's and APBI's respective businesses, prospects, historical and
projected financial performances, financial condition and operations; (ii) an
analyses of the respective projected contributions to net revenues, operating
profits and net incomes of each company; (iii) reports from management on PPD's
due diligence investigation of APBI; (iv) the business reputation and
capabilities of the management of APBI, as well as the compatibility of the
managements and corporate cultures of PPD and APBI; (v) a financial presentation
by Furman Selz, including the opinion of Furman Selz to the effect that the
Merger Consideration is fair, from a financial point of view, to PPD; (vi)
multiples of earnings for publicly traded companies with businesses comparable
to APBI; (vii) multiples paid in other CRO merger and acquisition transactions;
and (viii) the fact that the Merger Agreement permits PPD to terminate the
Merger Agreement if the Average PPD Stock Price declines below $30.00 per share.
In its deliberations concerning the Merger, the Board of Directors of PPD
also considered a variety of additional considerations and risk factors,
including: (i) the historical financial performance of APBI; (ii) the percentage
ownership dilution to PPD shareholders resulting form the issuance to APBI
stockholders of shares of PPD Common Stock in the Merger; (iii) the relatively
lower potential growth rate of APBI's ENVIRON business (although the Board did
consider ENVIRON's strong operating margin history); (iv) the risk that the
public market price of PPD Common Stock might be adversely affected by
announcement of the Merger; (v) the risk that the combined company might not
achieve revenue equal to the sum of the separate companies' anticipated revenue;
(vi) the risk that other benefits sought to be obtained by the Merger will not
be obtained; (vii) the cost of integration of the operations of PPD and APBI and
its impact on the combined results of the combined company after the Merger; and
(viii) other risks described under "Investment Considerations".
The foregoing discussion of the information and factors considered by the
PPD Board is not intended to be exhaustive, but it does include all material
factors considered by the PPD Board of Directors. In view of the wide variety of
factors, both positive and negative, considered by the PPD Board, the Board did
not find it practical to, and did not, quantify or otherwise assign relative
weights to the specific factors considered, and individual directors may have
given differing weights to different factors. After taking into consideration
all of the factors set forth above, the Board of Directors of PPD determined
that the Merger was in the best interests of PPD and its shareholders and that
PPD should proceed with the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF APBI
THE BOARD OF DIRECTORS OF APBI HAS UNANIMOUSLY DETERMINED THAT THE MERGER
IS IN THE BEST INTERESTS OF THE STOCKHOLDERS OF APBI AND APPROVED THE MERGER
AGREEMENT, AND RECOMMENDS THAT THE APBI STOCKHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
In reaching its recommendation, the Board of Directors of APBI considered a
number of factors, including, but not limited to, the following:
(i) The premium to be received by APBI stockholders. The agreed upon
exchange formula provides that at the Effective Time, each share of APBI
Common Stock is to be exchanged for $15.00 of PPD Common Stock as long as
PPD Common Stock is trading within a range of $37.00 to $48.00 per share.
At the close of trading on June 20, 1996, the date the APBI Board of
Directors approved the Merger and the last full day of trading which
preceded the public announcement that APBI and PPD had reached an agreement
to merge, APBI Common Stock was trading at $9.125 per share and PPD Common
Stock was trading at $39.50 per share. During the ten-day trading period
prior to such date, PPD Common Stock had averaged $44.3125 per share. PPD
Common Stock has since traded below $37.00 per share but the exchange
formula is structured so that APBI stockholders will receive at least
$12.16 of PPD Common Stock in exchange for each share of APBI Common Stock.
(ii) Both the strategic fit of the businesses to be combined as a
result of the Merger and the possible cost savings from such a combination.
The combination of PPD with Pharmaco, APBI's clinical
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<PAGE> 34
development business, will create the second or third largest CRO in the
industry. APBI believes that Pharmaco's and PPD's businesses are
complementary in nature in terms of client base, therapeutic specialties
and geographic market areas. APBI also believes that the combined
operations will be able to benefit from its more sophisticated information
technology, finance and accounting systems. Finally, APBI believes that
there will be significant cost savings resulting from the consolidation,
including the elimination of APBI's corporate function.
(iii) The strength of PPD's senior management, and in particular the
ability of Dr. Fredric N. Eshelman, PPD's current chief executive officer,
to lead the combined operations of APBI and PPD. In February 1995, Dr.
Kenneth H. Harper, APBI's chairman, was reappointed to the position of
president and chief executive officer of APBI. Dr. Harper had previously
served in these positions from 1987 through the end of 1992 and both he and
the APBI Board of Directors viewed his reappointment as an interim step
until a new chief executive officer could be identified. The APBI Board of
Directors believes that Dr. Eshelman is the appropriate candidate to lead
the combined companies.
(iv) The historical market price per share of APBI Common Stock and
APBI's financial performance. During the period from January 1, 1993
through the last full day of trading prior to the public announcement that
APBI and PPD had reached an agreement to merge, APBI Common Stock had
traded within a range of $4.125 to $10.00 per share. During this same
period, and particularly during 1993 and 1994, APBI's overall financial
performance had been disappointing. The APBI Board of Directors believes
that the recent divestiture of its worldwide toxicology operations,
together with the sale of several other non-core businesses in 1994 and
1995, has positioned APBI to complete its financial turnaround. While APBI
continues to believe that Pharmaco and ENVIRON, its two core businesses,
represent two of the preeminent companies in the country in their
respective industries, the APBI Board of Directors also believes that
stockholder value will be enhanced through the operation of these
businesses in combination with PPD's business.
(v) The strategic evaluation performed by Lehman Brothers and the
fairness opinion delivered by Lehman Brothers. In December 1995, APBI
announced the engagement of Lehman Brothers to evaluate whether stockholder
value would be enhanced through a separation of APBI into its two operating
groups, the Life Sciences Group and the Environmental Sciences Group. As
part of such engagement, Lehman Brothers separately valued APBI's component
businesses and, based on such valuation, concluded that stockholder value
would not be significantly enhanced merely through a separation of the
businesses. Lehman Brothers subsequently has acted as APBI's financial
advisor in the negotiations with PPD and has delivered their opinion to
APBI that the consideration to be received by APBI's stockholders in the
Merger is fair, from a financial point of view, to the stockholders of
APBI.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the APBI Board of Directors found it impracticable to,
and therefore did not, quantify or otherwise assign relative weights to the
individual factors considered in reaching its determination.
IN APPROVING THE MERGER AGREEMENT, CERTAIN MEMBERS OF THE BOARD OF
DIRECTORS OF APBI MAY BE DEEMED TO HAVE CERTAIN CONFLICTS ON INTEREST. SEE "THE
MERGER -- INTEREST OF CERTAIN PERSONS IN THE MERGER."
OPINIONS OF FINANCIAL ADVISORS
The following descriptions of the opinions and presentations of Furman Selz
and Lehman Brothers contain forward-looking information. See "Investment
Considerations -- Factors for Forward-Looking Information" for information with
respect to the factors that may affect such information. Without limiting the
generality of the foregoing, the projections and forecasts furnished to the
financial advisors rendering the opinions described above were prepared by the
respective managements of PPD or APBI. Neither PPD nor APBI publicly discloses
internal management projections of the type provided to such financial advisors
in connection with such investment banks' analyses of the Merger, and such
projections were not prepared with a view toward public disclosure. These
projections were based on numerous variables and assumptions that are inherently
uncertain and may be beyond the control of management, including, without
limitation, factors
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<PAGE> 35
related to general economic and competitive conditions and prevailing interest
rates. Accordingly, actual results could vary significantly from those set forth
in such projections.
Opinion of Furman Selz
Furman Selz was retained by PPD to act as its financial advisor in
connection with the Merger. In connection with such engagement, the Board of
Directors of PPD requested that Furman Selz, as investment bankers, render an
opinion to the Board of Directors of PPD of the fairness, from a financial point
of view, to PPD of the Merger Consideration to be paid to APBI's stockholders.
On June 20, 1996, Furman Selz rendered to the Board of Directors its opinion to
the effect that, as of such date and based upon and subject to certain
considerations and assumptions, the Merger Consideration to be paid to APBI's
stockholders was fair, from a financial point of view, to PPD.
In conducting its analysis and arriving at its opinion, Furman Selz
reviewed and analyzed, among other things: (i) a draft of the Merger Agreement
dated June 10, 1996; (ii) PPD's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 and APBI's Annual Reports on Form 10-K for the fiscal
years ended December 31, 1993, 1994 and 1995; (iii) PPD's and APBI's respective
Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 1996;
(iv) certain other publicly available information concerning PPD and APBI and
the trading market for their Common Stock; (v) certain internal information
relating to PPD and APBI, including financial forecasts and projections provided
by the respective managements of PPD and APBI; (vi) the results of operations of
PPD and APBI and of certain companies which Furman Selz deemed to be reasonably
similar to PPD and APBI; (vii) certain publicly available information concerning
other companies engaged in businesses which Furman Selz believed to be
comparable to PPD and APBI and the trading markets for certain of such
companies' securities; and (viii) the financial terms of certain recent business
combinations which Furman Selz believed to be relevant. Furman Selz also met
with certain officers and employees of PPD and APBI concerning their businesses
and operations, assets, present condition and future prospects and undertook
such other studies, analyses and investigations as Furman Selz deemed
appropriate.
In arriving at its opinion, Furman Selz did not conduct a physical
inspection of the properties and facilities of PPD or APBI (although it visited
PPD's and APBI's headquarters), nor did it make, obtain or assume any
responsibility for any independent evaluation or appraisal of any such
properties and facilities or of the assets and liabilities of PPD or APBI.
Furman Selz assumed and relied upon the accuracy and completeness of the
financial and other information supplied to or otherwise used by it in arriving
at its opinion and has not attempted independently to verify, or undertaken any
obligation to verify, such information. In addition, Furman Selz assumed that
PPD and APBI's forecasts and projections supplied to it represent the best
currently available estimates and judgment of PPD's and APBI's managements as to
the expected future financial condition and results of operations of PPD and
APBI, and assumed that such forecasts and projections were reasonably prepared
based on such currently available estimates and judgment. Furman Selz assumed no
responsibility for and expressed no view as to such forecasts and projections or
the assumptions on which they are based. Furman Selz further assumed that the
Merger will qualify as a tax-free reorganization within the meaning of Section
368(a) of the Code, and that for accounting purposes, the Merger will be
accounted for as a pooling of interests.
Furman Selz also noted that its opinion was necessarily based on its
assessment of general economic, market and financial conditions existing and
disclosed to Furman Selz as of the date of its opinion and its experience in
similar transactions, as well as its experience in securities valuation in
general. Furman Selz did not express any view as to what the value of PPD's
Common Stock will be when issued to APBI stockholders pursuant to the Merger, or
the price at which PPD's Common Stock will trade prior to or subsequent to the
closing of the Merger.
The full text of the written opinion of Furman Selz dated June 20, 1996,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached as Annex B hereto and is incorporated herein by
reference. Shareholders of PPD are urged to read this opinion carefully in its
entirety. Furman Selz' opinion is directed only to the fairness, from a
financial point of view, to PPD of the Merger
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Consideration to be paid to APBI's stockholders. The opinion is for the benefit
and use of the Board of Directors of PPD in its consideration of the Merger. The
opinion does not constitute a recommendation of the Merger over any other
alternative transactions which may be available to PPD and does not address the
underlying business decision of the Board of Directors of PPD to proceed with or
effect the Merger. Furthermore, the opinion does not constitute a recommendation
by Furman Selz to any PPD shareholder to vote in favor of the Merger. The
summary of the opinion of Furman Selz set forth herein is qualified in its
entirety by reference to the full text of such opinion.
In preparing its opinion to the Board of Directors of PPD, Furman Selz
performed a variety of financial and comparative analyses, including those
described below, and provided the Board of Directors with a written presentation
with respect to such analyses. The summary of such analyses set forth herein
does not purport to be a complete description of the analyses underlying Furman
Selz' opinion. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and relevant
methods of financial analyses and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or a summary description. In arriving at its
opinion, Furman Selz did not attribute any particular weight to any one analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Furman Selz
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Furman Selz made
numerous assumptions with respect to PPD and APBI, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of PPD. The estimates contained in such analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
The following is a brief summary of the financial analyses utilized by
Furman Selz in rendering its opinion. Such summary does not purport to be a
complete description of all of the analyses performed by, or all the factors
considered by, Furman Selz in connection with its opinion.
Analyses Relating to PPD
Comparable Company Analysis. Furman Selz compared selected historical,
current and projected financial and operating results of PPD with the publicly
reported operating results of selected publicly traded CROs that, in Furman
Selz' judgment, were most closely comparable to PPD (the "PPD Comparable
Companies"). The PPD Comparable Companies were chosen by Furman Selz as
companies that, based upon publicly available data, possess general business,
operating and financial characteristics representative of companies in the
industry in which PPD operates, although Furman Selz recognized that each of the
PPD Comparable Companies is distinguishable from PPD in certain respects. Such
PPD Comparable Companies consisted of: ClinTrials Research Inc.; IBAH, Inc.;
PAREXEL International Corporation; and Quintiles Transnational Corp. Furman Selz
considered, with respect to the PPD Comparable Companies, among other things:
(i) selected balance sheet data; (ii) operating statement data, including latest
12-month (previous reported four quarters, or "LTM") net revenue, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT") and estimated 1996 and 1997 net revenue,
EBITDA and EBIT; (iii) LTM earnings per share ("EPS") and estimated 1996 and
1997 EPS; and (iv) historical stock price performance. All 1996 and 1997 results
are based on publicly available estimates.
Furman Selz calculated a range of market multiples for the PPD Comparable
Companies by dividing the total capitalization (total common shares outstanding
as of March 31, 1996 multiplied by closing market price per share on June 14,
1996, or "Market Value", plus total debt, preferred stock and minority
interests, minus cash and cash equivalents as of March 31, 1996) for each PPD
Comparable Company by, among other things, such company's respective LTM net
revenue, EBITDA and EBIT and estimated 1996 and 1997 net revenue, EBITDA and
EBIT. For the PPD Comparable Companies: the LTM net revenue multiples ranged
from
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2.89x to 7.83x, the estimated 1996 net revenue multiples ranged from 2.40x to
6.23x and the estimated 1997 net revenue multiples ranged from 1.85x to 4.53x;
the LTM EBITDA multiples ranged from 38.8x to 54.8x, the estimated 1996 EBITDA
multiples ranged from 30.9x to 41.2x and the estimated 1997 EBITDA multiples
ranged from 14.9x to 29.3x; the LTM EBIT multiples ranged from 54.2x to 81.4x,
the estimated 1996 EBIT multiples ranged from 44.6x to 61.6x and the estimated
1997 EBIT multiples ranged from 20.3x to 41.8x. Furman Selz also calculated
multiples by dividing each of the PPD Comparable Companies' closing sale price
per share on June 14, 1996 by the respective LTM EPS, estimated 1996 EPS and
estimated 1997 EPS. Such stock price to LTM EPS multiples ranged from 84.9x to
122.8x, such stock price to estimated 1996 EPS multiples ranged from 66.6x to
104.7x and such stock price to estimated 1997 EPS multiples ranged from 25.4x to
60.9x. Based upon the closing price per share of PPD's Common Stock on June 14,
1996 of $44.00: PPD's LTM net revenue multiple and estimated 1996 and 1997 net
revenue multiples were 9.13x, 6.80x and 5.03x, respectively; PPD's LTM EBITDA
multiple and estimated 1996 and 1997 EBITDA multiples were 66.5x, 43.4x and
29.9x, respectively; PPD's LTM EBIT multiple and estimated 1996 and 1997 EBIT
multiples were 92.6x, 58.4x and 39.1x, respectively; and, PPD's LTM EPS multiple
and estimated 1996 and 1997 EPS multiples were 122.2x, 88.0x and 62.0x,
respectively. Because of the inherent differences in the business, operations
and prospects of PPD and the business, operations and prospects of the PPD
Comparable Companies, Furman Selz believed it was inappropriate to, and
therefore did not rely solely on the quantitative results of the analysis, but
rather also made qualitative judgments concerning differences between the
financial and operating characteristics and prospects of PPD and the PPD
Comparable Companies that would affect the public trading values of each.
Discounted Cash Flow Analysis. Furman Selz performed a discounted cash
flow analysis of PPD based upon a series of financial projections prepared by
the management of PPD for calendar years ending December 31, 1996 through
December 31, 2001 (the "PPD Projections"). Furman Selz discounted the projected
free cash flows (EBIT less taxes, capital expenditures and changes in net
working capital plus depreciation and amortization) plus the terminal value
(calculated as a multiple of future EBIT) derived from the PPD Projections to
arrive at a present value ("Present Value") for PPD. Furman Selz utilized
multiples of EBIT ranging from 20.0x to 40.0x. From this Present Value, Furman
Selz subtracted all debt obligations appearing on PPD's balance sheet at March
31, 1996 and added the excess cash balance on such balance sheet to arrive at an
equity value ("Equity Value") for PPD. Furman Selz performed sensitivity
analyses to understand the effect on the Equity Value of different discount
rates and terminal value multiples. Such analyses were performed under discount
rate assumptions ranging from 10% to 15%, based upon assumptions regarding such
factors as inflation rates, interest rates, PPD's cost of capital and the
inherent business risk of PPD, as well as the healthcare industry as a whole.
Furman Selz observed that the implied value per share for PPD ranged from $31.42
to $71.53 per share.
Analysis Relating to APBI
Comparable Company Analysis. Furman Selz compared selected historical,
current and projected financial and operating results of APBI with the publicly
reported operating results of selected publicly traded CROs that, in Furman
Selz' judgment, were most closely comparable to APBI (the "APBI Comparable
Companies"). The APBI Comparable Companies were chosen by Furman Selz as
companies that, based upon publicly available data, possess general business,
operating and financial characteristics representative of companies in the
industry in which APBI operates, although Furman Selz recognized that each of
the APBI Comparable Companies is distinguishable from APBI in certain respects.
Such APBI Comparable Companies consisted of: ClinTrials Research Inc.; IBAH,
Inc.; PAREXEL International Corporation; and Quintiles Transnational Corp.
Furman Selz considered with respect to the APBI Comparable Companies, among
other things: (i) selected balance sheet data; (ii) operating statement data,
including LTM net revenue, EBITDA and EBIT and estimated 1996 and 1997 net
revenue, EBITDA and EBIT; (iii) LTM EPS and estimated 1996 and 1997 EPS; and
(iv) historical stock price performance. All 1996 and 1997 results are based on
publicly available estimates.
Furman Selz calculated a range of market multiples for the APBI Comparable
Companies by dividing the total capitalization (Market Value plus total debt,
preferred stock and minority interests, minus cash and
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cash equivalents as of March 31, 1996) for each APBI Comparable Company by,
among other things, such company's respective LTM net revenue, EBITDA and EBIT
and estimated 1996 and 1997 net revenue, EBITDA and EBIT. For the APBI
Comparable Companies: the LTM net revenue multiples ranged from 2.89x to 7.83x,
the estimated 1996 net revenue multiples ranged from 2.40x to 6.23x and the
estimated 1997 net revenue multiples ranged from 1.85x to 4.53x; the LTM EBITDA
multiples ranged from 38.8x to 54.8x, the estimated 1996 EBITDA multiples ranged
from 30.9x to 41.2x and the estimated 1997 EBITDA multiples ranged from 14.9x to
29.3x; the LTM EBIT multiples ranged from 54.2x to 81.4x, the estimated 1996
EBIT multiples ranged from 44.6x to 61.6x and the estimated 1997 EBIT multiples
ranged from 20.3x to 41.8x. Furman Selz also calculated multiples by dividing
each of the APBI Comparable Companies' closing sale price per share on June 14,
1996 by the respective LTM EPS, estimated 1996 EPS and estimated 1997 EPS. Such
stock price to LTM EPS multiples ranged from 84.9x to 122.8x, such stock price
to estimated 1996 EPS multiples ranged from 66.6x to 104.7x and such stock price
to estimated 1997 EPS multiples ranged from 25.4x to 60.9x. Based upon the
closing price per share of APBI's Common Stock on June 14, 1996 of $8.75: APBI's
LTM net revenue multiple and estimated 1996 and 1997 net revenue multiples were
1.43x, 1.42x and 1.21x, respectively; APBI's LTM EBITDA multiple and estimated
1996 and 1997 EBITDA multiples were 14.8x, 16.5x and 12.7x, respectively; APBI's
LTM EBIT multiple and estimated 1996 and 1997 EBIT multiples were 41.0x, 16.5x
and 12.7x, respectively; and, APBI's LTM EPS multiple and estimated 1996 and
1997 EPS multiples were 97.2x, 35.0x and 19.4x, respectively. Based on an
assumed Merger Consideration value of $15.00 per share, APBI's multiples were as
follows: (i) for LTM, estimated 1996, Adjusted estimated 1996, estimated 1997
and Adjusted estimated 1997 net revenue, 2.49x, 2.52x, 2.58x, 1.96x and 2.14x,
respectively; (ii) for LTM, estimated 1996, Adjusted estimated 1996, estimated
1997 and Adjusted estimated 1997 EBITDA, 25.8x, 20.7x, 21.9x, 14.1x and 16.2x,
respectively; (iii) for LTM, estimated 1996, Adjusted estimated 1996, estimated
1997 and Adjusted estimated 1997 EBIT, 71.2x, 33.5x, 36.5x, 21.8x and 25.9x,
respectively; (iv) for LTM, estimated 1996, Adjusted estimated 1996, estimated
1997 and Adjusted estimated 1997 EPS, 173.5x, 55.6x, 60.4x, 37.4x and 44.3x,
respectively. (See "Discounted Cash Flow Analyses" below for a discussion of the
"Adjusted" APBI Projections.) Because of the inherent differences in the
business, operations, and prospects of APBI and the business, operations and
prospects of the APBI Comparable Companies, Furman Selz believed it was
inappropriate to, and therefore did not rely solely on the quantitative results
of the analysis, but rather also made qualitative judgments concerning
differences between the financial and operating characteristics and prospects of
APBI and the APBI Comparable Companies that would affect the public trading
values of each.
Discounted Cash Flow Analyses. Furman Selz performed a discounted cash
flow analysis of APBI based upon a series of financial projections prepared by
the management of APBI for calendar years ending December 31, 1996 through
December 31, 2000 (the "APBI Projections"). Furman Selz also performed a
discounted cash flow analysis of APBI based on certain adjustments to such
projections deemed appropriate by the management of PPD which reflect more
conservative assumptions relating to the future prospects of APBI (the "Adjusted
APBI Projections"). In each of the two discounted cash flow analyses, Furman
Selz discounted the projected free cash flows (EBIT less taxes, capital
expenditures and changes in net working capital plus depreciation and
amortization) plus the terminal value (calculated as a multiple of future EBIT)
derived from the APBI Projections and Adjusted APBI Projections to arrive at
Present Value for APBI. In each of the discounted cash flow analyses, Furman
Selz utilized multiples of EBIT ranging from 10.0x to 30.0x. From the Present
Value in each discounted cash flow analyses, Furman Selz subtracted all debt
obligations appearing on APBI's balance sheet at March 31, 1996 and added the
excess cash balance on such balance sheet to arrive at Equity Value for APBI.
For each discounted cash flow analyses, Furman Selz performed sensitivity
analyses to understand the effect on the Equity Value of different discount
rates and terminal value multiples. Such analyses were performed under discount
rate assumptions ranging from 10% to 20%, based upon assumptions regarding such
factors as inflation rates, interest rates, APBI's cost of capital and the
inherent business risk of APBI, as well as the healthcare industry as a whole.
Furman Selz observed that the implied value per share for APBI utilizing the
APBI Projections ranged from $8.01 to $31.92 per share and that the implied
value per share for APBI utilizing the Adjusted APBI Projections ranged from
$5.13 to $19.17 per share. Furman Selz further observed that the implied
purchase price for APBI was, in both cases, within the implied value per share
for APBI.
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Comparable Transactions Analysis. Furman Selz evaluated publicly available
information regarding nine acquisitions of selected CROs and laboratory
businesses (the "Acquired CROs"). Furman Selz calculated net revenue, EBITDA and
EBIT multiples based on the ratio of LTM net revenue, EBITDA and EBIT
(calculated immediately prior to the acquisition) to adjusted purchase price
(offer price plus latest reported total debt, preferred stock and minority
interests, minus total cash and cash equivalents) for each of the Acquired CROs.
Furman Selz also calculated LTM EPS and 1996 EPS multiples based on the ratio of
LTM net income (calculated immediately prior to the acquisition) and projected
next year net income to the offer price for each Acquired CRO. Such financial
multiples ranged as follows: (i) 0.51x to 3.21x for LTM net revenue; (ii) 16.4x
to 16.4x for LTM EBITDA; (iii) 22.6x to 22.6x for LTM EBIT; (iv) 12.3x to 40.1x
for LTM EPS; and (v) 35.7x to 35.7x for 1996 EPS. (The ranges of LTM EBITDA, LTM
EBIT and 1996 EPS multiples were the same due to the fact that only one
transaction was applicable for each of these respective multiple ranges.) These
multiples were applied to APBI's LTM net revenue, LTM EBITDA, LTM EBIT, LTM EPS
and 1996 EPS to derive a range of implied values for APBI. Based on an assumed
Merger Consideration value of $15.00 per share, APBI's LTM EBITDA and LTM EBIT
multiples were 25.8x and 71.2x, respectively.
None of such acquisitions, however, took place under market conditions or
competitive circumstances that were directly comparable to those of the Merger,
and each of the Acquired CROs is distinguishable from APBI in certain respects.
Accordingly, an analysis of the results of the foregoing is not mathematical nor
necessarily precise; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of companies
and other factors that could affect results.
Pro Forma Merger Analyses
Furman Selz analyzed four separate combined company scenarios: (i) a
combined company analysis utilizing the PPD Projections and the APBI
Projections, assuming an exchange ratio for APBI based on PPD's stock price as
of June 14, 1996 ("Combined Company Analysis 1"); (ii) a combined company
analysis utilizing the PPD Projections and the APBI Projections, assuming the
maximum Exchange Ratio, 0.4054 ("Combined Company Analysis 2"); (iii) a combined
company analysis utilizing the PPD Projections and the Adjusted APBI
Projections, assuming an exchange ratio for APBI based on PPD's stock price as
of June 14, 1996 ("Combined Company Analysis 3"); and (iv) a combined company
analysis utilizing the PPD Projections and the Adjusted APBI Projections,
assuming the maximum Exchange Ratio, 0.4054 ("Combined Company Analysis 4").
None of the four Combined Company Analyses included assumptions related to
synergies of the combined company.
Utilizing the four scenarios, Furman Selz calculated implied pro forma
combined company share prices based on various multiples derived from the PPD
Comparable Companies and APBI Comparable Companies analysis. Utilizing multiples
of LTM net revenue, EBITDA, EBIT and EPS applied to Combined Company Analysis 1
and Combined Company Analysis 3, the combined company implied share price was
calculated to range from $32.60 to $85.52, $45.03 to $62.93, $29.04 to $42.75
and $37.91 to $54.83, respectively. Utilizing multiples of 1996 net revenue,
Adjusted 1996 net revenue, 1996 EBITDA, Adjusted 1996 EBITDA, 1996 EBIT,
Adjusted 1996 EBIT, 1996 EPS and Adjusted 1996 EPS applied to Combined Company
Analysis 1 and Combined Company Analysis 3, the combined company implied share
price was calculated to range from $29.01 to $72.55, $28.51 to $71.27, $47.75 to
$63.13, $45.99 to $60.78, $45.73 to $62.45, $43.43 to $59.15, $43.41 to $68.29
and $41.23 to $64.85, respectively. Utilizing multiples of 1997 net revenue,
Adjusted 1997 net revenue, 1997 EBITDA, Adjusted 1997 EBITDA, 1997 EBIT,
Adjusted 1997 EBIT, 1997 EPS and Adjusted 1997 EPS applied to Combined Company
Analysis 1 and Combined Company Analysis 3, the combined company implied share
price was calculated to range from $28.97 to $68.77, $27.25 to $64.54, $34.01 to
$65.53, $31.08 to $59.73, $32.20 to $64.57, $29.00 to $57.99, $24.42 to $58.56
and $21.98 to $52.72, respectively. Utilizing multiples of LTM net revenue,
EBITDA, EBIT and EPS applied to Combined Company Analysis 2 and Combined Company
Analysis 4, the combined company implied share price was calculated to range
from $29.65 to $77.79, $40.96 to $57.24, $26.42 to $38.89 and $37.91 to $54.83,
respectively. Utilizing multiples of 1996 net revenue, Adjusted 1996 net
revenue, 1996 EBITDA, Adjusted 1996 EBITDA, 1996 EBIT, Adjusted 1996 EBIT, 1996
EPS and Adjusted 1996 EPS applied to Combined
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Company Analysis 2 and Combined Company Analysis 4, the combined company implied
share price was calculated to range from $26.38 to $65.99, $25.94 to $64.83,
$43.44 to $57.42, $41.84 to $55.29, $41.60 to $56.80, $39.42 to $53.81, $43.41
to $68.29 and $41.23 to $64.85, respectively. Utilizing multiples of 1997 net
revenue, Adjusted 1997 net revenue, 1997 EBITDA, Adjusted 1997 EBITDA, 1997
EBIT, Adjusted 1997 EBIT, 1997 EPS and Adjusted 1997 EPS applied to Combined
Company Analysis 2 and Combined Company Analysis 4, the combined company implied
share price was calculated to range from $26.35 to $62.55, $24.79 to $58.71,
$30.94 to $59.60, $28.27 to $54.33, $29.29 to $58.74, $26.38 to $52.75, $24.42
to $58.56 and $21.98 to $52.72, respectively.
Furman Selz performed a series of discounted cash flow analyses based on
the four different pro forma financial projections: Combined Company Analysis 1;
Combined Company Analysis 2; Combined Company Analysis 3; and Combined Company
Analysis 4. Furman Selz applied discount rates of 10% to 15% and utilized
multiples of EBIT of 20.0x to 40.0x. These four discounted cash flow analyses
yielded a range of per share value for the combined company Common Stock, on a
pro forma basis, ranging from $41.99 to $100.31, $38.19 to $91.24, $30.85 to
$72.99 and $28.06 to $66.39, respectively.
Furman Selz examined certain historical financial information for PPD, APBI
and the pro forma combined company resulting from the Merger. Furman Selz
analyzed the relative pro forma contribution of APBI to PPD actual and projected
net revenue, gross profit, EBITDA, EBIT, pretax income and net income for the
years ending December 31, 1996 and 1997 utilizing the PPD Projections, the APBI
Projections and the Adjusted APBI Projections. Utilizing the PPD Projections and
the APBI Projections, Furman Selz observed that immediately following the
consummation of the Merger, assuming an exchange ratio for APBI based on PPD's
stock price on June 14, 1996, shareholders of PPD are expected to own
approximately 46.6% of the pro forma combined entity. Assuming the maximum
Exchange Ratio, 0.4054, shareholders of PPD are expected to own approximately
42.3% of the pro forma combined entity. This analysis indicated that, for the
actual year ended December 31, 1995, APBI would have contributed 82.7% to net
revenue, 74.7% to gross profit, 75.7% to EBITDA, 57.9% to EBIT, 39.6% to pretax
income and 40.1% to net income of the pro forma combined entity. (December 31,
1995 actual APBI net income reflected here was positive due to the fact that
Furman Selz excluded losses on sale of operations, special charges and
restructuring costs.) For the projected year ending December 31, 1996, APBI
would contribute 75.1% to net revenue, 68.6% to gross profit, 69.8% to EBITDA,
65.2% to EBIT, 61.9% to pretax income, 62.3% to net income and 64.0% to net
income based on publicly available estimates of the pro forma combined entity.
For the projected year ending December 31, 1997, APBI would contribute 74.2% to
net revenue, 68.3% to gross profit, 70.2% to EBITDA, 65.7% to EBIT, 63.1% to
pretax income, 63.5% to net income and 65.5% to net income based on publicly
available estimates of the pro forma combined entity. Utilizing the PPD
Projections and the Adjusted APBI Projections, Furman Selz observed that for the
actual year ended December 31, 1995, APBI would have contributed 82.7% to net
revenue, 74.7% to gross profit, 75.7% to EBITDA, 57.9% to EBIT, 39.6% to pretax
income and 40.1% to net income of the pro forma combined entity. For the
projected year ending December 31, 1996, APBI would contribute 74.6% to net
revenue, 68.0% to gross profit, 68.6% to EBITDA, 63.2% to EBIT, 59.9% to pretax
income, 60.3% to net income and 64.0% to net income based on publicly available
estimates of the pro forma combined entity. For the projected year ending
December 31, 1997, APBI would contribute 72.4% to net revenue, 66.0% to gross
profit, 67.3% to EBITDA, 61.7% to EBIT, 59.1% to pretax income, 59.5% to net
income and 65.5% to net income based on publicly available estimates of the pro
forma combined entity. The results of the contribution analysis are not
necessarily indicative of what the actual contributions of the respective
businesses to the combined entity will be in the future.
Separately, Furman Selz noted that, based on the PPD Projections, the APBI
Projections and the Adjusted APBI Projections, and utilizing exchange ratios for
APBI based either on PPD's stock price as of June 14, 1996 or based on the
maximum Exchange Ratio, 0.4054, the Merger would be accretive under each
scenario, on an average EPS basis (excluding any transaction costs associated
with the Merger), in the years ending 1996 and 1997, before any post-Merger
savings or revenue enhancements, to PPD shareholders.
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Other Factors and Comparative Analyses
In rendering its opinion, Furman Selz considered certain other factors and
conducted certain other comparative analyses, including, among other things (i)
the businesses and operations of PPD and APBI and the industries in which they
operate, (ii) PPD's and APBI's historical operating results, (iii) the PPD
Projections, the APBI Projections, the Adjusted APBI Projections, Combined
Company Analysis 1, Combined Company Analysis 2, Combined Company Analysis 3 and
Combined Company Analysis 4, (iv) the current and historical stock price
performance of PPD and APBI, and (v) other factors it deemed relevant.
Fees and Expenses
On March 12, 1996, PPD entered into a letter agreement with Furman Selz
pursuant to which Furman Selz was engaged by PPD to render a written opinion to
the Board of Directors of PPD as to the fairness, from a financial point of
view, to PPD of the Merger Consideration to be paid to APBI's stockholders.
Under this letter agreement, PPD agreed to pay Furman Selz a retainer fee of
$25,000 payable as of the date of such agreement, a fee of $750,000 payable upon
delivery by Furman Selz of the opinion described above and a fee equal to 0.8%
of the aggregate merger consideration (net of the $25,000 and $750,000 referred
to above). In addition to the foregoing compensation, PPD agreed to reimburse
Furman Selz for its out-of-pocket expenses (including legal fees and
disbursements) not to exceed $75,000 in connection with its services and to
indemnify Furman Selz against certain liabilities and expenses arising out of or
in connection with Furman Selz' engagement.
Furman Selz is a nationally recognized investment banking firm and was
selected by PPD based on Furman Selz' experience and expertise. Furman Selz
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. In the
ordinary course of Furman Selz' business, it may actively trade in the equity
securities of PPD and APBI for its own account and for accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities. Furman Selz has provided investment banking services to PPD in the
past, including acting as a managing underwriter for PPD's initial public
offering in January 1996. In addition, Furman Selz' research department has,
from time to time, issued research reports regarding PPD.
Opinion of Lehman Brothers
APBI engaged Lehman Brothers to act as its financial advisor in connection
with the Merger and to render its opinion with respect to the fairness, from a
financial point of view, to the stockholders of APBI of the consideration to be
offered to such stockholders in the Merger.
At the meeting of the APBI Board on June 20, 1996, at which the APBI Board
approved the Merger Agreement, Lehman Brothers delivered its opinion to the
effect that, as of June 20, 1996, and based upon and subject to certain matters
as stated in its written opinion, the consideration to be offered to the
stockholders of APBI pursuant to the Merger is fair, from a financial point of
view, to such stockholders.
The full text of Lehman Brothers' opinion, dated as of June 20, 1996, is
attached as Annex C to this Proxy Statement (the "Lehman Opinion") and sets
forth assumptions made, matters considered and limitations of review undertaken.
The summary of the Lehman Opinion set forth in this Proxy Statement is qualified
in its entirety by reference to the full text of the Lehman Opinion.
Stockholders of APBI are urged to read the Lehman Opinion carefully in its
entirety.
No limitations were imposed by APBI on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
the Lehman Opinion. In preparing the Lehman Opinion, Lehman Brothers did not
ascribe a specific range of values to APBI, but rather made its determination as
to the fairness, from a financial point of view, of the consideration to be
offered to the stockholders of APBI in the Merger, on the basis of the financial
and comparative analyses described below. The Lehman Opinion is for the use and
benefit of the APBI Board and was rendered to the APBI Board in connection with
its
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consideration of the Merger. The Lehman Opinion is not intended to be and does
not constitute a recommendation to any stockholder of APBI as to how such
stockholder should vote with respect to the Merger. Lehman Brothers was not
requested to opine as to, and the Lehman Opinion does not in any matter address,
APBI's underlying business decision to proceed with or effect the Merger.
In preparing the Lehman Opinion, Lehman Brothers reviewed and analyzed (i)
the Merger Agreement and the specific terms of the Merger; (ii) publicly
available information concerning APBI and PPD which Lehman Brothers believed to
be relevant to its inquiry, including without limitation APBI's Form 10-K for
the year ended December 31, 1995 and Form 10-Q for the quarter ended March 31,
1996, and PPD's Form 10-K for the year ended December 31, 1995 and Form 10-Q for
the quarter ended March 31, 1996; (iii) financial and operating information with
respect to the business, operations and prospects of APBI, including such
information as to Pharmaco, ENVIRON and CCCR as separate operating businesses,
furnished to Lehman Brothers by APBI (iv) financial and operating information
with respect to the business, operations and prospects of PPD furnished to
Lehman Brothers by PPD; (v) a trading history of APBI Common Stock since its
initial public offering in March 1987, and of PPD Common Stock since its initial
public offering in January 1996, and a comparison of such trading histories with
those of other companies that Lehman Brothers deemed relevant; (vi) a comparison
of the historical financial results and present financial condition of APBI and
PPD with those of other companies that Lehman Brothers deemed relevant; (vii)
third party research analysts' quarterly and annual earnings estimates for APBI
and PPD; (viii) the potential pro forma financial effects of the Merger; and
(ix) a comparison of the financial terms of the Merger with the terms of certain
other recent transactions that Lehman Brothers deemed relevant. In addition,
Lehman Brothers had discussions with the respective managements of APBI,
including the managements of Pharmaco, ENVIRON and CCCR, as well as PPD,
concerning their respective businesses, operations, assets, financial conditions
and prospects and the potential cost savings, operating synergies and other
strategic benefits expected to result from a combination of the businesses of
APBI and PPD, and undertook such other studies, analyses and investigations as
Lehman Brothers deemed appropriate for the purposes of arriving at the Lehman
Opinion.
In preparing the Lehman Opinion, Lehman Brothers assumed and relied upon
the accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the management of APBI
that they were not aware of any facts that would make such information
inaccurate or misleading. With respect to the financial forecasts of APBI, upon
advice of APBI, Lehman Brothers assumed that such forecasts were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of APBI as to the future financial performance of
APBI and Lehman Brothers relied upon such forecasts in preparing the Lehman
Opinion. With respect to the financial forecasts of PPD, Lehman Brothers assumed
that such forecasts were reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of PPD as to the
future financial performance of PPD and that PPD will perform in accordance with
such forecasts. In preparing the Lehman Opinion, Lehman Brothers did not make or
obtain any evaluations or appraisals of the assets or liabilities of APBI or PPD
and, with APBI's consent, Lehman Brothers did not solicit indications of
interest from third parties with respect to all or a part of APBI's business.
Upon the advice of APBI and its legal and accounting advisors, Lehman Brothers
assumed the Merger will qualify (i) for pooling of interests accounting
treatment and (ii) as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended, and therefore, as a tax-free
transaction to the stockholders of APBI. The Lehman Opinion necessarily was
based upon market, economic and other conditions as they existed on, and could
be evaluated as of, the date of the Lehman Opinion.
In connection with its presentation to the APBI Board on June 20, 1996 and
in preparation and delivery to the APBI Board of the Lehman Opinion, Lehman
Brothers performed certain financial and comparative analyses, as described
below. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances,
and therefore such an opinion is not readily susceptible to summary description.
Furthermore, in preparing the Lehman Opinion, Lehman Brothers did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance
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and relevance of each analysis and factor. Accordingly, Lehman Brothers believes
that its analyses must be considered as a whole and that considering any
portions of such analyses and of the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying the Lehman Opinion. In its analyses, Lehman Brothers made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
APBI. 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 therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
Analyses Relating to APBI
Comparable Company Analysis. Lehman Brothers compared selected financial
data for APBI, Pharmaco and ENVIRON with similar, publicly available data for
selected publicly traded companies engaged in businesses considered by Lehman
Brothers to be generally comparable to Pharmaco and ENVIRON, respectively.
Specifically, with respect to Pharmaco, Lehman Brothers included in its review
ClinTrials Research Inc., PPD, PAREXEL International Corporation and Quintiles
Transnational Corp. (the "Pharmaco Comparable Universe"); and with respect to
ENVIRON, Lehman Brothers included in its review Dames & Moore, Inc., EA
Engineering, Science and Technology, Inc., EMCON, Fluor Daniel GTI, Inc.,
Harding Lawson Associates Group, Inc., Roy F. Weston, Inc. and TRC Companies,
Inc. (the "ENVIRON Comparable Universe"). For each company in the Pharmaco
Comparable Universe and the ENVIRON Comparable Universe, Lehman Brothers
calculated the current market price per share of APBI Common Stock as multiples
of the latest twelve months ("LTM") earnings per share ("EPS"), estimated
calendar 1996 EPS and estimated calendar 1997 EPS as published by First Call
Corporation, as well as the ratio of the multiple of the current market price
per share of APBI Common Stock to estimated calendar 1996 EPS to the five-year
projected EPS growth rate as published by Zack's. Lehman Brothers also
calculated multiples of market value plus net debt to (i) LTM revenues, (ii) LTM
operating profit and (iii) LTM operating cash flow (i.e., operating profit plus
depreciation and amortization). Lehman Brothers compared these multiples with
equivalent multiples for APBI. Lehman Brothers observed for the Pharmaco
Comparable Universe, that the multiples of market value plus net debt to LTM
revenues ranged from 4.2x to 9.1x; that the multiples of market value plus net
debt to LTM operating profit ranged from 57.4x to 92.6x; that the multiples of
market value plus net debt to LTM operating cash flow ranged from 41.1x to
65.9x; that the multiples of the current stock price to LTM EPS ranged from
84.3x to 121.9x; that the multiples of the current stock price to estimated
calendar 1996 EPS ranged from 66.0x to 88.0x; that the multiples of the current
stock price to estimated calendar 1997 EPS ranged from 51.1x to 62.0x; and that
the ratios of the multiples of the current market price per share of common
stock to estimated calendar 1996 EPS to five-year projected EPS growth rates
ranged from 2.3x to 2.7x. Lehman Brothers observed for the ENVIRON Comparable
Universe, that the multiples of market value plus net debt to LTM revenues
ranged from 0.2x to 0.8x; that the multiples of market value plus net debt to
LTM operating profit ranged from 3.7x to 45.2x; that the multiples of market
value plus net debt to LTM operating cash flow ranged from 2.2x to 13.0x; that
the multiples of the current stock price to estimated calendar 1996 EPS ranged
from 9.7x to 16.5x; that the multiples of the current stock price to estimated
calendar 1997 EPS ranged from 9.3x to 22.5x; and that the ratios of the
multiples of the current market price per share of APBI Common Stock to
estimated calendar 1996 EPS to five-year projected EPS growth rates ranged from
0.9x to 2.0x. Lehman Brothers observed that for a range of prices per common
share of APBI, including the closing price of $8.50 as of June 17, 1996 and,
assuming application of the exchange ratio as specified in the Merger Agreement,
at selected values chosen based on the exchange ratio provisions set forth in
the Merger Agreement for the Average PPD Stock Price of $30.00 per share, $37.00
per share, $44.00 per share, $48.00 per share, $50.00 per share and $55.00 per
share, the implied (i) multiples of market value plus net debt to estimated
calendar 1996 revenues, (ii) multiples of market value plus net debt to
estimated calendar 1996 operating profit, (iii) multiples of the stock price to
estimated calendar 1996 EPS and (iv) multiples of the stock price to estimated
calendar 1997 EPS for APBI were 1.4x, 18.7x, 34.0x and 18.9x at $8.50 per share;
2.1x, 28.0x, 48.6x and 27.0x at an Average PPD Stock Price of $30.00 per share;
2.6x, 35.0x, 60.0x and 33.3x at an Average PPD Stock Price of $37.00 per share;
2.6x, 35.0x, 60.0x and 33.3x at an
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Average PPD Stock Price of $44.00 per share; 2.6x, 35.0x, 60.0x and 33.3x at an
Average PPD Stock Price of $48.00 per share; 2.7x, 35.8x, 61.2x and 34.0x at an
Average PPD Stock Price of $50.00 per share; and 2.8x, 37.5x, 64.1x and 35.6x at
an Average PPD Stock Price of $55.00 per share. Because of the inherent
differences between the businesses, operations and prospects of APBI, Pharmaco
and ENVIRON and the businesses, operations and prospects of the companies in the
Pharmaco Comparable Universe and the ENVIRON Comparable Universe, Lehman
Brothers believed that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of these analyses, and accordingly also made
qualitative judgments concerning differences between the financial and operating
characteristics and prospects of APBI, Pharmaco and ENVIRON and the companies in
the Pharmaco Comparable Universe and the ENVIRON Comparable Universe which would
affect the values of APBI, Pharmaco and ENVIRON and the companies included in
the Pharmaco Comparable Universe and the ENVIRON Comparable Universe.
Comparable Transaction Analysis. In the course of its engagement for the
purpose of preparing the Lehman Opinion, Lehman Brothers reviewed several
mergers and acquisitions involving CROs. Lehman Brothers did not present the
results of such review to the APBI Board because, in Lehman Brothers' view,
these transactions were not relevant to a valuation of Pharmaco or APBI as of
June 20, 1996. In its valuation of ENVIRON, Lehman Brothers compared selected
financial and operating data of certain companies that had engaged in mergers or
acquisitions in the environmental consulting industry and which Lehman Brothers
considered relevant, with financial and operating data of ENVIRON. The
transactions Lehman Brothers considered relevant were Heidemej Holding,
NV/Geraghty & Miller, Inc., TRC Companies, Inc./Environmental Solutions, Inc.,
Earth Technology Corp. USA/Summit Environmental Group, Inc., Earth Technology
Corp. USA/HazWaste Industries, Inc., Foster Wheeler, Inc./Ensearch Environmental
Corp., Dames & Moore, Inc./O'Brien-Kreitzberg & Associates, Inc., Dames & Moore,
Inc./Walk Haydel & Associates, Inc., OHM Corp./Rust International, Tetra Tech
Inc./PRC Environmental Management, Tyco International Ltd./Earth Technology
Corp. USA and Fluor Daniel/Groundwater Technology (the "ENVIRON Comparable
Transactions"). Using the same methodology as in the Comparable Company Analysis
described above, Lehman Brothers calculated multiples of LTM revenues, LTM
operating profit and LTM net income for the ENVIRON Comparable Transactions.
Lehman Brothers observed for the ENVIRON Comparable Transactions, that the
multiples of market value plus net debt to LTM revenues ranged from 0.3x to
1.5x; that the multiples of market value plus net debt to LTM operating profit
ranged from 8.5x to 26.9x; and that the multiples of market value to LTM net
income ranged from 14.8x to 27.1x. Lehman Brothers observed that for a range of
prices per common share of APBI, including the closing price of $8.50 as of June
17, 1996 and, assuming application of the exchange ratio as specified in the
Merger Agreement, at selected values chosen based on the exchange ratio
provisions set forth in the Merger Agreement for the Average PPD Stock Price of
$30.00 per share, $37.00 per share, $44.00 per share, $48.00 per share, $50.00
per share and $55.00 per share, the implied (i) multiples of market value plus
net debt to estimated calendar 1996 revenues, (ii) multiples of market value
plus net debt to estimated calendar 1996 operating profit, (iii) multiples of
the stock price to estimated calendar 1996 EPS and (iv) multiples of the stock
price to estimated calendar 1997 EPS for APBI were 1.4x, 18.7x, 34.0x and 18.9x
at $8.50 per share; 2.1x, 28.0x, 48.6x and 27.0x at an Average PPD Stock Price
of $30.00 per share; 2.6x, 35.0x, 60.0x and 33.3x at an Average PPD Stock Price
of $37.00 per share; 2.6x, 35.0x, 60.0x and 33.3x at an Average PPD Stock Price
of $44.00 per share; 2.6x, 35.0x, 60.0x and 33.3x at an Average PPD Stock Price
of $48.00 per share; 2.7x, 35.8x, 61.2x and 34.0x at an Average PPD Stock Price
of $50.00 per share; and 2.8x, 37.5x, 64.1x and 35.6x at an Average PPD Stock
Price of $55.00 per share. Because the reasons for and the circumstances
surrounding each of the transactions analyzed were specific to each transaction
and because of the inherent differences between the business, operations and
prospects of ENVIRON and the businesses, operations and prospects of the
selected acquired companies analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly also made qualitative judgments concerning
differences between the characteristics of these transactions and the Merger
that would affect the value of ENVIRON and such acquired companies.
Discounted Cash Flow Analysis. Lehman Brothers calculated the present
value of the future streams of after-tax cash flows that Pharmaco and ENVIRON
could be expected to produce in the future. The analysis utilized financial
projections as provided to Lehman Brothers by APBI's management for Pharmaco and
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ENVIRON. After-tax cashflows were calculated as the after-tax earnings plus
amortization and depreciation less net changes in non-cash working capital and
capital expenditures. Lehman Brothers calculated terminal values for Pharmaco
and ENVIRON by applying to projected pro forma net income a range of multiples
chosen based on an analysis of the trading multiples of the companies in the
Pharmaco Comparable Universe and the ENVIRON Comparable Universe, respectively,
and on Lehman Brothers' general experience in mergers and acquisitions. The cash
flow streams and terminal values were then discounted to present values using a
range of discount rates, which were chosen based on several assumptions
regarding factors such as the inflation rate, interest rates, the inherent
business risk of Pharmaco and ENVIRON and the cost of capital. Based upon a
range of annual rates of discount of 17.5% to 22.5% and a range of terminal
multiples of pro forma net income for the year ending December 31, 2000 of 20.0x
to 25.0x, the implied value for Pharmaco as of June 30, 1996 was in a range from
approximately $192.6 million to approximately $287.8 million. Based upon a range
of annual rates of discount of 17.5% to 20.0% and a range of terminal multiples
of pro forma net income for the year ending December 31, 2000 of 13.0x to 17.0x,
the implied value for ENVIRON as of June 30, 1996 was in a range from
approximately $48.8 million to approximately $64.9 million. On a combined basis,
the valuations of Pharmaco and ENVIRON as so computed were in a range from
approximately $241.4 million to approximately $352.7 million. Lehman Brothers
observed that the combined value of Pharmaco and ENVIRON represented
substantially all of the value of APBI and that the total transaction values
implied by the Merger for a range of selected values chosen based on the
exchange rate provisions set forth in the Merger Agreement for the Average PPD
Stock Price were approximately $364.6 million for an Average PPD Stock Price of
$30.00 per share, approximately $455.0 million for an Average PPD Stock Price of
$37.00 per share, approximately $455.0 million for an Average PPD Stock Price of
$44.00 per share, approximately $455.0 million for an Average PPD Stock Price of
$48.00 per share, approximately $464.9 million for an Average PPD Stock Price of
$50.00 per share and approximately $487.5 million for an Average PPD Stock Price
of $55.00 per share.
Premiums Paid Analysis. Lehman Brothers compared the implied transaction
value per share of APBI stock for a range of values for the Average PPD Stock
Price from $30.00 per share to $55.00 per share with the closing price of APBI
Common Stock of $8.50 per share on June 17, 1996. Lehman Brothers noted that the
implied transaction value per share for this range of Average PPD Stock Prices
represented a range of premiums of $3.66 per share to $7.52 per share, or,
expressed as a percentage, a range of 43.1% to 88.5%. Lehman Brothers observed
that for completed merger and acquisition transactions over the last two years
with aggregate values greater than $300 million and less than $600 million, the
average premium paid was 36.7% and the median premium paid was 23.8% based upon
the stock price of the target company one day prior to announcement of the
transaction.
Analyses Relating to PPD
Comparable Company Analysis. Lehman Brothers compared selected financial
data for PPD with similar, publicly available data for selected publicly traded
companies engaged in businesses considered by Lehman Brothers to be generally
comparable to PPD. Specifically, Lehman Brothers included in its review
ClinTrials Research Inc., PAREXEL International Corporation and Quintiles
Transnational Corp. (the "PPD Comparable Universe"). For each company in the PPD
Comparable Universe, Lehman Brothers calculated the current market price per
share of PPD Common Stock as multiples of LTM EPS, estimated calendar 1996 EPS
and estimated calendar 1997 EPS as published by First Call Corporation, as well
as the ratio of the multiple of the current market price per share of PPD Common
Stock to estimated calendar 1996 EPS to the five-year projected EPS growth rate
as published by Zack's. Lehman Brothers also calculated multiples of market
value plus net debt to (i) LTM revenues, (ii) LTM operating profit and (iii) LTM
operating cash flow. Lehman Brothers compared these multiples with equivalent
multiples for PPD. Lehman Brothers observed for the PPD Comparable Universe,
that the multiples of market value plus net debt to LTM revenues ranged from
4.2x to 7.7x; that the multiples of market value plus net debt to LTM operating
profit ranged from 57.4x to 76.1x; that the multiples of market value plus net
debt to LTM operating cash flow
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ranged from 41.1x to 51.6x; that the multiples of the current stock price to LTM
EPS ranged from 84.3x to 103.8x; that the multiples of the current stock price
to estimated calendar 1996 EPS ranged from 66.0x to 79.8x; that the multiples of
the current stock price to estimated calendar 1997 EPS ranged from 51.1x to
58.3x; and that the ratios of the multiples of the current market price per
share of common stock of estimated calendar 1996 EPS to five-year projected EPS
growth rates ranged from 2.3x to 2.5x. Lehman Brothers observed that, based upon
the closing price per common share of PPD of $44.00 as of June 17, 1996 that
PPD's multiple of market value plus net debt to LTM revenues was 9.1x; that
PPD's multiple of market value plus net debt to LTM operating profit was 92.6x;
that PPD's multiple of market value plus net debt to LTM operating cash flow was
65.9x; that PPD's multiple of the current stock price to LTM EPS was 121.9x;
that PPD's multiple of the current stock price to estimated calendar 1996 EPS
was 88.0x; that PPD's multiple of the current stock price to estimated calendar
1997 EPS was 62.0x; and that PPD's ratio of the multiple of the current market
price per share of PPD Common Stock of estimated calendar 1996 EPS to five-year
projected EPS growth rate was 2.7x. Because of the inherent differences between
the business, operations and prospects of PPD and the businesses, operations and
prospects of the companies in the PPD Comparable Universe, Lehman Brothers
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly also made qualitative
judgments concerning differences between the financial and operating
characteristics and prospects of PPD and the companies in the PPD Comparable
Universe which would affect the public trading values of PPD and the companies
included in the PPD Comparable Universe.
Discounted Cash Flow Analysis. Lehman Brothers calculated the present
value of the future streams of after-tax cash flows that PPD could be expected
to produce in the future. The analysis utilized financial projections as
provided to Lehman Brothers by PPD's management for PPD. After-tax cash flows
were calculated as the after-tax earnings plus amortization and depreciation
less net changes in non-cash working capital and capital expenditures. Lehman
Brothers calculated terminal values for PPD by applying to projected pro forma
net income for the year ending December 31, 2000 a range of multiples based on
an analysis of the trading multiples of the companies in the PPD Comparable
Universe and on Lehman Brothers' general experience in mergers and acquisitions.
The cash flow streams and terminal values were then discounted to present values
using a range of discount rates, which were chosen based on several assumptions
regarding factors such as the inflation rate, interest rates, the inherent
business risk of PPD and the cost of capital. Based upon a range of annual rates
of discount and a range of terminal multiples of pro forma net income for the
year ending December 31, 2000, Lehman Brothers calculated a range of implied
values for PPD as of June 30, 1996.
Engagement of Lehman Brothers
Lehman Brothers is an investment banking firm engaged in, among other
things, the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements, and
valuations for corporate, estate and other purposes. The APBI Board selected
Lehman Brothers to act as its financial advisor because of its expertise,
reputation and familiarity with the contract research organization industry and
the environmental consulting industry in general and because its investment
banking professionals have substantial experience in transactions similar to the
Merger.
Lehman Brothers has previously rendered certain financial advisory and
investment banking services to APBI, for which Lehman Brothers received
customary compensation. Pursuant to the terms of an engagement letter dated
March 18, 1996, between APBI and Lehman Brothers (the "Engagement Letter"), APBI
agreed to pay Lehman Brothers fees totaling $600,000 upon the issuance of the
Lehman Opinion (which fees are to be credited against any fees that are payable
if a transaction is consummated) and will pay to Lehman Brothers a fee in an
amount equal to 0.8% of the aggregate value of the Merger in connection with the
consummation of the transactions contemplated by the Merger Agreement. APBI has
also agreed to reimburse Lehman Brothers for its reasonable out-of-pocket
expenses (including professional fees and disbursements) not to exceed $50,000
and to indemnify Lehman Brothers against certain losses, claims,
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damages or liabilities arising out of or in connection with its engagement.
Frederick Frank, Vice Chairman of Lehman Brothers, is a director of APBI.
Lehman Brothers acted as lead manager of the initial public offering of
Common Stock by PPD, which was completed in January 1996. In the ordinary course
of its business, Lehman Brothers actively trades in the securities of APBI and
PPD for its own account and for the accounts of its customers and, accordingly,
may at any time hold a long or short position in such securities.
THE MERGER AGREEMENT
The statements and descriptions contained in this Proxy Statement with
respect to the terms and conditions of the Merger Agreement are intended only as
a general discussion of the Merger Agreement and are qualified in their entirety
by reference to the detailed provisions set forth in the Merger Agreement
attached hereto as Annex A. Each shareholder of PPD and stockholder of APBI is
advised to read the Merger Agreement carefully.
General
The Merger Agreement provides that, subject to the approval and adoption
thereof by the shareholders of PPD and the stockholders of APBI and the
satisfaction of the other conditions set forth therein, Merger Sub will be
merged with and into APBI and Merger Sub will cease to exist as a separate legal
entity. At the time the Merger becomes effective, each share of APBI Common
Stock will be converted into the right to receive shares of PPD Common Stock
based upon a ratio (the "Exchange Ratio") computed as follows: (i) if the
Average PPD Stock Price (as defined below) is equal to or less than $48.00 per
share, then the Exchange Ratio shall be equal to the quotient of $15.00 divided
by the Average PPD Stock Price, provided, however, that in such event the
Exchange Ratio shall not be less than 0.3125 nor greater than 0.4054; and (ii)
if the Average PPD Stock Price is greater than $48.00 per share, then the
Exchange Ratio shall be equal to the quotient of (x) divided by (y), where (x)
is $15.00 per share and where (y) is the Average PPD Stock Price less the
product of 0.5 and the difference between the Average PPD Stock Price and
$48.00. No fractional shares of PPD Common Stock will be issued but, in lieu
thereof, each holder of APBI Common Stock, the conversion of whose shares
results in a fractional share of PPD Common Stock, shall receive from PPD an
amount of cash (rounded to the nearest whole cent) equal to the product of such
fraction multiplied by the Average PPD Stock Price. The "Average PPD Stock
Price" means the average of the last sale prices of a share of PPD Common Stock
for the 10 most recent days that PPD Common Stock has traded ending on the day
which is five days immediately prior to the effective date of the Merger, as
reported on the Nasdaq National Market, rounded to the nearest cent. The average
of the last sale prices of a share of PPD Common Stock for the 10 most recent
trading days ended July 15, 1996 was $31.65. It is anticipated that as a result
of the Merger, the former stockholders of APBI will own a majority of the
outstanding stock of PPD.
Effective Time of the Merger
It is the intention of the parties to consummate the Merger as soon as
possible following adoption and approval of the Merger Agreement by the
shareholders of PPD and APBI and satisfaction of all conditions (or, to the
extent permitted, waiver thereof) to the parties' respective obligations to
consummate the Merger. The Merger will become effective when Articles of Merger
and any other necessary documents are filed with the Secretaries of State of the
States of Delaware and North Carolina (the "Effective Time").
Exchange of Shares
At the Effective Time, each then outstanding share of APBI Common Stock
will be converted into shares of PPD Common Stock based upon the Exchange Ratio.
After the Effective Time, each holder of one or more certificates that
represent shares of APBI Common Stock prior to the Effective Time will be
requested to surrender such stock certificate(s), together with a duly executed
letter of transmittal, to Wachovia Bank of North Carolina, N.A., as exchange
agent for the Merger (the "Exchange Agent"), in order to receive a new
certificate representing the number of whole shares of
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PPD Common Stock into which such APBI Common Stock was converted in the Merger,
along with a check in lieu of any fractional shares of PPD Common Stock. From
and after the Effective Time of the Merger, until so surrendered, each
certificate that theretofore represented shares of APBI Common Stock will be
deemed for all purposes to evidence the right to receive the number of whole
shares of PPD Common Stock into which such shares of APBI Common Stock were
converted in the Merger, plus cash in lieu of any fractional share of PPD Common
Stock. Promptly following the Effective Time, persons who owned APBI Common
Stock of record immediately prior to the Effective Time will be sent detailed
instructions concerning procedures to be followed for the submission of their
stock certificates to the Exchange Agent. APBI stockholders are requested not to
surrender their certificates of APBI Common Stock until they receive such a
letter of transmittal.
At and after the Effective Time, there will be no transfers on the books of
APBI of shares of APBI Common Stock that were outstanding immediately prior to
the Effective Time.
Treatment of Stock Options and Employee Stock Purchase Plan
Pursuant to the Merger Agreement, APBI has agreed not to make, except in
the ordinary course of business consistent with past practice, any additional
grants or awards of options to purchase stock of APBI under its stock plans,
including its Employee Stock Purchase Plan. PPD has agreed that in the case of
unexpired options granted under or outside of the APBI Stock Program (other than
out-of-the-money options), the holder will receive from PPD either substitute
options to purchase PPD Common Stock or an amount equal to the excess of the
highest market price for APBI Common Stock on the day, or the earliest prior
date on which a price has been established for trading purposes, preceding the
Merger (the "Measurement Date"), over the purchase price of each share of APBI
Common Stock covered by the option. Such amount shall be payable in shares of
PPD Common Stock valued on the basis of PPD's closing trading price on the day
immediately preceding the Merger. As required by the APBI Stock Program, each
optionholder may elect to receive either substitute options or shares of PPD
Common Stock. For unexpired options for which the highest market price for APBI
Common Stock on the Measurement Date does not exceed the purchase price of the
share of APBI Common Stock covered by the option, the holder will receive from
PPD substituted options to purchase PPD Common Stock under PPD's 1995 Equity
Compensation Plan, so that optionees shall receive for each option representing
the right to purchase one share of APBI Common Stock, the right to purchase a
fractional number of shares of PPD Common Stock equal to the Exchange Ratio. The
exercise price per share of each substitute option will be equal to the exercise
price per share at which APBI Common Stock was purchasable under the prior
Option divided by the Exchange Ratio. As of June 30, 1996, there were
outstanding options to purchase 2,822,405 shares of APBI Common Stock at a
weighted average exercise price of $7.29 per share.
PPD will also assume the APBI Employee Stock Purchase Plan and each
outstanding subscription to purchase shares of APBI Common Stock thereunder.
Each assumed APBI purchase right will be exercisable for that number of whole
shares of PPD Common Stock equal to the product of the number of shares of APBI
Common Stock purchasable under the APBI purchase right immediately prior to the
Effective Time multiplied by the Exchange Ratio and rounded down to the nearest
whole number of shares of PPD Common Stock. The purchase price payable per share
of PPD Common Stock under the assumed right will be equal to 85% of the lower of
(i) the fair market value per share of the APBI Common Stock on the date the
APBI purchase right was granted, divided by the Exchange Ratio and rounded up to
the nearest whole cent, or (ii) the fair market value per share of PPD Common
Stock on the date such right is exercised.
Pursuant to the Merger Agreement, PPD has agreed to file a registration
statement covering the shares of PPD Common Stock issued in exchange for APBI
options and issuable upon exercise of any PPD options substituted for APBI
options, and to use its best efforts to cause such shares to be registered under
the Securities Act and to maintain such registration in effect until the
exercise or termination of the APBI options.
Certain Covenants
Prior to the Effective Time, PPD and APBI are required by the Merger
Agreement to conduct their business only in the ordinary course consistent with
past practice, to use reasonable efforts to preserve intact
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<PAGE> 49
their business organizations and relationships with third parties and to keep
the services of their present officers and key employees. In addition, except
for certain pre-approved transactions, each party has agreed that, without the
consent of the other party, prior to the Effective Time, among other actions (a)
it will not adopt or propose any change in its Articles of Incorporation or
Bylaws; (b) it will not, and will not permit any of its subsidiaries to, merge
or consolidate with any other person or acquire a material amount of assets of
any other person; (c) it will not, and will not permit any subsidiary to, sell,
lease, license or otherwise dispose of any material assets or property except in
the ordinary course consistent with past practice; (d) it will not declare, set
aside or pay dividends or other distributions with respect to any shares of its
capital stock or make any repurchase, redemption or other acquisition of any
outstanding shares of its capital stock or other securities; (e) it will not
amend any material term of any of its outstanding securities; (f) except with
respect to certain PPD acquisitions, it will not, nor will it permit any of its
subsidiaries to, incur, assume or guarantee any indebtedness for borrowed money
other than in the ordinary course of its business and in amounts and on terms
consistent with past practices; (g) it will not, nor will it permit any of its
subsidiaries to, grant any severance or termination pay to any director,
officers or employee, subject to certain limited exceptions, including
previously existing agreements; (h) it will not, nor will it permit any of its
subsidiaries to, enter into, amend or modify in any material respect any
material contract, other than in the ordinary course of business consistent with
past practices; and (i) it will not, nor will it permit any of its subsidiaries
to, take any action that to its knowledge would interfere with PPD's ability to
account for the Merger as a pooling of interests.
In addition, APBI has also agreed that it will not, directly or indirectly,
(a) take any action to solicit or initiate discussions concerning any
Acquisition Proposal (as defined below) or (b) subject to any action taken by
the Board of Directors of APBI in the exercise of its good faith judgment as to
its fiduciary duties to the APBI stockholders, based upon the advice of counsel,
engage in negotiations with, or furnish any nonpublic information relating to
APBI and or its subsidiaries to, any person that may be considering making or
has made, an Acquisition Proposal. "Acquisition Proposal" means any offer or
proposal for a merger or other business combination involving APBI or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement.
Conditions to Consummation of the Merger
The obligations of PPD, Merger Sub and APBI to effect the Merger are
subject to the fulfillment or waiver of a number of conditions, including the
following conditions: (i) no "stop order" shall be in effect with respect to the
Registration Statement of which this Proxy Statement forms a part and there
shall be no proceeding instituted or threatened by the Commission or any state
to suspend the effectiveness thereof; (ii) the holders of outstanding APBI
Common Stock shall have approved the Merger Agreement; (iii) the holders of PPD
Common Stock shall have approved the Merger Agreement; (iv) all necessary
permits, authorizations, regulatory approvals and consents necessary for the
consummation of the Merger shall have been received; (v) the tax opinion
discussed below under the caption "The Merger -- Certain Federal Income Tax
Consequences" shall have been delivered; (vi) the delivery by the independent
public accountants to the parties of certain opinions related to the ability of
PPD to account for the Merger as a pooling of interests; (vii) no material
adverse effect shall have taken place with respect to PPD or APBI; and (viii)
the Effective Time shall have occurred on or before December 31, 1996.
The obligations of PPD and Merger Sub to effect the Merger are also subject
to the fulfillment or waiver of certain additional conditions, including the
following: (i) the material accuracy of the representations and warranties made
by APBI in the Merger Agreement (except where the failure to be true and correct
would not have a material adverse effect on APBI); (ii) the material compliance
by APBI with all material covenants and agreements contained in the Merger
Agreement required to be performed by it prior to the Effective Time; (iii) the
absence of any action or proceeding that seeks to restrain, enjoin or otherwise
prohibit the Merger; and (iv) the receipt of all permits, authorizations,
regulatory approvals and consents from third parties necessary for consummation
of the Merger.
The obligation of APBI to consummate the Merger is also subject to the
fulfillment or waiver of certain additional conditions, including the following:
(i) the material accuracy of the representations and warranties made by PPD and
Merger Sub in the Merger Agreement (except where the failure to be true and
correct
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<PAGE> 50
would not have a material adverse effect on PPD); (ii) the material compliance
by PPD and Merger Sub with all material covenants and agreements contained in
the Merger Agreement required to be performed by them prior to the Effective
Time; (iii) the absence of any action or proceeding that seeks to restrain,
enjoin or otherwise prohibit the Merger; and (iv) the receipt of all permits,
authorizations, regulatory approvals and consents from third parties necessary
for consummation of the Merger.
Amendment and Termination of the Merger Agreement
The Merger Agreement may be amended at any time, whether before or after
approval of the Merger Agreement by the PPD shareholders and APBI stockholders,
by APBI, PPD and Merger Sub; provided, however, that, after any such approval,
no amendment shall alter or change the amount or kind of consideration to be
exchanged for APBI Common Stock, alter or change any term of PPD's Articles of
Incorporation or adversely affect the rights of the APBI stockholders or PPD
shareholders.
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the
shareholders of PPD and the stockholders of APBI: (i) by the mutual written
consent of PPD and APBI; (ii) by either party if the Merger is not consummated
by December 31, 1996 (unless such party's failure to fulfill an obligation under
the Merger Agreement has been a significant cause of such delay); (iii) by
either PPD or APBI if any permanent injunction or other order of a court or
other competent authority preventing consummation of the Merger shall have
become final and nonappealable; (iv) by either party, in the event of a material
breach by the other party of any representation, warranty or agreement contained
in the Merger Agreement which has not been cured within 10 days of written
notice thereof (and which breach would have a material adverse effect on the
non-breaching party); (v) by either PPD or APBI, if the Board of Directors of
APBI following receipt of an Acquisition Proposal in the exercise of its good
faith judgment, after consultation with its legal counsel, withdraws its
approval and recommendation of this Agreement and the transactions contemplated
hereby after determining that to cause APBI to proceed with the transactions
contemplated hereby would not be consistent with the Board of Directors'
fiduciary duty to the stockholders of APBI; or (vi) by either PPD or APBI, if
the Average PPD Stock Price is less than $30.00 per share.
In the event that the Merger Agreement is terminated based upon a
determination of APBI's Board of Directors to entertain or accept an Acquisition
Proposal and APBI's Board of Directors accepts a written binding agreement with
respect to such Acquisition Proposal either prior to or within two years after
the termination of the Merger Agreement, then APBI shall be liable to PPD for a
termination fee in the amount of $10,000,000 to be paid within 90 days after
acceptance of such Acquisition Proposal. In the event PPD terminates the Merger
Agreement or causes the termination of the Merger Agreement other than as
expressly permitted by the Merger Agreement, and such termination does not
constitute a willful breach, then PPD shall be liable to APBI for a termination
fee in the amount of $10,000,000 to be paid within 90 days after such
termination by PPD.
Board of Directors and Management of PPD After the Merger
The Merger Agreement provides that upon consummation of the Merger, PPD's
Board of Directors shall consist of: Ernest Mario, Fredric N. Eshelman, John A.
McNeill, Jr., Stuart Bondurant and four individuals to be designated by APBI.
APBI has designated John D. Bryer, Kirby L. Cramer, Frederick Frank and Frank E.
Loy (the "APBI Designees"), all of whom are currently either members of APBI's
Board of Directors or senior management. Subsequent to the consummation of the
Merger, if not previously agreed to by PPD and APBI, one additional outside
director who has significant knowledge and experience regarding PPD's and APBI's
existing and/or prospective businesses shall be appointed by PPD's then-existing
Board.
PPD currently has a staggered or classified Board of Directors of eight (8)
members: Drs. Mario, Eshelman and Bondurant and John A. McNeill, Jr. (the "PPD
Continuing Directors"), and four other individuals (the "PPD Non-Continuing
Directors"). In order to facilitate the appointment of the APBI Designees to the
PPD Board of Directors, each of the PPD Non-Continuing Directors has agreed to
step down from the PPD Board as of the Effective Time of the Merger, with the
APBI Designees then being appointed
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<PAGE> 51
to fill such vacancies. Assuming that the proposal to amend PPD's Bylaws to
provide for the annual election of its directors is approved, the APBI Designees
would be elected to terms expiring at the 1997 Annual Meeting of Shareholders of
PPD. See "The Merger Transactions -- Approval of Amendment to PPD's Bylaws to
Provide for the Annual Election of Directors". If the proposal to amend PPD's
Bylaws to eliminate the classification of its Board of Directors is approved,
the terms of the PPD Continuing Directors would expire at the 1997 Annual
Meeting of Shareholders of PPD. The members of the Nominating Committee of the
Board of Directors of PPD, to be formed after consummation of the Merger, are
obligated under the terms of the Merger Agreement to use their reasonable best
efforts consistent with their fiduciary duties to cause the PPD Continuing
Directors and the APBI Designees to be nominated for election at the 1997 Annual
Meeting of Shareholders of PPD.
It is currently expected that the executive officers of PPD after
consummation of the Merger will be Ernest Mario, Chairman, Fredric N. Eshelman,
Chief Executive Officer, and Rudy C. Howard, Chief Financial Officer. It is also
currently expected that at and after the Merger, John D. Bryer will serve as
chief operating officer of PPD's CRO operations and Joseph H. Highland will
continue as ENVIRON Chief Executive Officer.
The following table sets forth, as of June 30, 1996, certain information
with respect to the persons who currently are or currently are expected to be
the directors and officers of PPD following the Merger:
<TABLE>
<CAPTION>
SERVED AS
OFFICER OR
CURRENT DIRECTOR OF
POSITION WITH PPD OR
NAME AGE PPD OR APBI APBI SINCE
--------------------------------- --- --------------------------------- --------------
<S> <C> <C> <C>
Ernest Mario, Ph.D............... 57 PPD Chairman of the Board of 1993
Directors
Fredric N. Eshelman, Pharm. D.... 47 PPD Chief Executive Officer and 1990
Director
John A. McNeill, Jr.............. 46 PPD Director 1989
Stuart Bondurant, M.D............ 66 PPD Director 1994
John D. Bryer.................... 62 Pharmaco President and Chief 1994
Executive Officer
Kirby L. Cramer.................. 59 APBI Director 1995
Frederick Frank.................. 63 APBI Director 1988
Frank E. Loy..................... 67 APBI Director 1991
Peter J. Wise, M.D............... 62 PPD President and Chief Operating 1993
Officer, Director(1)
Terrence W. Mischler, Ph.D....... 56 PPD Senior Vice President of 1992
Governmental and International
Affairs
Joshua S. Baker, Ph.D............ 41 PPD Senior Vice President, 1994
Operations
Rudy C. Howard, CPA.............. 38 PPD Chief Financial Officer, Vice 1995
President Finance, Secretary and
Treasurer
Joseph H. Highland, Ph.D......... 51 ENVIRON Chief Executive Officer 1992
</TABLE>
- ---------------
(1) Dr. Wise will not be a director after consummation of the Merger.
Ernest Mario, Ph.D. has served as non-executive Chairman of the Board of
Directors of PPD since July 1993. Dr. Mario also serves as Co-Chairman and Chief
Executive Officer of ALZA Corporation, a pharmaceutical company, a position he
has held since August 1993. Prior to joining PPD and ALZA
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<PAGE> 52
Corporation, Dr. Mario served as Chief Executive of Glaxo Holdings plc, a
pharmaceutical company, from 1989 to March 1993 and as Deputy Chairman of Glaxo
Holdings plc from January 1992 to March 1993. Dr. Mario is also a director of
COR Therapeutics Inc., a biotechnology company.
Fredric N. Eshelman, Pharm.D. has served as Chief Executive Officer and a
director of PPD since July 1990. Dr. Eshelman founded PPD's predecessor and
served as its Chief Executive Officer until its sale to PPD in 1989. Prior to
rejoining PPD in 1990, Dr. Eshelman served as Senior Vice President Development
and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc.
John A. McNeill, Jr. has served as a director of PPD since its
incorporation in 1989, served as PPD's President until July 1990 and as its
Chairman of the Board until July 1993. Mr. McNeill currently serves as Chairman
and Chief Executive Officer of Liberty Commons Nursing Home, Inc., a nursing
home facility, and of Liberty Medical Specialties, Inc., a supplier of home
medical equipment and intravenous services. Mr. McNeill also serves as Chairman
of Ballard Speech Language Associates, a speech, occupational and physical
therapy company, and as President of J.A. McNeill & Sons Inc., an operator of an
assisted living facility.
Stuart Bondurant, M.D. has served as a director of PPD since October 1994.
Dr. Bondurant currently serves as a Professor and Dean Emeritus of the School of
Medicine at the University of North Carolina (Chapel Hill). Dr. Bondurant served
as Director of Epidemiologic Studies at the New York Academy of Medicine from
January 1995 until March 1996. Prior to that, Dr. Bondurant had served as
Professor of Medicine and Dean of the School of Medicine at the University of
North Carolina (Chapel Hill) since 1979.
John D. Bryer served, from 1988 to 1994, as the President of Lexis
Pharmaceuticals Inc. From 1985 to 1988, Mr. Bryer was the President of Ivy
Laboratories, Inc. Mr. Bryer served as Area Director and a member of the Board
of Boots International Limited from 1982 through 1984 and was the Chief
Executive Officer and a member of the Board of Boots Pharmaceuticals, Inc. (a
wholly owned subsidiary of Boots Plc) from 1976 through 1982. Mr. Bryer joined
Pharmaco in June 1994 and in February 1995 he was appointed President and Chief
Executive Officer of Pharmaco International Inc. Mr. Bryer holds a business
degree from Manchester University.
Kirby L. Cramer has served as a member of the Board of Directors of APBI
since December 1995. Mr. Cramer is the Chairman Emeritus of Hazleton
Laboratories Corporation, a contract biological and chemical research
laboratory, which was acquired by Corning Incorporated in 1987. He is Chairman
of the Board of Northwestern Trust Company and also President of Keystone
Capital Company, an investment company. Mr. Cramer received his Bachelor of Arts
degree from Northwestern University and Master of Business Administration degree
from the University of Washington and is a graduate of the Harvard Business
School's Advanced Management Program. In 1988, he received an honorary Doctor of
Laws degree from James Madison University. Mr. Cramer is a member of the
University of Washington Foundation and also is Chairman of the Advisory Board
of the University of Washington School of Business Administration. He is the
past President and Trustee Emeritus of the Darden School Foundation of the
University of Virginia. Mr. Cramer is a member of the Boards of Directors of
Northwestern Trust Company, Immunex Corporation, Unilab Corporation, The
Commerce Bank of Washington, N.A., Landec Corporation, Advanced Technology
Laboratories and International Technology Corp.
Frederick Frank has served as a director of APBI since 1988. Mr. Frank has
been an investment banker with Lehman Brothers since 1969, and is currently Vice
Chairman of the firm. Previously, Mr. Frank served as a Managing Director of
Lehman Brothers from 1972 to 1993, and as Senior Managing Director from 1993 to
1995. Mr. Frank also serves on the Boards of Directors of R.P. Scherer
Corporation, Diagnostic Products and Physicians' Computer Network Inc. Mr. Frank
received his Master of Business Administration from Stanford University in 1958.
Frank E. Loy has served as a director of APBI since 1991. Mr. Loy is
currently the Chairman of the Board of Directors of the League of Conservation
Voters. Mr. Loy served as President of the German Marshall Fund of the United
States from 1981 to 1995. Previously, he served as Director of the Bureau of
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<PAGE> 53
Refugee Programs and as Deputy Assistant Secretary for Economic Affairs of the
United States Department of State, as President and Chief Operating Officer of
the Penn Central Corporation and the Pennsylvania Company, and as Senior Vice
President of Pan American Airways.
Peter J. Wise, M.D. has served as President and Chief Operating Officer and
a director of PPD since October 1993. Prior to joining PPD, Dr. Wise held
various executive positions at Glaxo Inc., most recently as Senior Vice
President Medical Operations, a position he had held since 1988.
Terrence W. Mischler, Ph.D. has served as Senior Vice President of
Governmental and International Affairs of PPD since November 1995. Prior to
holding this position, Dr. Mischler had been Senior Vice President, Clinical
Operations of PPD since October 1992. Prior to joining PPD, Dr. Mischler held
various executive positions at SmithKline Beecham Pharmaceuticals, Inc., a
pharmaceutical company, most recently as Vice President, Clinical Management
Services, a position he had held since March 1990.
Joshua S. Baker, Ph.D. has served as Senior Vice President, Operations of
PPD since November 1995. Prior to holding this position, Dr. Baker had served as
Vice President, Biostatistics & Data Management of PPD since May 1994. Prior to
joining PPD, Dr. Baker had served as Director of Biostatistics of Glaxo Research
Institute, the research and development division of Glaxo Inc., a position he
had held since September 1987.
Rudy C. Howard has served as Chief Financial Officer, Vice President
Finance, Secretary and Treasurer of PPD since October 1995. Prior to joining
PPD, Mr. Howard had worked with Coopers & Lybrand L.L.P., an accounting firm,
since 1990 and had been a partner at Coopers & Lybrand L.L.P. since 1993.
Joseph H. Highland co-founded ENVIRON in 1982. He is currently the Chief
Executive Officer of ENVIRON and has served as such since February 1992. Dr.
Highland also served as a director of APBI from 1990 to 1995. Dr. Highland, who
holds a Ph.D. in Biochemistry from the University of Minnesota's School of
Medicine, served as co-director of the Hazardous Waste Research Program at
Princeton University before joining ENVIRON.
Indemnification
If the Merger is consummated, PPD has agreed that, for a period of six
years after the Effective Time, both PPD and APBI will indemnify each former or
current employee, agent, officer or director of APBI or any of its subsidiaries
in respect to claims arising from or in respect to their acts or omissions on or
prior to the Effective Time (including claims arising out of or in connection
with the Merger). PPD has also agreed for a period of three years after the
Effective Time to pay for and maintain in effect $10,000,000 of directors' and
officers' "tail" liability insurance coverage in favor of former or current APBI
officers and employees with respect to claims arising from facts or events which
occurred on or before the Effective Time.
Expenses
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby (including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such
expense, except that, in the event the Merger shall not be consummated for any
reason or if this Agreement shall be terminated for any reason other than
pursuant to a PPD breach or failure of PPD shareholders to approve the Merger,
expenses incurred in connection with printing this Proxy Statement, registration
and filing fees incurred in connection with this Registration Statement and the
listing of additional shares of PPD Common Stock on Nasdaq, fees in connection
with any pooling letters, and fees, costs and expenses associated with
compliance with applicable state securities laws in connection with the Merger
shall be shared equally by APBI and PPD.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the principal federal income tax
consequences of the Merger. This discussion does not purport to address all
aspects of federal income taxation that may be relevant to particular
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<PAGE> 54
APBI stockholders and may not be applicable to APBI stockholders who are not
citizens or residents of the United States, or who will acquire their PPD Common
Stock pursuant to the exercise or termination of employee stock options or
otherwise as compensation, nor does the discussion address the effect of any
applicable foreign, state, local or other tax laws. Thus, APBI stockholders are
urged to consult their own tax advisors as to the particular tax consequences to
them of the Merger under federal, state, local, foreign or other applicable law.
Taxpayers, such as charitable remainder or lead trusts, taxable trusts, S
Corporations, qualified plans and trusts under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), Individual Retirement Plans under
Section 408 of the Code, foreign citizens, and private foundations, are
specially cautioned to consult their tax advisors prior to approving the Merger.
This discussion is based upon existing provisions of the Code, existing
Treasury Regulations, published interpretations and rulings of the Internal
Revenue Service (the "IRS"), and court decisions in effect as of the date of
this Proxy Statement, all of which are subject to change, retroactively or
prospectively, or possibly differing interpretations. This discussion is also
based upon certain assumptions described below.
As a condition to the consummation of the Merger, APBI is to receive
certain opinions from its counsel, Shaw, Pittman, Potts & Trowbridge, to the
effect that:
(i) the Merger will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code;
(ii) no gain or loss will be recognized by PPD, APBI, or Merger Sub as
a result of the Merger;
(iii) no gain or loss will be recognized by the holders of APBI Common
Stock upon their receipt of PPD Common Stock in exchange for their APBI
Common Stock, except with respect to the cash received in lieu of
fractional shares of PPD Common Stock;
(iv) the tax basis of the shares of PPD Common Stock received by the
holders of APBI Common Stock will be the same as the tax basis of their
APBI Common Stock exchanged therefore (reduced by an amount allocable to
fractional share interests for which cash is received);
(v) the holding period of the PPD Common Stock in the hands of the
holders of APBI Common Stock will include the holding period of their APBI
Common Stock (provided that the APBI stockholders held their shares of APBI
Common Stock as capital assets within the meaning of Section 1221 of the
Code immediately prior to the Effective Time); and
(vi) each APBI stockholder receiving cash in lieu of a fractional
share interest in PPD generally should be treated as if such stockholder
actually received such fractional share interest and such interest was
subsequently redeemed by PPD. This redemption generally should result in
either (i) capital gain or loss measured by the difference between the
amount of cash received and the portion of the stockholder's basis in his
APBI Common Stock allocable to the fractional PPD Common Stock deemed
redeemed or (ii) a dividend in an amount equal to the amount of cash
received, depending, among other things, on the stockholder's percentage
ownership of PPD, including ownership by attribution.
The foregoing, including the opinions of Shaw, Pittman, Potts & Trowbridge,
is conditioned upon the accuracy, as of the date hereof and as of the Effective
Time, of certain assumptions, including, but not limited to the following: (i)
the fair market value of the PPD Common Stock received by each APBI stockholder
will be approximately equal to the fair market value of the APBI Common Stock
exchanged therefor; (ii) following the Merger, APBI will hold at least 90% of
the fair market value of the net assets and at least 70% of the fair market
value of the gross assets held by Merger Sub and APBI immediately prior to the
Merger (treating amounts used by APBI or Merger Sub to pay reorganization
expenses or to redeem APBI Common Stock during the past 36 months as assets of
APBI or Merger Sub, respectively, immediately prior to the Merger); (iii) prior
to the Merger, PPD will be in control of Merger Sub within the meaning of
section 368(c)(1) of the Code; (iv) PPD has no plan or intention of selling or
otherwise disposing of any of the APBI Common Stock received in the Merger, and
APBI has no plan or intention to issue additional shares of its stock that would
result in PPD losing control of APBI within the meaning of section 368(c)(1) of
the Code; (v) PPD has no plan or intention to reacquire any of the PPD Common
Stock issued in connection with the Merger; (vi) PPD has no plan or intention to
liquidate APBI, to merge APBI with and into another
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<PAGE> 55
corporation, to sell or otherwise dispose of the capital stock of APBI, or to
cause APBI to sell or otherwise dispose of the capital stock of APBI, or cause
APBI to sell or otherwise dispose of any of its assets, except for sales or
dispositions in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Code; (vii) any liabilities of Merger Sub assumed by
APBI and any liabilities to which the transferred assets of Merger Sub are
subject were incurred by Merger Sub in the ordinary course of its business;
(viii) after the Merger, APBI will continue its historic business or use a
significant portion of its historic assets in a business; (ix) PPD, Merger Sub,
APBI, and the APBI stockholders will pay their respective expenses, if any,
incurred in connection with the Merger; (x) there is no intercorporate
indebtedness existing between Merger Sub and APBI that was issued, acquired or
will be settled at a discount; (xi) in the Merger, shares of APBI Common Stock
representing control of APBI, as defined in section 368(c)(1) of the Code, will
be exchanged solely for voting stock of PPD (treating APBI stock exchanged for
cash or other property originating with PPD as outstanding APBI Common Stock on
the date of the Merger); (xii) on the date of the Merger, the fair market value
of the assets of APBI will equal or exceed the sum of its liabilities, including
the amount of liabilities, if any, to which its assets are subject; (xiii) PPD
does not own, nor has it owned during the last five years, any shares of the
stock of APBI; (xiv) as of the Effective Time, the value of the PPD Common Stock
received by the APBI stockholders as a result of the Merger will be greater than
50% of the value of all the APBI Common Stock outstanding immediately prior to
the Effective Time (treating fractional share interests for which cash is
received, and stock redeemed within the past 36 months, as outstanding APBI
Common Stock); and (xv) the APBI stockholders have no plan or intention to sell,
exchange, pledge, dispose or engage in any other transaction that results in a
reduction in the risk of ownership with respect to a number of shares of PPD
Common Stock received in the Merger having a value as of the Effective Time of
more than 50% of the value of all the formerly outstanding APBI Common Stock
immediately prior to the Effective Time (treating fractional share interests for
which cash is received, and stock redeemed within the past 36 months, as
outstanding APBI Common Stock).
Pursuant to the Merger Agreement, PPD has agreed to assume certain
outstanding options for the purchase of APBI Common Stock. Such options will be
converted into options to purchase PPD Common Stock by adjusting the number of
shares to be purchased and the exercise price in accordance with the Exchange
Ratio. The other provisions of such APBI options will be unaffected by the
conversion. The holders of these APBI options should not recognize any taxable
income as a result of the conversion of such options into options to purchase
PPD Common Stock.
Pursuant to the Merger Agreement, PPD has also agreed to make a payment
equal in amount to the option spread to holders of certain other outstanding
APBI options. These payments will be made in PPD Common Stock. The holders of
APBI non-qualified stock options exchanged for PPD Common Stock will recognize
taxable income equal to the option spread under such APBI options as a result of
this exchange.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. THE
DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND
PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. THE OPINIONS OF SHAW, PITTMAN, POTTS & TROWBRIDGE DESCRIBED
ABOVE ARE NOT BINDING UPON THE IRS, AND NO RULINGS OF THE IRS WILL BE SOUGHT OR
OBTAINED. THERE IS NO ASSURANCE THAT THE IRS WILL AGREE WITH THE OPINIONS
DESCRIBED ABOVE. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE
COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. ANY SUCH CHANGE MAY OR
MAY NOT BE RETROACTIVE AND COULD AFFECT THE TAX CONSEQUENCES OF THE MERGER. EACH
HOLDER OF APBI STOCK SHOULD CONSULT HIS/HER OWN TAX ADVISOR WITH RESPECT TO THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
It is intended that the Merger will be treated as a pooling of interests
for financial accounting purposes in accordance with generally accepted
accounting principles. As a condition to the obligations of PPD and APBI to
consummate the Merger they must receive, on the closing date under the Merger
Agreement, from
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Coopers & Lybrand L.L.P. and Arthur Andersen LLP, respectively, opinions to the
effect that each of PPD and APBI is eligible to be a participant in a pooling of
interests and, in the case of the Coopers & Lybrand L.L.P. opinion, that such
accounting method is appropriate.
RESTRICTIONS ON RESALES OF PPD COMMON STOCK
The shares of PPD Common Stock to be issued pursuant to the Merger
Agreement have been registered under the Securities Act. Persons who are not
affiliates of APBI and who will not be affiliates of PPD following the Effective
Time may resell their shares of PPD Common Stock without restriction. Under
present law, any public reoffering or sale of such shares by any person who is
an "affiliate" of APBI at the time the Merger Agreement is submitted to a vote
of APBI's stockholders will require either (i) the further registration of such
shares under the Securities Act, (ii) compliance with Rule 145 promulgated under
the Securities Act, which permits sales under certain conditions, as discussed
below, or (iii) the availability of another exemption from such further
registration. In very general terms, under Rule 145, assuming that such a person
is not, at any time, an affiliate of PPD, such a person may publicly sell such
stock if the person: (1) (a) sells during any three-month period no more than
the number of shares permitted under Rule 144(e) (which is generally the greater
of (i) 1% of the total number of shares of PPD Common Stock outstanding, or (ii)
the average weekly volume of trading of PPD Common Stock for the four calendar
weeks prior to the sale); (b) sells in a "brokers' transaction" (which means,
generally, that the broker can do no more than execute the order as agent for
the seller, can receive no more than the usual broker's commission, cannot
solicit orders to buy in connection with the transaction, and cannot believe
that the seller is an underwriter of the securities being sold); (c) does not
solicit orders to buy in connection with the transaction and does not make any
payment in connection with such sale to anyone other than the selling broker;
and (d) sells at a time when there is adequate current public information about
PPD (which will be satisfied so long as PPD's Common Stock remains registered
under the Exchange Act and PPD continues to file the necessary reports under
such act); or (2) (a) holds the shares for at least two years and (b) sells at a
time where there is adequate public information about PPD (as in 1(d) above); or
(3) holds the shares for at least three years.
Certain APBI stockholders will, upon closing of the Merger, become parties
to a Registration Rights Agreement with PPD, pursuant to which they will have
certain rights to have their shares of Common Stock of APBI registered for
resale under the Securities Act. See "Certain Information Concerning PPD --
Description of Capital Stock -- Registration Rights".
Pooling of interests accounting treatment requires that affiliates of APBI
who receive shares of PPD Common Stock in the Merger and affiliates of PPD who
hold PPD Common Stock must not sell or otherwise reduce their risk relative to
their shares of PPD Common Stock until PPD has published consolidated financial
results including the combined operations of PPD and APBI for a period of at
least 30 days following the Effective Time. Under the terms of the Merger
Agreement, PPD has committed to file a Form 8-K with the Commission in order to
satisfy such publication requirement within 30 days of the completion of the
first full month of combined operations of PPD and APBI following the Effective
Time.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Options/Restricted Stock Grants
Under the APBI Stock Program each optionholder will be entitled, at the
optionholder's election, either to receive substitute options to purchase PPD
Common Stock or to have their options, regardless of vesting dates, bought out
by the surviving company on the terms specified in such plan. APBI's senior
management are the holders of a significant number of stock options granted
under the APBI Stock Program.
In June 1995, Dr. Kenneth H. Harper, APBI's president and chief executive
officer, and Mr. John H. Timoney, an APBI senior vice president, were awarded
restricted stock grants for 50,000 and 10,000 shares, respectively, of APBI
Common Stock. Vesting of the awards was contingent on APBI's Common Stock
trading at or above $10.00 per share for a specified period and occurs
automatically upon a change of control of APBI. During the initial 10-day period
following the announcement of APBI's proposed merger with PPD, APBI Common Stock
traded above $10.00 per share, resulting in the vesting of these grants.
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Certain Employment Arrangements
Dr. Joseph H. Highland, the chief executive officer of ENVIRON, and the
other three remaining founders of ENVIRON will each receive a payment of
$185,000 as of the Effective Time of the Merger. They have each committed to use
their best efforts to promote the proposed Merger with PPD to ENVIRON employees,
to foster morale among ENVIRON employees and to assist PPD in developing a
business plan for ENVIRON following the change of control.
Certain Severance Arrangements
As a result of the Merger, Mr. Stephen L. Waechter's position as chief
financial officer and senior vice president of APBI will be eliminated. Mr.
Waechter's severance arrangement includes APBI's payment to him of $250,000
which is equivalent to 15 months of his current base salary. As of the Effective
Time, it is anticipated that Mr. Waechter will enter into a short-term agreement
with PPD to assist in the transition of APBI's finance and accounting function.
Prior to the Effective Time, APBI intends to enter into an agreement with
Mr. John D. Bryer, Pharmaco's chief executive officer, which will provide that
he is entitled to receive severance in an amount equal to one year of his
current base pay in the event his employment with Pharmaco is terminated within
the 12-month period subsequent to the Effective Time. Similar arrangements will
be offered by APBI to five additional members of Pharmaco senior management, but
in each case providing for severance in an amount equal to six months of current
base pay.
Other Arrangements
Mr. Frederick Frank, a member of the Board of Directors of APBI, is
Vice-Chairman of Lehman Brothers. APBI has retained Lehman Brothers as its
financial advisor in connection with the Merger and has agreed to pay Lehman
Brothers a fee of $600,000 for rendering its fairness opinion and a fee equal to
0.8% of the consideration received by APBI stockholders in the Merger (with
amounts paid in connection with the fairness opinion credited towards such fee)
for its services in assisting in the negotiation of the Merger and other
services.
Certain members of APBI's senior management who are also APBI stockholders
will, upon closing of the Merger, become parties to a Registration Rights
Agreement with PPD, pursuant to which they will have certain rights to have
their shares of PPD Common Stock registered for resale under the Securities Act.
See "Certain Information Concerning PPD -- Description of Capital
Stock -- Registration Rights".
REGULATORY AND OTHER LEGAL MATTERS
Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), the Merger may not be consummated unless
certain information has been filed with the Federal Trade Commission (the "FTC")
and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the applicable waiting period under the HSR Act has expired or
been terminated by the FTC and the Antitrust Division. PPD and APBI each
submitted filings required under the HSR Act on July 15, 1996, and each has
requested early termination of the requisite waiting period in connection with
such filings. The waiting period applicable to the Merger is expected to
terminate on August 1, 1996.
At any time before or after the Effective Time, and notwithstanding the
termination of the HSR Act waiting period, the Antitrust Division, the FTC or a
private person could seek under the antitrust laws, among other things, to
enjoin the Merger or to cause PPD to divest itself, in whole or in part, of APBI
or of other business conducted by PPD. Based upon the information available to
them, PPD and APBI believe that the Merger can be consummated in compliance with
the antitrust laws. However, there can be no assurance that a challenge to the
Merger will not be made or that, if such a challenge is made, PPD and APBI will
prevail.
PPD and APBI are not aware of any other material governmental or regulatory
requirements that remain to be complied with in connection with the Merger,
other than applicable securities and "blue sky" laws of the various states and
the filing of Articles of Merger, setting forth the principal terms of the
Merger Agreement, with the Secretary of State of the States of North Carolina
and Delaware.
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THE MERGER TRANSACTIONS
APPROVAL OF AMENDMENT TO PPD'S ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED
SHARES
PPD's Board of Directors has unanimously approved an amendment to the PPD
Restated Articles of Incorporation (the "PPD Articles") to increase the number
of authorized shares of PPD Common Stock from 30,000,000 to 95,000,000 shares.
This amendment to the PPD Articles is a condition to APBI closing the Merger.
Upon consummation of the Merger, PPD will have over 22,800,000 shares of PPD
Common Stock outstanding and reserved for issuance pursuant to existing
instruments. In order to provide PPD with flexibility to engage in financing and
other acquisition transactions with PPD Common Stock, and to otherwise have
sufficient shares of PPD Common Stock available for issuance from time to time
by the Board of Directors upon its determination that such issuance is
appropriate and in the best interest of PPD, the Board has approved, and
recommends that PPD's shareholders approve, the amendment to the PPD Articles
increasing the number of authorized shares of PPD Common Stock to 95,000,000
shares. Other than the Merger with APBI, PPD is presently a party to letters of
intent to acquire four international companies (Depha Team based in Milan,
Italy, Medisys based in Barcelona, Spain, TriLife based in Nurnberg, Germany,
and Q&Q based in Sao Paulo, Brazil), in exchange for cash and shares of PPD
Common Stock. PPD also plans to continue pursuing additional acquisition
opportunities in the contract research organization industry as they become
available and upon a determination that such opportunities meet PPD's
acquisition criteria. See "Investment Considerations -- Considerations with
Respect to PPD's Business -- Risks Associated with Acquisitions; Integration of
Acquired Operations".
Accordingly, it is proposed that Article III of the PPD Articles be amended
to read as follows:
"The corporation shall have authority to issue One Hundred
Million (100,000,000) shares, of which Five Million
(5,000,000) shares shall be preferred stock having a par value
of $.10 per share, and Ninety-Five Million (95,000,000) shares
shall be common stock having a par value of $.10 per share."
If the Merger is not approved or consummated for any reason, but the
amendment to the PPD Articles is approved by the PPD shareholders, the amendment
will be effective and will be implemented by PPD.
The amendment to the PPD Articles to increase the number of authorized
shares of PPD Common Stock requires the affirmative vote of the majority of all
eligible votes present in person or represented by proxy at a meeting of
shareholders at which a quorum is present. The Board of Directors of PPD
unanimously recommends a vote FOR approval and adoption of the proposed
amendment to the PPD Articles to increase the number of authorized shares of PPD
Common Stock from 30,000,000 shares to 95,000,000 shares.
APPROVAL OF INCREASE IN THE AUTHORIZED NUMBER OF DIRECTORS
Section 2(a) of Article III of PPD's Amended and Restated Bylaws ("PPD's
Bylaws") provides for the number of directors of PPD to be fixed, within a range
of eight (8) to twelve (12), by the shareholders. The current number of
directors is eight (8). PPD's Board of Directors has unanimously approved an
increase in the authorized number of directors from eight (8) to nine (9). The
Board believes that this proposal will enable the Board to take timely advantage
of the availability of well-qualified candidates for appointment to the Board.
The increase in the authorized number of directors will also enable PPD to
satisfy a covenant contained in the Merger Agreement, which covenant requires
PPD to place on the Board an additional outside director who has significant
knowledge and experience regarding PPD's and APBI's existing and/or prospective
businesses. See "The Merger -- The Merger Agreement -- Board of Directors and
Management of PPD After the Merger".
Accordingly, it is proposed that pursuant to Section 2(a) of Article III of
PPD's Bylaws the number of directors of PPD be fixed at nine (9).
The approval of the proposed increase in the authorized number of directors
requires the affirmative vote of the holders of 75% of all eligible votes
present in person or represented by proxy at a meeting of
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shareholders at which a quorum is present. The Board unanimously recommends a
vote FOR an increase in the number of directors from eight to nine.
APPROVAL OF AMENDMENT TO PPD'S BYLAWS TO PROVIDE FOR THE ANNUAL ELECTION OF
DIRECTORS
PPD's Board of Directors has unanimously approved an amendment to PPD's
Bylaws to eliminate the classification of the directors, to provide for the
terms for which the current directors have been elected to expire at the 1997
Annual Meeting of Shareholders of PPD and to provide that their successors shall
be elected for terms of one year. If the proposal is approved, all PPD directors
will be elected for one-year terms at the PPD 1997 Annual Meeting of
Shareholders.
If the proposed amendment is approved by PPD's shareholders, Section 2(c)
of Article III of PPD's Bylaws, which currently contains the provision for a
classified Board of Directors, would be eliminated.
The Board of Directors believes that the elimination of the classified
board will provide shareholders with a greater degree of control over management
by permitting them to elect the entire Board each year and to register their
views on the performance of the Board of Directors, collectively, and with
respect to each individual director, on an annual basis.
The amendment to PPD's Bylaws to eliminate classification of the Board
requires the affirmative vote of 75% of all eligible votes present in person or
represented by proxy at a meeting of shareholders at which a quorum is present.
The Board of Directors recommends a vote FOR the proposed amendment to PPD's
Bylaws to provide for the annual election of directors.
APPROVAL OF AMENDMENT TO PPD'S 1995 EQUITY COMPENSATION PLAN
PPD's Board of Directors has unanimously approved an amendment to PPD's
1995 Equity Compensation Plan (the "Equity Plan") to increase the number of
shares reserved for issuance thereunder from 750,000 shares to 1,500,000 shares.
Following is a description of the Equity Plan.
In October 1995, PPD adopted the Equity Plan, which is administered by the
PPD Compensation Committee in compliance with Rule 16b-3 under the Exchange Act.
The Equity Plan provides for the granting of incentive and nonqualified stock
options, stock appreciation rights, restricted stock, deferred stock, stock
awards, performance shares and other stock-based awards (individually, an
"Award" or, collectively, "Awards"). All employees and directors of PPD (other
than Non-Employee Directors), are eligible to participate in the Equity Plan.
The Compensation Committee has discretion to select the employees to whom Awards
will be granted (from among those eligible) and to determine the type, size and
terms and conditions of each Award, and the authority to interpret, construe and
administer the provisions of the Equity Plan. The Compensation Committee's
decisions are conclusive, final and binding on PPD and persons eligible to
participate in the Equity Plan and all other persons having any interest in the
Equity Plan.
Currently a total of 750,000 shares of PPD Common Stock may be subject to
Awards under the Equity Plan, subject to adjustment in accordance with the terms
of the Equity Plan. If this amendment is approved a total of 1,500,000 shares
shall be reserved for issuance under the Equity Plan. PPD Common Stock issued
under the Equity Plan shall be from authorized but unissued shares. To the
fullest extent permitted under Rule 16b-3 under the Exchange Act and Section 422
of the Code, as amended, any shares of PPD Common Stock subject to an Award that
lapses, expires or is otherwise terminated without the issuance of such shares
may become available for new Awards.
As of June 30, 1996, approximately 408,050 shares of PPD Common Stock
remain available for the granting of new Awards. The Board of Directors of PPD
believes it is important and in the best interest of PPD to amend the Equity
Plan to increase the number of shares reserved for issuance thereunder. In
connection with the Merger, holders of certain options to purchase APBI Common
Stock will be granted substitute options to purchase shares of PPD Common Stock
under the Equity Plan. See "The Merger -- The Merger Agreement -- Treatment of
Stock Options and Employee Stock Purchase Plan".
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Awards under the Equity Plan are determined by the Compensation Committee
in its discretion. For this reason, it is not possible to determine the benefits
and amounts that will be received by any individual participant or group of
participants in the future.
Set forth below is a description of the types of Awards which may be
granted under the Equity Plan:
Stock Options
Options (each, an "Option") to purchase shares of PPD Common Stock
that may be incentive or nonqualified stock options, may be granted under
the Equity Plan at an exercise price (the "Option Price") determined by the
Compensation Committee in its discretion, provided that, in the case of
incentive stock options, the Option Price may be no less than the fair
market value of the underlying PPD Common Stock on the date of grant (110%
of fair market value if granted to a 10% shareholder). The Option Price for
nonqualified stock options may be less than the fair market value of the
underlying Common Stock on the date of the grant. The Compensation
Committee may award to any holder of Options the right to receive, prior to
the exercise of such Options, payments in cash or stock on the shares of
PPD Common Stock subject to any stock option in amounts per share equal to
all payments of dividends paid per share on outstanding shares of Common
Stock ("dividend equivalents").
Incentive stock options will expire not later than 10 years after the
date on which they are granted (five years in the case of an incentive
stock option granted to a 10% shareholder). Nonqualified stock options will
expire as determined by the Compensation Committee. Notwithstanding the
foregoing, Options shall lapse and cease to be exercisable upon, or within
a short period following, the termination of the employment with PPD of the
holder of such Option. Options will become exercisable at such times and in
such installments as shall be determined by the Compensation Committee. The
Compensation Committee may also accelerate the period for the exercise of
any or all Options held by an optionee. Terms, timing and amounts of
payment of the Option Price for any Option shall be determined by the
Compensation Committee. As determined by the Compensation Committee,
payment in full or in part may also be made by tendering to PPD shares of
Common Stock having a fair market value equal to the Option Price (or such
portion thereof), by a "cashless exercise" procedure to be approved by the
Compensation Committee.
The holder of an incentive stock option which qualifies under Section
422 of the Code will not recognize income at the time of grant or exercise
of such Option. No federal income tax deduction will be allowable to PPD
upon the grant or exercise of such incentive stock option. However, upon
the exercise of an incentive stock option, any excess in the fair market
price of the Common Stock over the Option Price constitutes a tax
preference item which may have alternative minimum tax consequences for the
employee. When the employee sells such shares more than one year after the
date of transfer of such shares and more than two years after the date of
grant of such incentive stock option, the employee will normally recognize
a long-term capital gain or loss equal to the difference, if any, between
the sale prices of such shares and the Option Price. If the employee does
not hold such shares for the required period, then, when the employee sells
such shares, the employee will recognize ordinary compensation income and
possibly capital gain or loss in such amounts as are prescribed by the Code
and the regulations thereunder and PPD will generally be entitled to a
federal income tax deduction in the amount of such ordinary compensation
income.
An employee to whom a nonqualified stock option is granted will not
recognize income at the time of grant of such Option. When such employee
exercises such nonqualified stock option, the employee will recognize
ordinary compensation income equal to the difference, if any, between the
Option Price paid and the fair market value, as of the date of Option
exercise, of the shares the employee receives. The tax basis of such shares
to such employee will be equal to the Option Price paid plus the amount
includible in the employee's gross income, and the employee's holding
period for such shares will commence on the date on which the employee
recognized taxable income in respect of such shares. Subject to the
applicable provisions of the Code and regulations thereunder, PPD will
generally be entitled to a federal
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income tax deduction in respect of a nonqualified stock option in an amount
equal to the ordinary compensation income recognized by the employee.
Stock Appreciation Rights
A stock appreciation right ("SAR") is an Award entitling an employee
to receive an amount equal to the excess of the fair market value of a
share of Common Stock on the date of exercise over the exercise price per
share specified for the SAR, multiplied by the number of shares of Common
Stock with respect to which the SAR was exercised. An SAR granted in
connection with an Option will be exercisable to the extent that the
related Option is exercisable. Upon the exercise of an SAR related to an
Option, the Option related thereto will be cancelled to the extent of the
number of shares covered by such exercise, and such shares will no longer
be available for grant under the Equity Plan. Upon the exercise of a
related Option, the SAR will be cancelled automatically to the extent of
the number of shares covered by the exercise of the Option. SARs unrelated
to an Option will contain such terms and conditions as to exercisability,
vesting and duration as the Compensation Committee may determine, but such
duration will not be greater than 10 years. Payment upon exercise of an SAR
will be made, at the election of the Compensation Committee, in cash, in
shares of Common Stock or in a combination thereof.
The Compensation Committee may grant under the Equity Plan limited
stock appreciation rights (an "LSAR") to any holder of a stock option. An
LSAR is an SAR which becomes exercisable only in the event of a "change in
control" (as defined below). Any such LSAR will be settled solely in cash.
Restricted Stock
An Award of restricted stock ("Restricted Stock") is an Award of
Common Stock which is issued with the restriction that the holder of
Restricted Stock may not sell, transfer, pledge or assign such Restricted
Stock and with such other restrictions as the Compensation Committee may
impose including restrictions on the rights to vote Restricted Stock and on
the right to receive dividends on the Restricted Stock. Restricted Stock
Awards may be granted under the Equity Plan for or without consideration.
Restrictions on Restricted Stock may lapse in installments based on factors
selected by the Compensation Committee. The Compensation Committee, in the
event of hardship or other special circumstances of a participant whose
employment with PPD was involuntarily terminated, may waive in whole or in
part any or all restrictions with respect to any Restricted Stock held by
such Person, based on such factors as the Compensation Committee shall deem
appropriate. Prior to the expiration of the restricted period, except as
otherwise provided by the Compensation Committee, a grantee who has
received a Restricted Stock Award has the rights of a shareholder of PPD,
including the right to vote and to receive cash dividends on the shares
subject to the Award.
Deferred Stock
An Award of Deferred Stock ("Deferred Stock") is an Award of Common
Stock to be issued in the future to the participant, the payment of which
may be conditioned by the Compensation Committee upon the attainment of
specified performance goals or other criteria. Such Awards may be granted
together with cash dividend equivalents, the payment of which may also be
deferred. Unless otherwise determined by the Compensation Committee, such
dividend equivalents shall be deemed to be reinvested in additional shares
of Deferred Stock, subject to the same deferral limitations as the
underlying Award. The Compensation Committee may also determine that a
designated percentage of the total fair market value of the shares of
Deferred Stock be payable in cash, and may provide that affected
participants may elect to receive an additional percentage of the Award in
cash, subject to certain limits. The participant may elect to defer receipt
of Deferred Stock beyond the expiration of the original Deferral Period,
subject to Compensation Committee approval. The Compensation Committee
shall determine timing and amounts of the payment, if any, to be paid by
any recipient of a Deferred Stock Award in exchange for such deferred
stock. Based upon any factors or criteria that it feels is relevant, the
Compensation Committee has the right to accelerate the vesting of all or
any part of any Deferred Stock.
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Stock Awards
Awards of Common Stock ("Stock Awards") may be granted by the
Compensation Committee only in payment of compensation that has been earned
or as compensation to be earned. The terms and timing of the issuing of
shares of Common Stock subject to any Stock Award shall be determined by
the Compensation Committee. Further, each Stock Award shall be subject to
such terms and conditions, including restrictions on the sale or
disposition of shares of Common Stock subject to such Stock Award, as the
Compensation Committee shall determine.
Performance Shares
A Performance Share Award is an Award of a unit valued by reference to
a designated number of shares of Common Stock, which value may be paid to
the recipient of such Award by delivery of such property as the
Compensation Committee shall determine, including cash or Common Stock, or
any combination thereof, upon achievement of such performance objectives
during a set period of time (the "Performance Period") as the Compensation
Committee shall establish at the time of granting of such Award or
thereafter. Performance objectives may vary from recipient to recipient and
between Awards and shall be based upon such performance criteria or
combination of factors as the Compensation Committee may deem appropriate,
including, for example, minimum earnings per share or return on equity.
Prior to the end of a Performance Period, the Compensation Committee, in
its discretion, may adjust the performance objectives for any Performance
Share Award to reflect any significant events that the Compensation
Committee expects to have a material effect on the applicable performance
objective. The extent to which a grantee is entitled to payment in
settlement of a Performance Share Award at the end of the Performance
Period will be determined by the Compensation Committee, in its sole
discretion, based on whether the related performance objectives have been
met.
Payment in settlement of a Performance Share Award will be made as
soon as practicable following the last day of the Performance Period in
cash or shares of Common Stock.
Other Stock Based Awards
Other Awards that are valued in whole or in part by reference to, or
are otherwise based on, Common Stock ("Other Stock Based Awards"),
including convertible preferred stock, convertible debentures, exchangeable
securities, phantom stock and Stock Awards or options valued by reference
to book value or performance, may be granted by the Compensation Committee
either alone or in connection with other Awards. Subject to the terms of
the applicable Award, recipients of Other Stock Based Awards shall be
entitled to receive, currently or on a deferred basis, interest or dividend
equivalents with respect to the number of shares covered by the Award.
Additional Information
In the event of a change in control or potential change in control and
subject to the approval of the Compensation Committee (as constituted prior
to such change in control) if the Board of Directors has approved such
change in control: all Performance Share Awards shall be deemed to have
been fully earned, and a percentage of payments due thereon equal to the
percentage of the Performance Period that has elapsed shall be made as soon
as practicable after such change in control; the Compensation Committee may
declare any or all then outstanding Options, and any and all related stock
rights outstanding for at least six months, to be immediately vested and
exercisable; the Compensation Committee may declare all restrictions
applicable to Awards of Restricted Stock, Deferred Stock or Other
Stock-Based Awards to have lapsed; and the value of all outstanding
Options, Restricted Stock, Deferred Stock, Performance Shares, Stock Awards
and Other Stock-Based Awards, to the extent vested, shall, unless otherwise
determined by the Compensation Committee, be cashed out at the highest
price per share of Common Stock paid in any transaction reported on the
exchange on which the Common Stock is then traded, or paid or offered
during the 60-day period immediately preceding the change of control. For
purposes of the Equity Plan, a "change in control" shall have occurred if:
(A) any
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person, other than PPD or any employee benefit plan of PPD, (i) makes a
tender or exchange offer for any share of Common Stock pursuant to which
any shares of Common Stock are purchased, or (ii) becomes, together with
its affiliates and associates, the beneficial owner of at least 20% of the
Common Stock; (B) the holders of Common Stock approve a definitive
agreement or plan to merge or consolidate PPD with or into another
corporation, to sell or otherwise dispose of all or substantially all of
its assets, or to liquidate PPD; or (C) during any period of 24 consecutive
months, the individuals who at the beginning of such period constituted the
Board of Directors, together with any new director whose election by the
Board of Directors or nomination for election by PPD's shareholders was
approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, no longer
constitute at least a majority of the Board of Directors. For purposes of
the Equity Plan, a "potential change in control" shall have occurred when:
(A) the holders of Common Stock approve an agreement the consummation of
which would result in a change in control of PPD; or (B) any person, entity
or group (other than PPD or any PPD employee benefit plan) becomes the
beneficial owner of securities of PPD representing five percent or more of
the combined voting power of PPD's outstanding securities and the Board of
Directors passes a resolution to the effect that a potential change in
control for purposes of the Equity Plan has occurred.
The Equity Plan will remain in effect until terminated by the PPD
Board of Directors and thereafter until all Awards granted thereunder are
satisfied by the issuance of shares of Common Stock or the payment of cash
or otherwise terminated pursuant to the terms of the Equity Plan or under
any Award agreements. The Board of Directors may at any time terminate,
modify or amend the Equity Plan; provided, however, that no such amendment,
modification or termination may adversely affect, as determined by the
Compensation Committee, an optionee's or grantee's rights under any Award
theretofore granted under the Equity Plan, except with the consent of such
optionee or grantee, and except in the case of a termination for cause or
competing with PPD, and no such amendment or modification will be effective
unless and until the same is approved by the shareholders of PPD where such
shareholder approval is required to comply with Rule 16b-3 under the
Exchange Act, or other applicable law, regulation or Nasdaq National Market
or stock exchange rule. Rule 16b-3 currently requires shareholder approval
if the amendment would, among other things, materially increase the
benefits accruing to optionees or grantees under the Equity Plan.
The amendment to the 1995 Equity Plan to increase the number of shares
reserved for issuance thereunder from 750,000 to 1,500,000 requires the
affirmative vote of the majority of all eligible votes present in person or
represented by proxy at a meeting of shareholders at which a quorum is present.
The Board of Directors of PPD unanimously recommends a vote FOR approval and
adoption of the proposed amendment to the 1995 Equity Plan described above.
APPROVAL OF AMENDMENT TO PPD'S 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
PPD's Board of Directors has approved an amendment to PPD's 1995 Stock
Option Plan for Non-Employee Directors (the "Non-Employee Director Plan") to
increase the number of shares reserved for issuance thereunder from 50,000
shares to 100,000 shares. Following is a description of the Non-Employee
Director Plan.
In October 1995, PPD adopted the Non-Employee Director Plan. Currently a
total of 50,000 shares of Common Stock have been reserved for issuance under the
Non-Employee Director Plan, subject to adjustment in accordance with the terms
of the plan. As of June 30, 1996, 35,000 shares of PPD Common Stock remain
available for the granting of options under the Non-Employee Director Plan. The
Board of Directors believes it is in the best interest of PPD to amend the
Non-Employee Director Plan to increase the number of shares reserved for
issuance thereunder. If this amendment is approved a total of 100,000 shares of
Common Stock will be reserved for issuance under the Non-Employee Director Plan.
In connection with the Merger, options to purchase 20,000 shares of PPD Common
Stock will be issued under the Non-Employee Director Plan to new non-employee
directors appointed to PPD's expanded Board of Directors. See "The Merger -- The
Merger Agreement -- Board of Directors and Management of PPD After the Merger".
The
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<PAGE> 64
Non-Employee Director Plan is administered by the Compensation Committee. It is
intended that the Non-Employee Director Plan be nondiscretionary and fall within
the exception for formula awards set forth in Rule 16b-3(c)(ii) promulgated
under the Exchange Act, and the powers of the Compensation Committee under the
Non-Employee Director Plan shall be limited to ministerial and nondiscretionary
acts which do not affect the status of the plan as nondiscretionary.
Under the Non-Employee Director Plan, each member of the Board of Directors
of PPD who is not a full- or part-time employee of PPD, who was not such an
employee at any time during the 12 months immediately preceding his or her
election to the Board of Directors and who was not a shareholder of PPD on the
date that the Non-Employee Director Plan was adopted (a "Non-Employee Director")
shall automatically be granted an option to purchase 5,000 shares of Common
Stock upon the date the Non-Employee Director first becomes a director of PPD.
Options granted under the Non-Employee Director Plan shall be exercisable on the
date of grant and shall expire 10 years after the date of grant. The options
shall be exercisable at a price per share equal to the fair market value of the
shares of Common Stock on the date of grant.
The Non-Employee Director Plan will continue until terminated by the Board
of Directors of PPD.
The amendment to the Non-Employee Director Plan to increase the number of
shares reserved for issuance thereunder from 50,000 to 100,000 requires the
affirmative vote of the majority of all eligible votes present in person or
represented by proxy at a meeting of shareholders at which a quorum is present.
The Board of Directors of PPD unanimously recommends a vote FOR approval and
adoption of the proposed amendments to the 1995 Non-Employee Director Plan
described above.
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<PAGE> 65
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma combined financial statements assume a
business combination between PPD and APBI accounted for on a pooling of
interests basis. The pro forma condensed combined balance sheet combines the
condensed balance sheets of PPD and APBI as of March 31, 1996. The pro forma
condensed combined statements of operations combine historical condensed
statements of operations of PPD and APBI for the three-month periods ended March
31, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993.
The unaudited pro forma combined financial statements are not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as representative of future combined results.
The unaudited pro forma combined financial statements are based upon the
historical audited consolidated financial statements and unaudited interim
financial statements of PPD and APBI included elsewhere in this Proxy Statement
and should be read in conjunction with those consolidated financial statements
and related notes thereto.
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<PAGE> 66
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following unaudited pro forma condensed combined balance sheet has been
prepared by combining the condensed balance sheets of PPD and APBI as of March
31, 1996, using the "pooling of interests" method of accounting. This unaudited
pro forma condensed combined balance sheet should be read in conjunction with
the other unaudited pro forma condensed combined financial statements, the
accompanying notes and the historical financial statements of the respective
companies and the related notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
PRO FORMA PRO FORMA
PPD APBI ADJUSTMENTS COMBINED
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 5,012 $ 8,683 $ 13,695
Marketable securities............................... 27,010 27,010
Accounts receivable, net............................ 17,735 56,426 74,161
Prepaid expenses and other current assets........... 921 10,910 11,831
------- -------- ----------- ---------
Total current assets........................ 50,678 76,019 126,697
Property and equipment, at cost less accumulated
depreciation and amortization....................... 5,374 21,086 26,460
Goodwill, less accumulated amortization............... 2,904 10,048 12,952
Other assets.......................................... 364 6,439 6,803
------- -------- ----------- ---------
Total assets................................ $59,320 $113,592 $ 0 $ 172,912
======= ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt................ $ 4,036 $ 277 $ 4,313
Accounts payable.................................... 1,699 3,294 4,993
Accrued liabilities................................. 8,283 21,659 29,942
Advanced billings................................... 3,552 12,971 16,523
------- -------- ----------- ---------
Total current liabilities................... 17,570 38,201 55,771
Long-term debt........................................ 76 552 628
Deferred rent......................................... 2,912 2,912
------- -------- ----------- ---------
Total liabilities........................... 17,646 41,665 59,311
------- -------- ----------- ---------
Shareholders' equity
Common stock........................................ 924 302 942 2,168
Paid-in capital..................................... 39,842 72,244 (5,277) 106,809
Retained earnings................................... 919 4,371 (394) 4,896
Treasury stock, at cost, 713,000 shares............. (4,335) 4,335 --
Unrealized loss on investments...................... (78) (78)
Cumulative translation adjustment................... (11) (183) (194)
Deferred compensation............................... (394) 394 --
------- -------- ----------- ---------
Total shareholders' equity.................. 41,674 71,927 -- 113,601
------- -------- ----------- ---------
Total liabilities and shareholder's
Equity.................................... $59,320 $113,592 $ 0 $ 172,912
======= ======== ========= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE> 67
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma condensed combined statements of
operations have been prepared by combining the condensed statements of
operations of PPD and APBI for each of the three month periods ended March 31,
1996, and 1995 and for the years ended December 31, 1995, 1994, and 1993. The
pro forma combination has been accounted for using the "pooling of interests"
method. These statements should be read in conjunction with the other unaudited
pro forma condensed combined financial statements, the accompanying notes, and
the historical financial statements of the respective companies and the related
notes thereto. The pro forma results are not necessarily indicative of the
combined results to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 THREE MONTHS ENDED MARCH 31, 1995
-------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
PPD APBI ADJUSTMENTS COMBINED PPD APBI ADJUSTMENTS COMBINED
------- ------- ----------- ---------- ------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................. $11,953 $37,389 $ -- $ 49,342 $8,752 $45,773 $ -- $ 54,525
------- ------- ----------- ---------- ------ ------- ----------- ----------
Direct costs.................. 6,384 25,088 (848) 30,624 4,528 32,738 (1,548) 35,718
Selling, general and
administrative expenses..... 3,828 10,365 (1,133) 13,060 2,643 11,568 (1,402) 12,809
Depreciation and
amortization................ 467 1,981 2,448 285 2,950 3,235
------- ------- ----------- ---------- ------ ------- ----------- ----------
10,679 35,453 -- 46,132 7,456 44,306 -- 51,762
------- ------- ----------- ---------- ------ ------- ----------- ----------
Operating income.............. 1,274 1,936 -- 3,210 1,296 1,467 -- 2,763
Interest income (expense),
net......................... 128 128 (758) (758)
Other income (expense)........ 284 (85) 199 (47) 44 (3)
------- ------- ----------- ---------- ------ ------- ----------- ----------
Income before provision for
income taxes................ 1,558 1,979 -- 3,537 1,249 753 -- 2,002
Provision for income taxes.... 639 752 1,391 -- 317 547 864
------- ------- ----------- ---------- ------ ------- ----------- ----------
Net income.................... $ 919 $ 1,227 $ -- $ 2,146 $1,249 $ 436 $ (547) $ 1,138
======= ======= =========== ========== ====== ======= =========== ==========
Weighted average number of
common shares outstanding... 8,673 29,685 21,322 7,279 28,430 19,433
======= ======= ========== ====== ======= ==========
Earnings (loss) per common
share....................... $ 0.11 $ 0.04 $ 0.10 $ 0.17 $ 0.02 $ 0.06
======= ======= ========== ====== ======= ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE> 68
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
--------------------------------------------- --------------------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
PPD APBI ADJUSTMENTS COMBINED PPD APBI ADJUSTMENTS COMBINED
-------- -------- ----------- --------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues................. $ 38,263 $183,253 $ -- $221,516 $28,862 $174,862 $ -- $203,724
-------- -------- ----------- --------- ------- -------- ----------- ---------
Direct costs................. 19,523 127,788 (5,937) 141,374 15,867 122,787 (4,918) 133,736
Selling, general and
administrative expenses.... 13,151 49,821 (5,836) 57,136 8,442 44,642 (4,456) 48,628
Depreciation and
amortization............... 1,478 11,773 13,251 1,001 9,374 10,375
Loss on sale of business..... 19,308 19,308
Special charges and
restructuring costs........ 4,982 4,982
-------- -------- ----------- --------- ------- -------- ----------- ---------
34,152 201,899 -- 236,051 25,310 167,429 -- 192,739
-------- -------- ----------- --------- ------- -------- ----------- ---------
Operating income (loss)...... 4,111 (18,646) -- (14,535) 3,552 7,433 -- 10,985
Interest expense............. (2,834) (2,834) (2,682) (2,682)
Other income (expense)....... 200 18 218 (33) (13) (46)
-------- -------- ----------- --------- ------- -------- ----------- ---------
Income (loss) from continuing
operations before provision
for income taxes........... 4,311 (21,462) -- (17,151) 3,519 4,738 -- 8,257
(Benefit) provision for
income
taxes...................... (16,134) 1,775 (14,359) 1,873 1,498 3,371
-------- -------- ----------- --------- ------- -------- ----------- ---------
Net income (loss) from
continuing operations...... $ 4,311 $ (5,328) $(1,775) $ (2,792) $ 3,519 $ 2,865 $(1,498) $ 4,886
======== ======== =========== ========== ======= ======== =========== ==========
Weighed average number of
common shares
outstanding................ 7,279 28,457 19,443 7,268 28,129 19,164
======== ======== ========== ======= ======== ==========
Earnings (loss) per common
share:
Income from continuing
operations............... $ 0.59 $ (0.19) $ (0.14) $ 0.48 $ 0.10 $ 0.25
======== ======== ========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------
PRO
PRO FORMA FORMA
PPD APBI ADJUSTMENTS COMBINED
------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues................... $20,835 $155,344 $ -- $176,179
------- -------- ----------- --------
Direct costs................... 12,522 115,342 (5,375) 122,489
Selling, general and
administrative expenses...... 4,260 46,783 (4,870) 46,173
Depreciation and
amortization................. 471 10,245 10,716
Special charges and
restructuring costs.......... 9,365 9,365
------- -------- ----------- --------
17,253 171,490 -- 188,743
------- -------- ----------- --------
Operating income (loss)........ 3,582 (16,146) -- (12,564)
Interest expense............... (1,567) (1,567)
Other (expense) income......... (10) 394 384
------- -------- ----------- --------
Income (loss) from continuing
operations before provision
for income taxes............. 3,572 (17,319) -- (13,747)
(Benefit) provision for income
taxes........................ (3,446) 1,445 (2,001)
------- -------- ----------- --------
Net income (loss) from
continuing operations........ $ 3,572 $(13,873) $(1,445) $(11,746)
======= ======== =========== ========
Weighted average number of
common shares outstanding.... 6,955 28,254 18,796
======= ======== ========
Earnings (loss) per common
share
Income from continuing
operations................. $ 0.51 $ (0.49) $ (0.62)
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
64
<PAGE> 69
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. PRO FORMA ADJUSTMENTS
Equity
The pro forma shareholders' equity accounts of PPD and APBI as of March 31,
1996, have been adjusted to reflect the issuance of shares of PPD Common Stock
in exchange for the outstanding shares of APBI and for the value of outstanding
options to purchase shares of APBI Common Stock pursuant to the APBI Stock
Program in accordance with the Merger Agreement. The maximum Exchange Ratio of
0.4054 was used.
The pro forma shareholders' equity accounts have also been adjusted to
reflect the retirement of APBI's treasury stock and completion of the
amortization of APBI's deferred compensation attributable to restricted stock
granted to two executives of APBI, which completely vests upon a change of
control.
Taxes
The historical financial statements of PPD through 1995 did not include a
provision for income taxes because the taxable income of PPD up until December
31, 1995, was included in the income tax returns of the individual shareholders
under PPD's S corporation election. In January 1996, prior to the effectiveness
of the initial public offering of PPD Common Stock, PPD elected to no longer be
treated as an S corporation for tax purposes. Accordingly, from that point
forward PPD became subject to federal and state income taxes and began recording
income taxes payable and deferred taxes in accordance with Statement of
Financial Accounting Standards No. 109. The pro forma statements of operations
for each of 1993, 1994 and 1995 have been adjusted to reflect a tax provision on
taxable income for financial reporting purposes using statutory federal and
state rates that would have resulted if PPD had filed corporate tax returns
during those periods.
Depreciation
The historical statements of operations of APBI reflect depreciation and
amortization expense in direct costs and in selling, general and administrative
expenses, as appropriate. The historical statements of operations of PPD reflect
depreciation and amortization as a separate line item. The pro forma condensed
combined statements of operations reflect a pro forma adjustment to reclassify
APBI's depreciation previously reported in direct costs and in selling, general
and administrative expenses to a separate line item, consistent with PPD's
presentation.
Intercompany Transactions
For all periods presented, intercompany transactions between PPD and APBI
were not material.
2. MERGER EXPENSES
The unaudited pro forma condensed combined statements of operations do not
include direct expenses related to the Merger, which will be recorded at the
time of the Merger.
3. PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share amounts as presented in the unaudited pro
forma condensed combined statements of operations are based on the average
number of shares outstanding of PPD and APBI for each period. Shares of APBI
Common Stock for each period have been adjusted based upon the assumed
conversion of the value of stock options as of the beginning of each period
presented and upon the maximum Exchange Ratio of 0.4054.
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<PAGE> 70
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
AND APPLIED BIOSCIENCE INTERNATIONAL INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS -- (CONTINUED)
4. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The unaudited pro forma condensed combined financial statements assume the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code. See "The Merger -- Certain
Federal Income Tax Consequences."
5. SALE OF APBI'S TOXICOLOGY OPERATIONS
On November 21, 1995, APBI sold its toxicology laboratories located in New
Jersey and Suffolk, England, to Huntingdon International Holdings plc
("Huntingdon"). APBI received as consideration cash proceeds of $32,500,000,
plus an additional $6,000,000 for an equal amount of cash conveyed to Huntingdon
as part of the sale. The consideration also included APBI's acquisition of
Huntingdon's Phase I clinical center located in Leicester, England, at an agreed
upon value of $4,500,000. No pro forma adjustments have been made to APBI's
historical financial statements as a result of this transaction.
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<PAGE> 71
CERTAIN INFORMATION CONCERNING PPD
BUSINESS
PPD is a leading contract research organization ("CRO") providing a broad
range of integrated product development services in the United States and
certain services in Europe to complement the research and development activities
of companies in the pharmaceutical and biotechnology industries. PPD offers its
clients high quality, value-added services designed to reduce drug development
time. Reduced development time allows the client to get its products into the
market faster and to maximize the period of marketing exclusivity and the
economic return for such products. In addition, PPD's integrated services offer
its clients a variable cost alternative to the fixed costs associated with
internal drug development. PPD's professional services include Phase I clinical
testing, laboratory services, Phase II-IV clinical trial management, clinical
data management and biostatistical analysis, treatment Investigational New Drug
Applications, medical writing and regulatory services and healthcare economics
and outcomes research. PPD believes that it is one of a few CROs capable of
providing such a broad range of clinical development services within the United
States.
CRO Industry Overview
The CRO industry provides independent product development services to the
pharmaceutical and biotechnology industries. In general, CROs derive
substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing limited clinical services in the 1970s to a full-service
industry today that encompasses the clinical research process (including
pre-clinical evaluations), study design, clinical trial management, data
collection and biostatistical analysis and product registration support. All of
these services are provided in accordance with applicable government regulations
covering clinical trials and the drug approval process in the jurisdictions
where the services are provided, including the regulations of the FDA in the
United States.
As a general matter, the CRO industry is not capital intensive and the
financial costs of entry into the industry are relatively low. The CRO industry
is highly fragmented, with several hundred small, limited-service providers,
several medium-sized CROs and a few full-service CROs with international
capabilities. Although there are few barriers to entry for small,
limited-service providers, PPD believes that there are significant barriers to
becoming a full-service CRO with international capabilities. Some of these
barriers include the cost and experience necessary to develop broad therapeutic
expertise, the ability to manage complex clinical trials, the experience to
prepare regulatory submissions and the infrastructure and experience to respond
to the international needs of clients.
Trends Affecting the CRO Industry
In 1994, worldwide expenditures on research and development by
pharmaceutical and biotechnology companies are estimated to have been $30
billion, of which PPD estimates $20 billion was spent on drug development
activities of the type offered by the CRO industry. PPD believes that
approximately $1.5 billion of such spending was outsourced to CROs.
PPD believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase for the following reasons:
Cost Containment Pressures
Market forces and governmental initiatives have placed significant pressure
on pharmaceutical and biotechnology companies to reduce drug prices. Pressures
on profit margins have arisen from increased competition as a result of patent
expiration, market acceptance of generic drugs, and governmental and private
efforts to reduce healthcare costs. In addition, private managed care
organizations are beginning to limit the selection of drugs from which
affiliated physicians may prescribe, thereby further increasing competition
among pharmaceutical and biotechnology companies. PPD believes that the
pharmaceutical industry is responding to these pressures by downsizing
operations, decentralizing the internal research and development process and
converting the fixed costs of maintaining a research and development
infrastructure to variable
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<PAGE> 72
costs by outsourcing drug development activities to CROs. The downsizing of
research and development activities also creates demand for CROs as internal
development bottlenecks arise when a large number of compounds emerge from the
research process and need to be pushed through the development pipeline. In
addition, increased pressure to differentiate products and to generate support
for product pricing serves as the foundation for growth in the area of
healthcare economics, both with respect to drugs under development and to
products already on the market.
Revenue Enhancement Through Faster Drug Development
Pharmaceutical and biotechnology companies face increased pressure to bring
innovative, patent-protected medicines to market in the shortest possible time,
while following good science practices and adhering to government regulations.
Pharmaceutical and biotechnology companies are attempting to increase the speed
of new product development, and thereby maximize the period of marketing
exclusivity and economic returns for their products, by outsourcing development
activities to CROs. PPD believes that CROs, by providing specialized development
services, are often able to perform the needed services with a higher level of
expertise or specialization, and more quickly, than a pharmaceutical or
biotechnology company could perform such services internally. In addition, some
pharmaceutical and biotechnology companies are beginning to contract with large
full-service CROs to conduct all phases of clinical trials for new product
programs lasting several years, rather than separately contracting specific
phases of drug development to several different CROs, an approach which PPD
believes may result in shorter overall development times.
Biotechnology Industry Growth
The United States biotechnology industry has grown rapidly over the last
ten years and is developing significant numbers of new drug candidates that will
require regulatory approval. Many of these new drug candidates are now moving
into clinical development and many biotechnology companies do not have the
necessary staff, expertise or financial resources to conduct clinical trials on
their own. Accordingly, many of these companies have chosen to outsource the
product development process rather than expend significant time and resources to
develop an internal clinical development capability. Further, as a result of
recent product development setbacks encountered by some biotechnology companies,
PPD's experience suggests that biotechnology companies are increasingly turning
to CROs for their sophisticated regulatory expertise. Moreover, the
biotechnology industry is expanding into and within Europe, providing growth
opportunities for CROs with international capabilities.
Need for International Support
Pharmaceutical and biotechnology companies are attempting simultaneous
filings of registration packages in several major jurisdictions rather than
following the past practice of sequential filings. The studies to support such
registration packages may include a combination of multinational and domestic
trials. Pharmaceutical and biotechnology companies may turn to CROs for
assistance with such trials as well as collecting, analyzing, integrating and
reporting the data. PPD believes that CROs with an international presence and
management experience in the simultaneous filing of multiple applications may
benefit from these trends.
Consolidation in the CRO Industry
As a result of competitive pressures, the CRO industry is consolidating.
Mergers and acquisitions have resulted in the emergence of several large,
full-service CROs that have the capital, technical and financial resources to
conduct all phases of clinical trials on behalf of pharmaceutical and
biotechnology companies. As pharmaceutical and biotechnology companies
increasingly outsource development, they may turn to larger CROs that provide a
broad range of clinical services, while at the same time they may also limit the
number of CROs they choose to provide such services. PPD believes that this
trend will further concentrate market share among larger CROs with a track
record of speed, flexibility, responsiveness and overall development experience
and expertise.
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<PAGE> 73
Company Strategy
PPD's fundamental strategy is to distinguish its services on the basis of
superior performance. PPD strives to deliver to its clients efficient and
innovative services that accelerate the rate of new product development. PPD
intends to expand the depth and breadth of its services by (i) capitalizing on
its managerial and operational strengths, (ii) focusing on the hiring and
training of its staff and on its strategic marketing initiatives, (iii)
developing its services in healthcare economics and communications consulting
and (iv) pursuing strategic acquisition, geographical expansion and
technological innovation opportunities.
Management and Operational Strength
PPD is guided by senior management who have spent much of their careers as
development experts within major pharmaceutical companies and who have a record
of success before the United States Food and Drug Administration (the "FDA").
PPD concentrates on its core operational strengths in all phases of clinical
studies and other critical path studies such as treatment Investigational New
Drug Applications. Timely performance is based on parallel drug development
processes and leveraging the knowledge and experience of management and
investigators. Basic medical, scientific and regulatory services continue to be
integrated with, and streamlined through, advances in various areas of
technology, all directed toward a reduction in overall development times. PPD
emphasizes efficiencies in each phase of clinical trials, data acquisition, data
management and analysis, report writing and report filing, in order to reduce
the time and cost of obtaining regulatory approval for its clients' products. As
a means of differentiating itself from its competitors, PPD emphasizes
therapeutic area specialization, in particular in the areas of
virology/AIDS/infectious diseases, gastroenterology/metabolic diseases, critical
care, pulmonary/allergy and central nervous system. See "-- Clients and
Marketing".
Hiring and Training
PPD's success is based on the quality and dedication of its employees. PPD
strives to hire the best available people in terms of ability, attitude,
experience and fit with PPD's performance philosophy. New employees are trained
extensively, and PPD believes that it is an industry leader in the thoroughness
of its training programs. In addition, employees are encouraged to upgrade their
skill level through internal and external training. As new technologies develop,
employees are equipped with and trained to make use of such technological
innovations.
Strategic Marketing
PPD carefully focuses its marketing and sales efforts with an emphasis on
high volume clients with needs in the service segments and therapeutic areas in
which PPD specializes. Direct salespeople concentrate on a group of assigned
clients, marketing across service segments. PPD's business development personnel
consult with potential clients early in the bidding stage in order to determine
their needs. The business development personnel and PPD's project managers then
invest significant time to determine the optimal way to design and carry out the
potential client's proposal. PPD's recommendations to the potential client with
respect to study design and implementation are an integral part of PPD's bids
and an important aspect of the integrated services that PPD offers to its
clients. PPD believes that its extensive preliminary efforts relating to the
evaluation of a potential client's proposed clinical protocol and implementation
plan allow accelerated commencement of the clinical trial after a contract has
been awarded to PPD.
Healthcare Economics and Outcomes Research
The healthcare market in the United States is evolving from a fragmented
system of individual providers with little incentive to control costs to a
managed care system in which large managed care organizations attempt to lower
the cost of healthcare through a number of means. PPD believes that such market
dynamics support the need for healthcare economics analysis and outcomes
research. PPD offers programs integrating such analysis in clinical development
programs to support regulatory approval, as well as pricing, marketing and
reimbursement strategies. While PPD's current focus in this area is on its
traditional client base within the
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pharmaceutical and biotechnology industries, both with respect to drugs under
development and products already on the market, PPD expects to extend such
services to payers and providers as well.
Acquisitions
PPD will continue to actively seek strategic acquisitions, both within and
outside current CRO service segments. Acquisition candidates must provide
opportunities for innovation, synergy and growth. For example, PPD's criteria
for acquisitions may include complementary client lists, ability to increase
market share within and across clients, complementary therapeutic area and
service segment strengths, strategic geographic capabilities or particular
process expertise.
Geography
Outside of the United States, PPD currently has operations in Australia and
the United Kingdom, as well as experience in conducting clinical trials in
Canada and Central and South America. PPD has identified certain strategic areas
of promise where CROs currently have limited or no presence. PPD intends to
selectively pursue these and other strategic opportunities internationally.
Technology
PPD believes that optimizing the use of information technology in
conjunction with drug development experience can accelerate the development
process and yield valuable marketing information. PPD has experience in the use
of information technology in clinical trial management and offers or is
developing a wide range of technology-based services, including initial market
research and study design, remote monitoring and data acquisition, ongoing study
management, outcomes research, patient and disease management and the filing of
Computer Assisted New Drug Applications and Product License Applications. PPD
believes that the use of third-party systems and selective internally developed
software allows it to offer its clients the best available technology for
expediting the drug development process.
Services
PPD has designed its various services to be flexible and integrated in
order to assist its clients in optimizing their research and development
spending through the clinical stages of the drug development process. See "The
Drug Development Process". PPD provides Phase I clinical testing, laboratory
services, Phase II-IV clinical trial management, clinical data management and
biostatistical analysis, treatment Investigational New Drug Applications,
medical writing and regulatory services and healthcare economics and outcomes
research for its clients. PPD's services can be provided individually or as an
integrated package of services to meet its clients' needs.
Phase I Clinical Testing
After an Investigational New Drug Application has been filed with the FDA,
human testing of a new drug can begin. The drug is typically first administered
to healthy volunteers to determine the drug's basic safety data based on
tolerance, absorption, metabolization, excretion and other pharmacological
actions. Later, special studies are conducted in volunteers and special patient
populations to further define the drug's overall pharmacological profile. PPD
conducts its Phase I clinical testing services in its 66-bed Clinical Research
Unit located near Research Triangle Park, North Carolina. The Clinical Research
Unit's professional nursing staff administers general Phase I safety tests,
special population studies and bioavailability and bioequivalence testing.
Special population studies may involve the elderly, women or patients with
specific diagnoses such as renal failure or asymptomatic HIV disease.
Bioavailability and bioequivalence testing, generally conducted each time the
dosage, form or formulation of the drug is modified, involves administration of
the test compounds and obtaining biological fluids sequentially over time to
measure absorption, distribution, metabolization and excretion of the drug.
PPD attempts to manage its Clinical Research Unit services to maximize
scheduling flexibility and efficiency. The services also can be smoothly and
quickly integrated with PPD's other service segments such as
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laboratory, pharmacokinetic and biostatistical services. PPD is one of a few
full-service CROs offering Phase I clinical testing in the United States.
Laboratory Services
PPD provides bioanalytical and product analysis services through its
laboratory in Madison, Wisconsin. Biological fluid samples from clinical studies
such as those conducted by PPD's Clinical Research Unit must be transported to a
laboratory such as PPD's to be analyzed for drug and metabolite content and
concentration. PPD currently has approximately 350 validated assays available
for its clients' use in conducting laboratory analyses, thereby qualifying PPD
for a wide range of assignments. PPD's laboratory also processes fluid samples
from pre-clinical studies.
Product analysis services include dissolution and stability studies which
are necessary to characterize a dosage form's release patterns and stability
under various environmental conditions in the intended package for marketing.
These studies must be carried out over the commercial life of products,
beginning at the clinical trial stage. New formulations require the same set of
studies as the original dosage form.
PPD is one of a few full-service CROs able to offer its clients the
advantages of both bioanalytical and product analysis services and a Phase I
clinical testing unit in the United States.
Phase II-IV Clinical Trial Management
The core of PPD's business is a comprehensive package of services for the
conduct of Phase II-IV clinical trials, which, in concert with its other
analytical and Phase I testing services, allows PPD to offer its clients an
integrated package of clinical management services. PPD has significant clinical
trials experience in the therapeutic areas of virology/AIDS/infectious diseases,
gastroenterology/metabolic diseases, critical care, pulmonary/allergy and
central nervous system.
Clients' needs are served by conducting clinical trials through a dedicated
project team. A project manager supervises all aspects of the conduct of the
clinical trial, while PPD's clinical research associates are in the field,
monitoring the trial at the various investigational sites where it is being
conducted. Within this project-oriented structure, PPD can manage every aspect
of clinical trials in Phases II through IV of the drug development process,
including protocol development, case report form ("CRF") design, feasibility
studies, investigator selection, recruitment and training, site initiation and
monitoring, accelerated patient enrollment, development of training materials
for investigators and training of clients' staff.
PPD monitors its clinical trials in strict adherence to government
regulations. PPD has adopted standard operating procedures which are intended to
satisfy regulatory requirements and serve as a tool for controlling and
enhancing the quality of its clinical trials. PPD's procedures are written in
accordance with the regulations and guidelines appropriate to the region where
they will be used, thus ensuring compliance with Good Clinical Practice ("GCP")
requirements. In North America, FDA regulations and guidelines serve as a basis
for PPD's 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". Data generated during clinical
trials are compiled, analyzed, interpreted and submitted in report form to the
FDA or other relevant regulatory agencies for purposes of obtaining regulatory
approval.
PPD provides its clients with one or more of the following core Phase II-IV
clinical trials management services using parallel processing to accelerate the
development process:
Study Design. PPD serves its clients in the critical area of study
design by applying its wide development experience in the preparation of
the study protocols and CRFs. 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 and the exact inclusion and exclusion criteria to be met for
the patients enrolled in the study. The success of the study depends not
only on the ability of the protocol to correctly predict requirements of
regulatory authorities, but also on the ability of the protocol to fit
coherently with the
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other aspects of the development process and the ultimate marketing
strategy for the drug. This includes healthcare economic components to
support rational pricing and positioning. See "-- Trends Affecting the CRO
Industry -- Healthcare Economics and Outcomes Research".
Once the study protocol has been finalized, CRFs must be developed to
record the desired information to be obtained from the clinical studies.
The various other disciplines involved in the drug development process,
including data management, must work closely with the clinical trial
management project team to assure that the right data are acquired in a
form which is most efficient for subsequent data entry, management and
reporting. Proper CRF design is critical to allowing investigators and
field monitors to conduct their respective jobs quickly, accurately and
effectively.
Investigator Recruitment. During the clinical trials, administration
of the drug to patients is supervised by physicians, also referred to as
investigators, at hospitals, clinics or other locations, also referred to
as investigational sites. PPD solicits the participation in the study of
investigators who contract directly with either PPD or its client. The
successful rapid identification and recruitment of investigators who have
the appropriate expertise and an adequate base of patients who satisfy the
requirements of the study protocol are critical to the timely completion of
the trial.
PPD maintains and constantly expands and refines its computerized
database of approximately 2,700 investigators. Information regarding PPD's
experience with these investigators, including factors relevant to rapid
study initiation, are contained in the database. This information allows
project managers to choose the appropriate investigators for a particular
study in an efficient manner.
Study Monitoring. PPD provides study monitoring services which
include investigational site initiation, patient enrollment assistance and
data collection through subsequent site visits. These visits also serve to
assure that data are gathered according to GCP, according to the
requirements of the client and applicable regulatory authorities and as
specified in the study protocol.
Project management and field monitoring services are the operational
heart of Phase II and III clinical studies. In most instances a project
will meet, exceed or fail to meet expected timeliness for completion based
on meeting deadlines during the first few months of study initiation.
Therefore, PPD focuses at an early stage on identifying and quickly
completing the critical rate-limiting steps of screening and selecting
investigators, processing pre-study regulatory paperwork, obtaining
institutional review board approvals and scheduling investigational site
initiation visits. Drugs under study cannot be released to the
investigational sites, and thus the study cannot begin until these
activities have been completed.
Following study initiation, PPD utilizes all appropriate methods of
accelerating patient recruitment. This may involve PPD's integrated systems
of telephone recruitment, telefaxing and media advertising.
Patient data must be obtained from the field efficiently, quickly and
accurately to speed subsequent data entry, management and analysis and
report writing. PPD acquires data via visits by its field monitors to
investigative sites and by electronic means. Field monitors are equipped
with laptop computers for the purpose of data collection.
PPD has monitored many clinical trials, including a number of very
large studies. For example, PPD is in its second five-year contract with
the National Institutes of Health ("NIH") to monitor investigational sites
for AIDS treatment related trials sponsored by the NIH. This project
involves approximately 200 investigational sites and a total enrollment of
approximately 58,000 patients. In another example, PPD recently completed
managing on behalf of an existing client the clinical trials conducted
pursuant to a series of four protocols relating to a major New Drug
Application in the gastroenterology therapeutic area. These trials involved
approximately 2,500 patients at 115 to 161 investigational sites per
protocol. Patients were followed for up to six months.
Clinical Data Management and Biostatistical Analysis
PPD's data management and biostatistical analysis operations are managed by
professionals with extensive pharmaceutical and biotechnology industry
experience in the design and construction of local and
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multinational clinical trial databases. PPD provides clients with assistance in
such areas as study design, sample size determination, CRF design and
production, fax-based monitoring, database design and construction, New Drug
Application preparation and production, including electronic submissions to the
FDA, known as Computer Assisted New Drug Applications, and FDA presentations and
defense.
Data management and biostatistical analysis services are offered as
discrete products and as part of an integrated drug development program. During
the design of development plans and protocols, PPD offers consulting services
relating to, and the determination of, sample size parameters for patient
enrollment, development of data analysis plans and randomization schemes. During
the conduct of clinical trials, PPD assists in the rapid acquisition of clean
and accurate data. Following completion of the clinical trials, PPD assists in
report preparation and FDA presentations. PPD's biostatisticians may participate
with clients in meetings with the FDA to present and defend biostatistical
analyses prepared by PPD. PPD has expertise in electronically capturing and
integrating geographically diverse data. PPD employs SAS, Oracle and BBN
Clintrial software, as specified by clients, combined with customized programs
developed by PPD.
Drug development time is reduced by performing data management and
biostatistical analysis activities in parallel with other drug development
activities where possible. For example, data management personnel work with
clinical program managers and field monitors to continuously enter data, program
output tables and listings and validate the database so that there is a rapid
progression from data lock, to database freeze, to final tables and listings
preparation and to biostatistical analyses. Similarly, there is a close working
relationship with medical writing and regulatory services personnel.
Treatment Investigational New Drug Applications
A treatment Investigational New Drug Application is an application by a
pharmaceutical or biotechnology sponsor and the associated procedure to allow
patients to receive treatment with an investigational new drug for a serious or
immediate life-threatening disease, such as AIDS or multiple sclerosis, for
which no comparable or satisfactory therapy is available. This treatment is
provided during the clinical trial phase of development, but outside the
controlled clinical trial. For promising new drugs, the treatment
Investigational New Drug Application has the advantage of getting the new drug
into an expanded patient base early, as well as allowing earlier publicity about
the potential success of the drug. PPD's involvement in a treatment
Investigational New Drug Application may range from monitoring the treatment to
an integrated service project involving full investigational site management,
data management and biostatistical analysis and report writing.
Medical Writing and Regulatory Services
PPD provides report writing and regulatory services to its clients in a
manner designed to complement parallel development processes to reduce overall
development time. Strategic plan and protocol design services provided at the
beginning of a project, combined with clear, concise data presentation, analysis
and discussion at the completion of the project assist the client in obtaining
regulatory approvals. These services are fully integrated with PPD's other
services to assure maximum speed consistent with good service and regulatory
compliance. In a recent example of service integration, a draft report was
submitted to a biotechnology client 11.5 months from the first telephone call
from the client. During the 11.5 months, the study protocol and CRFs were
developed with the client, investigators were recruited, 50 sites were
initiated, approximately 500 patients were enrolled in tertiary care centers and
data were entered, analyzed and reported. The study was critical both in timing
and importance to PPD's client. PPD's successful completion of this project was
attributable to its management's experience with fast track submissions for
blockbuster drugs, combined with the superior performance of its employees.
PPD maintains a large internal compliance and quality assurance department
to provide in-process monitoring of GCP performance. PPD also offers these
services to clients to assess their own trials, whether conducted by the client
or another CRO.
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Healthcare Economics and Outcomes Research
PPD is developing a number of services in the healthcare economics area to
be offered to pharmaceutical and biotechnology companies as well as managed care
payers and providers. These services include prospective and retrospective
clinicoeconomics analysis, quality of life and drug therapy evaluation, large
sample market research, clinical hypothesis testing for product marketing,
enhanced patient, investigator and managed care plan recruiting, managed care
consulting, patient therapeutic support systems and disease management
consulting.
Clients and Marketing
PPD provides development services to pharmaceutical and biotechnology
companies. For the year ended December 31, 1995, approximately 75% of PPD's net
revenues were attributable to clinical services and the remainder was
attributable to laboratory services. For the year ended December 31, 1995, PPD's
net revenue was derived approximately as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
SOURCE NET REVENUE
------------------------------------------------------------------------ -------------
<S> <C>
Pharmaceutical.......................................................... 75.5%
Biotechnology........................................................... 15.5
Government (NIH)........................................................ 7.0
Other................................................................... 2.0
</TABLE>
From 1992 through 1995, PPD's net revenue derived from biotechnology
clients has increased from approximately 4% to 15.5%. PPD has provided services
to 23 of the top 25 pharmaceutical companies in the world as ranked by 1994
research and development spending. For the year ended December 31, 1995, PPD's
net revenue derived from clinical service contracts was divided among
therapeutic categories approximately as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
CLINICAL SERVICES
THERAPEUTIC AREA NET REVENUE
---------------------------------------------------------------------- -----------------
<S> <C>
Virology/AIDS/infectious diseases..................................... 25.1%
Gastroenterology/metabolic diseases................................... 28.5
Critical care......................................................... 12.7
Pulmonary/allergy..................................................... 16.2
Central nervous system................................................ 7.5
Other................................................................. 10.0
</TABLE>
PPD provides services to the pharmaceutical and biotechnology industries
and its revenues are highly dependent on expenditures on research and
development by clients in these industries. Accordingly, PPD's operations could
be materially and adversely affected by general economic downturns in these
industries, the current trend toward consolidation in these industries or other
factors resulting in a decrease in research and development expenditures.
Furthermore, PPD has benefited to date from the increasing tendency of
pharmaceutical and biotechnology companies to outsource large clinical research
projects. Should this trend be reversed, the revenues of PPD could be materially
and adversely affected. PPD believes that concentration of business among
certain large customers is not uncommon in the CRO industry. PPD has experienced
such concentration in the past and may experience such concentration in the
future. During 1994, two of PPD's clients, both major international
pharmaceutical companies, accounted for 10% or more (approximately 23% and 10%,
respectively) of PPD's net revenue. During 1995, only the larger of such clients
accounted for more than 10% (approximately 13%) of PPD's net revenue. While PPD
has attempted to reduce its reliance on a limited number of major customers,
there can be no assurance that PPD's business will not continue to be dependent
on such customers. The loss of business from a significant customer could have a
material adverse effect on PPD.
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Contractual Arrangements
Most of PPD's contracts are fixed price, with some variable components, and
range in duration from a few months to several years. Generally, for multi-year
contracts involving clinical trials, a portion of the contract fee is paid at
the time the trial is initiated, with the balance of the contract fee payable in
installments over the trial duration. The installment payments are typically
performance-based, relating payment to previously negotiated events, such as
investigator recruitment, patient enrollment or delivery of databases. Since
PPD's contracts are predominantly fixed price, PPD bears the risk of cost
overruns but benefits if costs are lower than anticipated. Under-pricing of
contracts or significant cost overruns could have a material adverse effect on
PPD. Most of PPD's contracts for the provision of its services, including
contracts with government agencies, are terminable by the client upon 30 to 90
days' notice under certain circumstances, including the client's unilateral
decision to terminate the development of the product or end the study. Contracts
may be terminated for a variety of reasons, 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 or insufficient patient
enrollment or investigator recruitment. Although the contracts typically require
payment of certain fees for winding down the study and, in some cases, a
termination fee, the loss of a large contract or the loss of multiple contracts
could materially and adversely affect PPD.
Backlog
Backlog consists of anticipated gross and net revenue from letters of
intent and contracts that have not been completed. Net revenue is defined as
professional fee income (gross revenue) less reimbursed costs consisting
principally of investigator fees and travel. Once contracted work begins, net
revenue is recognized over the life of the contract. In certain cases, PPD
begins work for a client before a contract is signed. Accordingly, backlog does
not include anticipated net revenue for which PPD has begun work but for which
PPD does not have a letter of intent or signed contract, or fee for service
contracts with no specified amount.
PPD believes that its backlog as of any date is not necessarily a
meaningful predictor of future results because backlog can be affected by a
number of factors, including variable size and duration of contracts, many of
which are performed over several years. Additionally, contracts generally are
subject to early termination by the client or delay by regulatory authorities
for many reasons, including unexpected test results. Moreover, the scope of a
contract can change during the course of a study. There can be no assurances
that PPD will be able to fully realize all of its backlog as net revenue.
At March 31 1996, backlog was approximately $67.8 million in terms of
anticipated net revenue, as compared to an estimated $38.6 million net at March
31, 1995.
Competition
The CRO industry consists of several hundred small, limited-service
providers, several medium-sized CROs and a few full-service global drug
development companies. The CRO industry is consolidating and, in recent years,
several large, full-service competitors have emerged, some of which have
substantially greater capital, technical, financial and other resources than
PPD. This trend of industry consolidation will likely result in greater
competition among the larger CROs for clients and acquisition candidates. PPD's
competitors include ClinTrials Research Inc., Corning Pharmaceutical Services,
Inc., APBI, IBAH, Inc., Parexel International Corporation and Quintiles
Transnational Corporation. PPD also competes against certain medium-sized
companies. Additionally, PPD competes against other CROs and the in-house
research and development departments of pharmaceutical and biotechnology
companies, as well as universities and teaching hospitals. In addition, there
are few barriers to entry for small, limited-service entities considering
entering the CRO industry. These entities may compete against larger CROs for
clients. Furthermore, the CRO industry has attracted the attention of the
investment community, which could lead to increased competition by increasing
the availability of financial resources for CROs. Increased competition may lead
to price and other forms of competition that may adversely affect PPD's
operating results.
CROs compete on the basis of several things, including reputation for
on-time quality performance, expertise and experience in specific therapeutic
areas, scope of service offerings, strengths in various
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geographic markets, technological expertise and systems, ability to acquire,
process, analyze and report data in a time-saving accurate manner, ability to
manage large-scale clinical trials both domestically and internationally,
expertise and experience in healthcare economics and communication. PPD believes
that it competes favorably in these areas.
Potential Liability and Insurance
Clinical research services involve the testing of new drugs on human
volunteers pursuant to a study protocol. Such testing exposes PPD to the risk of
liability for personal injury or death to patients resulting from, among other
things, possible unforeseen adverse side effects or improper administration of
the new drug. Many of these patients are already seriously ill and are at risk
of further illness or death. PPD attempts to manage its risk of liability for
personal injury or death to patients from administration of products under study
through measures such as contractual indemnification provisions with clients and
through insurance maintained by clients. The contractual indemnifications
generally do not protect PPD against certain of its own actions, such as
negligence. The contractual arrangements are subject to negotiation with clients
and the terms and scope of such indemnification vary from client to client and
from trial to trial. Although most of PPD's clients are large, well capitalized
companies, the financial performance of these indemnities is not secured.
Therefore, PPD bears the risk that the indemnifying party may not have the
financial ability to fulfill its indemnification obligations. PPD could be
materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by the client or where the indemnifying party does not fulfill its
indemnification obligations. PPD does not currently maintain liability insurance
with respect to these risks.
The Drug Development Process
Before a new drug is marketed, the drug must undergo extensive testing and
regulatory review in order to determine that it is safe and effective. The
development process consists of two stages: pre-clinical and clinical. The first
stage is the pre-clinical research, in which the new drug is tested in vitro
(test tube) and in animals, generally over a one-to-three-year period, in order
to determine the basic biological activity and safety of the drug. If the drug
is perceived to be safe for human testing, the drug then undergoes a series of
clinical tests in humans. During the clinical stage, one of the most
time-consuming and expensive parts of the drug development process, the drug
undergoes a series of tests in humans, including healthy volunteers and patients
with the targeted disease or condition.
Prior to commencing human clinical trials in the United States, the sponsor
must file an Investigational New Drug ("IND") application with the FDA. In order
to receive IND status, the sponsor of the new drug must provide available
manufacturing data, pre-clinical data, information about any use of the drug in
humans in other countries or in the United States for other purposes, and a
detailed plan for the conduct of the proposed clinical trials. The design of
these trials, also referred to as the study protocols, is essential to the
success of the drug development effort because the protocols must correctly
anticipate the nature of the data to be generated and results that the FDA will
require before approving the drug. In the absence of any FDA comments within 30
days after the IND filing, human clinical trials may begin.
Although there is no statutory definition of the structure or design of
clinical trials, human trials usually start on a small scale to assess safety
and then expand to larger trials to test efficacy. These trials are usually
grouped into the following three phases, with multiple trials generally
conducted within each phase:
- Phase I. Phase I trials involve testing the drug on a limited number
of healthy individuals, typically 20 to 80 persons, to determine the
drug's basic safety data relating to tolerance, absorption,
metabolization and excretion as well as other pharmacological
indications and actions. This phase lasts an average of six months to
one year.
- Phase II. Phase II trials involve testing a small number-of volunteer
patients, typically 100 to 200 persons who suffer from the targeted
disease or condition, to determine the drug's effectiveness and dose
response relationship. This phase lasts an average of one to two years.
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- Phase III. Phase III trials involve testing large numbers of
patients, typically several hundred to several thousand persons, to
verify efficacy on a large scale, as well as long-term safety. These
trials involve numerous sites and generally last two to three years.
After the successful completion of all three clinical phases, the sponsor
of a new drug in the United States submits a New Drug Application ("NDA") to the
FDA requesting that the product be approved for marketing. The NDA is a
comprehensive, multi-volume filing that includes, among other things, the
results of all pre-clinical and clinical studies, information about the drug's
composition and the sponsor's plans for producing, packaging and labeling the
drug. In addition, while the FDA does not use price as a criterion for approving
a new drug, advisory panels of scientists that help the FDA evaluate new types
of therapies have started taking cost into consideration. The FDA's review of an
NDA can last from a few months, for drugs related to life-threatening
circumstances, to many years, with the average review lasting two and one-half
years. Drugs that successfully complete this review may be marketed in the
United States, subject to the conditions imposed by the FDA.
As a condition to its approval of a drug, the FDA may require that a
sponsor conduct additional clinical trials following receipt of NDA approval to
monitor long-term risks and benefits, study different dosage levels, or evaluate
different safety and efficacy parameters in target patient populations. In
recent years the FDA has increased its reliance on these trials, known as Phase
IV trials, which allow new drugs that show early promise to reach patients
without the delay associated with the conventional review process. Phase IV
trials usually involve thousands of patients.
The pre-clinical and clinical testing and approval processes for biologics
are substantially similar to those for drugs except that the results of clinical
trials are submitted in the form of a Product License Application rather than an
NDA.
Government Regulation
The laboratory services performed by PPD are subject to various regulatory
requirements designed to ensure the quality and integrity of the testing
process. The industry standards for conducting laboratory testing are embodied
in the regulations for Good Laboratory Practice ("GLP") and Good Manufacturing
Practice ("GMP"). GLP and GNP have been adopted by the FDA, by the Department of
Health in the United Kingdom and by similar regulatory authorities in other
parts of the world GLP and GMP stipulate requirements for facilities, equipment
and professional staff. The regulations require standardization procedures for
studies, for recording and reporting data and for retaining appropriate records.
To help ensure compliance, PPD has established quality assurance controls at its
laboratory facility which monitor ongoing compliance with GLP and GMP
regulations by auditing test data and conducting regular inspections of testing
procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations include (i)
complying with FDA regulations governing the selection of qualified
investigators, (ii) obtaining specific written commitments from the
investigators, (iii) verifying that patient informed consent is obtained, (iv)
monitoring the validity and accuracy of data, (v) verifying drug or device
accountability, and (vi) instructing investigators to maintain records and
reports. PPD must also maintain reports for each study for specified periods for
inspection by the study sponsor and the FDA during audits. Noncompliance with
GCP can result in the disqualification of data collection during the clinical
trial.
PPD's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region where they will be used.
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". In addition, FDA regulations and guidelines serve as a
basis for PPD's North America standard operating procedures. From an
international perspective when applicable, PPD has
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implemented common standard operating procedures across regions to assure
consistency whenever it is feasible and appropriate to do so.
PPD's business depends on the continued strict government regulation of the
drug development process, especially in the United States. Changes in
regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, could materially and
adversely affect the demand for the services offered by PPD.
The failure on the part of PPD to comply with applicable regulations could
result in the termination of ongoing research or the disqualification of data
for submission to regulatory authorities. Furthermore, the issuance of a notice
of finding by the FDA to either PPD or its clients based upon a material
violation by PPD of GCP, GLP or GMP requirements could materially and adversely
affect PPD.
Intellectual Property
PPD has developed certain computer software and technically derived
procedures intended to maximize the quality and efficiency of its services.
Although PPD does not believe that its intellectual property rights are as
important to its results of operations as are such factors as the technical
expertise, knowledge, ability and experience of PPD's professionals, PPD
believes that its technological capabilities provide significant benefits to its
clients.
Employees
At December 31, 1995, PPD had approximately 546 employees (537 full-time
and 9 part-time), approximately 21 of whom hold Ph.D., M.D., Pharm.D. or D.V.M.
degrees and 60 approximately of whom hold other masters or postgraduate degrees.
PPD believes that its relations with its employees are good.
PPD's performance depends on its ability to attract and retain qualified
professional, scientific and technical staff. The level of competition among
employers for such skilled personnel is high. PPD believes that its employee
benefit plans enhance employee morale, professional commitment and work
productivity and provide an incentive for employees to remain with PPD. PPD,
like many CROs and other companies, also relies on a number of key executives.
The loss of the services of any of PPD's key executives could have a material
and adverse effect on PPD. While PPD has not experienced any significant
problems in attracting or retaining qualified staff, there can be no assurance
that PPD will be able to avoid such problems in the future.
Properties
PPD leases all of its facilities. PPD's principal executive offices are
located in Wilmington, North Carolina, where it leases approximately 49,000
square feet under various leases expiring between 1996 and 1998. In March 1996,
PPD entered into a new 10-year build-to-suit lease for approximately 70,000
square feet in Wilmington, North Carolina. The new lessor has agreed to assume
PPD's leases for its current Wilmington, North Carolina headquarters upon PPD's
occupancy of the new premises.
PPD also maintains offices in Morrisville, North Carolina; San Antonio,
Texas; Madison, Wisconsin; Southampton, England; and Sydney, Australia. In
Morrisville, PPD leases approximately 65,000 square feet of office space and
patient testing facilities under leases expiring between 2000 and 2003. In
January 1996, PPD entered into a new 15-year build-to-suit lease for
approximately 44,000 square feet of laboratory space in Middleton, Wisconsin.
Legal Proceedings
PPD is not a party to any material pending legal proceedings other than
ordinary routine litigation incidental to its business.
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Prior S Corporation Status and Reorganization
Since its inception, PPD had elected to be treated for Federal income and
certain state tax purposes as an S corporation under Subchapter S of the Code
and comparable state laws. As a result, earnings of PPD for prior tax years have
been included in the taxable income of its shareholders, and PPD has not been
subject to income tax on such earnings, for federal and most state tax purposes.
PPD has, however, been subject to franchise or capital taxes in certain states
in which it is located or does business.
PPD's S corporation status was terminated as of January 1, 1996 and,
accordingly, PPD became fully subject to federal and state income taxes as of
that date. In connection with the termination of PPD's S Corporation status, PPD
distributed to its S corporation shareholders approximately (i) $4.7 million,
representing substantially all of PPD's previously earned and undistributed
taxable Subchapter S income ("Taxable Subchapter S Income") through September
30, 1995, and (ii) $1.8 million, representing PPD's estimate of the amount
necessary to allow such shareholders to pay taxes related to the Taxable
Subchapter S Income required to be recognized by such shareholders for the
period January 1, 1995 through September 30, 1995 arising from PPD's adoption of
the accrual method of accounting for tax purposes and taxes related to the
Taxable Subchapter S Income required to be recognized by such shareholders for
the period from October 1, 1995 through December 31, 1995 (collectively, the "S
Corporation Distribution"). The approximately $6.5 million S Corporation
Distribution was paid in cash and was funded (i) as to $5.5 million by a 30-day,
8%, term loan from Wachovia Bank of North Carolina, NA (the "Term Loan"), and
(ii) as to approximately $1.0 million from PPD's cash on hand.
Prior to PPD's initial public offering in January 1996, certain of PPD's
clinical research unit and laboratory services operations were conducted by
Pharmaceutical Product Development Clinical Research Unit, Inc. ("PPD-CRU").
Five of the seven shareholders of PPD-CRU were shareholders of PPD. In January
1996, a wholly owned subsidiary of PPD was merged with and into PPD-CRU (the
"PPD-CRU Merger"). PPD-CRU was the surviving corporation in the PPD-CRU Merger
and thereby became a wholly owned subsidiary of PPD. In the PPD-CRU Merger, the
shareholders of PPD-CRU received an aggregate of 144,431 shares of PPD Common
Stock. In addition, PPD owned 79% of Gabbay Group Ltd. ("Gabbay") and
PPD-Europe, Inc. ("PPD-Europe") owned the remaining 21% of Gabbay. All of the
shareholders of PPD-Europe were shareholders of PPD. In January 1996, PPD-Europe
was merged with and into PPD (the "PPD-Europe Merger"). As a result of the
PPD-Europe Merger, Gabbay became a wholly owned subsidiary of PPD. In the
PPD-Europe Merger, the shareholders of PPD-Europe received an aggregate of 2,814
shares of PPD Common Stock. Each of these mergers was structured so as to
qualify as a tax-free reorganization under Section 368(a) of the Code.
The termination of PPD's S corporation status, the payment of the S
Corporation Distribution, the agreement to pay the Supplemental S Corporation
Distribution, the PPD-CRU Merger, the PPD-Europe Merger, the amendment and
restatement of PPD's Articles of Incorporation consummated in January 1996, and
the distribution prior to such effectiveness to PPD's shareholders of record as
of October 30, 1995 of a dividend of 62 shares of PPD Common Stock per share of
PPD Common Stock are collectively referred to herein as the "Reorganization".
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements which reflect the current view of PPD's management with respect to
certain future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, and actual results
may differ materially. Factors that could cause or contribute to such
uncertainties include the effect on financial performance and future events of
competitive pricing in the markets in which PPD offers its services, economic
conditions generally and in PPD's industry statements, as well as those factors
discussed elsewhere herein and in PPD's other periodic reports and registration
statements filed with the Commission. See "Investment Considerations".
General
PPD is a leading CRO providing a broad range of integrated product
development services across the globe to complement the research and development
activities of many of the world's largest companies in the pharmaceutical and
biotechnology industries. PPD's professional services include Phase I clinical
testing, laboratory services, Phase II-IV clinical trial management, clinical
data management and biostatistical analysis, treatment Investigational New Drug
Applications, medical writing and regulatory services and healthcare economics
and outcomes research.
PPD has broadened its range of services in the United States and
facilitated its offering of certain services in Europe through acquisitions and
internal growth. In 1990, PPD opened its Phase I Clinical Research Unit
("PPD-CRU"), located near Research Triangle Park, North Carolina. In May 1994,
PPD-CRU acquired Wisconsin Analytical and Research Services, Ltd. ("WARS"), an
analytical laboratory located in Madison, Wisconsin. In August 1995, PPD
acquired Southampton, England-based Gabbay, which specializes in clinical
research services and training. Each of the acquisitions was accounted for under
the purchase method with the acquired company's results being included in PPD's
results from the effective date of acquisition. See Note 2 of Notes to Combined
Financial Statements of PPD for additional information regarding these
transactions.
PPD's clinical research and development service contracts generally have
terms ranging from several months to several years. A portion of the contractual
fee is generally payable at the time the contract is entered into, with the
balance payable in installments over the contract's term. Revenues from the
contracts are generally recognized on a percentage of completion basis as work
is performed, except for the contracts which PPD performs on a cost-plus basis.
As is customary in the CRO industry, PPD routinely subcontracts with third party
investigators in connection with clinical trials and with other third party
service providers for laboratory analysis and other specialized services. These
costs and other reimbursable costs are passed through to clients and are
included in gross revenue, but, in accordance with industry practice, are
deducted to arrive at net revenue. Reimbursed costs vary from contract to
contract. Consistent with industry practice, PPD views growth in net revenue as
its primary measure of revenue growth.
PPD has experienced significant growth through internal expansion. Net
revenue, excluding acquisitions, grew from $9.3 million in 1991 to $13.7 million
in 1992, $20.8 million in 1993, $25.5 million in 1994 and $31.0 million in 1995.
PPD has supplemented internal growth through the acquisitions referenced above.
Despite the cost of acquisitions, PPD has been profitable over the years ended
1991 through 1995.
PPD's backlog consists of anticipated net revenue from letters of intent
and contracts that have not been completed. At December 31, 1995, backlog was
approximately $54.1 million, as compared to $23.5 million at December 31, 1994,
a 130% increase. PPD believes that its backlog as of any date is not necessarily
a meaningful predictor of future results and no assurances can be given that PPD
will be able to fully realize all of its backlog as net revenue.
Results of Operations
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Net revenue for the year ended December 31, 1995 was $38.3 million, an
increase of $9.4 million, or 32.6%, from $28.9 million in the comparable period
in 1994. The increase was primarily the result of the
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performance of services pursuant to the large number of contracts which were
entered into as a result of PPD's enhanced business development efforts during
1994 and 1995.
Direct costs increased by $3.7 million, or 23.0%, to $19.5 million for the
year ended December 31, 1995 from the $15.9 million in 1994, but decreased as a
percentage of net revenue from 55.0% for the year ended December 31, 1994 to
51.0% for 1995. Direct costs include compensation and related fringe benefits
for non-administrative employees and any other expenses directly related to
contracts which are not included as reimbursed costs. The decrease in direct
costs relative to net revenue was due principally to PPD's ability to perform
its contracts more efficiently and the allocation of fixed costs over a larger
revenue base as PPD's volume of business has grown.
Selling, general and administrative expenses were $13.2 million for the
year ended December 31, 1995, an increase of $4.7 million, or 55.8%, from $8.4
million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased to 34.4% from 29.2%, principally due to
increases in business development expenses, administrative staffing at the
executive and middle management levels and the number of employees in finance,
human resources and other administrative areas reflecting the continued growth
of PPD.
Depreciation and amortization increased by 47.7% rising to $1.5 million for
the year ended December 31, 1995 from $1.0 million for 1994. The increase was
principally related to purchases of furniture, fixtures and equipment as a
result of significant increases in PPD's operations and amortization of goodwill
related to acquisitions.
Other income (expense), net, improved by $233,000, rising to $200,000 in
net other income for the year ended December 31, 1995 from $33,000 in net other
expense for 1994. The improvement was primarily the result of a $261,000 gain on
the sale in September 1995 of PPD's investment in a telemarketing company which
had commenced operations in April 1994.
Year Ended December 31, 1994, Compared with Year Ended December 31, 1993
Net revenue in 1994 was $28.9 million, an increase of $8.0 million, or
38.5%, from $20.8 million in 1993. This increase resulted principally from an
increase in the number and size of contracts under management and the
acquisition of WARS in May 1994, which accounted for $3.0 million of the
increase.
Direct costs increased by $3.3 million, or 26.7% to $15.9 million in 1994
from $12.5 million in 1993, but decreased as a percentage of net revenue from
60.1% in 1993 to 55.0% in 1994. This decrease was due principally to the
Company's ability to perform its contracts more efficiently and the allocation
of fixed costs over a larger revenue base as PPD's volume of business has grown.
Selling, general and administrative expenses were $8.4 million in 1994, an
increase of 98.2% from $4.3 million in 1993. As a percentage of net revenue,
selling, general and administrative expenses increased to 29.2% from 20.4%. This
increase was attributable principally to acquisitions and to an increase in the
number of employees in management, business development and administrative
functions to support PPD's growth.
Depreciation and amortization increased by 112.5%, rising to $1,001,000 in
1994 from $471,000 in 1993. The increase was primarily attributable to capital
expenditures for computers, office equipment and leasehold improvements related
to the growth of PPD.
Other income (expense), net, which consisted primarily of interest expense
net of interest income, remained relatively stable, increasing from $10,000 in
net other expense in 1993 to $33,000 in net other expense in 1994.
Quarterly Results
PPD's quarterly results have been, and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including the commencement, completion or cancellation of large
contracts, progress of ongoing contracts, acquisitions, the timing of start-up
expenses for new offices and changes in the mix of services. Since a large
percentage of PPD's operating costs are relatively
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fixed, variations in the timing and progress of large contracts can materially
affect quarterly results. To the extent PPD's international business increases,
exchange rate fluctuations may also influence these results. PPD believes that
comparisons of its quarterly financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
Quarter ended March 31, 1996 compared with the quarter ended March 31,
1995. Net revenue for the quarter ended March 31, 1996 was $12.0 million, an
increase of $3.2 million, or 36.6% from $8.8 million for the comparable period
in 1995. The increase was primarily the result of the performance of services
pursuant to the large number of contracts which were entered into as a result of
PPD's enhanced business development efforts during 1994 and 1995.
Direct costs increased by $1.9 million, or 41.0%, to $6.4 million for the
quarter ended March 31, 1996 from the $4.5 million for the same period in 1995.
This represents a slight increase in direct costs as a percentage of net revenue
from 51.7% for the quarter ended March 31, 1995 to 53.4% for 1996. Direct costs
include compensation and related fringe benefits for non-administrative
employees and any other expenses directly related to contracts which are not
included as reimbursed costs. The slight increase in direct costs relative to
net revenue was due principally to PPD's constant efforts to improve internal
cost accounting systems. The management accounting systems of recent
acquisitions have been enhanced to accurately match direct costs with revenue,
these enhancements will allow PPD to manage these costs more effectively in the
future. In addition, the Clinical Research Unit incurred a project loss of
approximately $120,000 during the quarter which related to trial rework for a
particular client.
Selling, general and administrative expenses were $3.8 million for the
quarter ended March 31, 1996, an increase of $1.2 million, or 44.8%, from $2.6
million in the quarter ended 1995. As a percentage of net revenue, selling,
general and administrative expenses increased to 32.0% from 30.2%, principally
due to increases in business development expenses, administrative staffing at
the executive and middle management levels and the number of employees in
finance, human resources and other administrative areas, reflecting the
continued growth of PPD.
Depreciation and amortization increased by 63.9% rising to $467,000 for the
quarter ended March 31, 1996 from $285,000 for the same period in 1995. The
increase was principally related to purchases of furniture, fixtures and
equipment as a result of significant increases in PPD's operations, and
amortization of goodwill related to acquisitions.
Other income (expense), net, improved by $331,000, rising to $284,000 in
net other income for the quarter ended March 31, 1996 from $47,000 in net other
expenses for the quarter ended March 31, 1995. The improvement was primarily the
result net interest income of $235,000 in the first quarter of 1996, compared to
net interest expense of $69,000 for the quarter ended March 31, 1995. Interest
income during the first quarter of 1996 is primarily the result of investment of
funds received in connection with PPD's initial public offering in late January
1996.
Liquidity and Capital Resources
PPD has historically funded its operations and growth, including
acquisitions, with cash flow from operations and borrowings. Prior to January
24, 1996, the only issuance of equity securities over the last few years have
been in the acquisition of WARS, the sale of stock to PPD's Chairman of the
Board and stock awards to PPD's President. See Note 13 of Notes to Combined
Financial Statements of PPD. Equity issued in the WARS transaction accounted for
approximately 20% of the total purchase price. In January 1996, PPD completed an
initial public offering of its Common Stock. Proceeds of the offering, after
expenses, were approximately $37.2 million and a portion thereof was used to
repay a $5.5 million loan.
Total capital expenditures were approximately $1.3 million and $0.6 million
for the quarters ended March 31, 1996 and 1995, respectively. Facilities
expansion, additional furniture and a phone system upgrade accounted for a
significant portion of the purchases in 1996, while computer and laboratory
equipment accounted for a significant portion of the purchases in 1995.
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Cash increased during the quarter ended March 31, 1996 primarily as a
result of PPD's initial public offering. The number of days revenue outstanding
in accounts receivable and unbilled services net of unearned income was 56 days
at March 31, 1995 and 67 days at March 31, 1996. The number of days revenue
outstanding at any particular date is subject to fluctuation. Most of PPD's
contracts for its services call for bills to be rendered based upon the
achievement of certain project goals, or milestones. These milestones, while
related to work performed, may call for installment payments that are not
reflective of work performed for purposes of revenue recognition by PPD. As a
result, billing by PPD (and therefore collection of receivables) and recognition
of revenue do not necessarily coincide.
In February 1996, PPD renegotiated a new credit facility with Wachovia Bank
of North Carolina, N.A. The new facility consists of a $10 million Line of
Credit with an additional discretionary line of credit for $20 million. Terms on
the $10 million line are for one year, rates at LIBOR plus 120 basis points, or
the Bank's Prime rate, with selection at PPD's option, and interest payable
quarterly. Indebtedness under the Line is unsecured and subject to certain
covenants relating to financial ratios and tangible net worth.
The CRO industry is generally not capital intensive. PPD's principal cash
needs on both a short-term and long-term basis are for the payment of salaries,
office rent and the travel expenditures of its clinical research assistants. PPD
has historically financed these expenditures through operations. PPD utilizes
its working capital to finance these expenditures pending receipt of its
receivables. Contract payments by PPD's clients vary according to the terms of
each contract.
PPD expects to continue expanding its operations through internal growth
and strategic acquisitions. PPD expects such activities will be funded from
existing cash and cash equivalents, cash flow from operations, the net proceeds
from the offering and borrowings under its credit facility. PPD believes that
such sources of cash will be sufficient to fund PPD's current operations for the
foreseeable future. PPD is currently evaluating a number of acquisition and
other growth opportunities which may require additional external financing, and
PPD may from time to time seek to obtain funds from public or private issuances
of equity or debt securities.
New Accounting Pronouncements
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation", which provides companies the option to account for employee stock
compensation awards based on their estimated fair value at the date of grant,
resulting in a charge to income in the period the awards are granted, or to
present pro forma footnote disclosure describing the effect to PPD's net income
and net income per share data. SFAS No. 123 is effective for PPD's 1996
financial statements. PPD has not yet determined what impact, if any, the
adoption of SFAS No. 123 will have on PPD's financial position or disclosure to
its financial statements.
Other pronouncements issued by the FASB with future effective dates are
either not applicable or not material to the consolidated financial statements
of PPD.
Inflation
PPD believes the effects of inflation generally do not have a material
adverse effect on it results of operations or financial condition.
MANAGEMENT
PPD's Bylaws provide that the number of directors constituting the Board of
Directors shall be not less than eight (8) nor more than twelve (12). The number
of director seats currently authorized is eight. Two directors are currently
serving for a one-year term expiring in 1997 (Class I), three directors are
currently serving for a two-year term expiring in 1998 (Class II) and three
directors are currently serving for a three-year term expiring in 1999 (Class
III), in each case for such term and until his or her respective successor is
elected and qualified. PPD's shareholders are being asked to approve an
amendment to eliminate classification of the Board. See "The Merger
Transactions -- Approval of Amendment to PPD's Bylaws to Provide for Annual
Election of Directors". None of the current PPD directors is related by blood,
marriage or adoption to
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any other director or any executive officer of PPD, except that John A. McNeill,
Jr. and Ronald B. McNeill are brothers.
For information regarding the persons expected to be the directors and
executive officers of PPD following the Merger, including biographical
information regarding Drs. Mario, Eshelman, Bondurant and Wise and John A.
McNeill, Jr., see "The Merger -- The Merger Agreement -- Board of Directors and
Management of PPD After the Merger".
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
- ------------------------------------------------------------------------------- --- --------
<S> <C> <C>
CLASS I
W. Travis Porter, III........................................................ 65 1994
Patti S. Manuel.............................................................. 40 1994
CLASS II
Peter J. Wise, M.D........................................................... 61 1993
Ronald B. McNeill............................................................ 44 1989
Stuart Bondurant, M.D........................................................ 66 1994
CLASS III
Ernest Mario, Ph.D........................................................... 57 1993
Fredric N. Eshelman, Pharm.D................................................. 47 1990
John A. McNeill, Jr.......................................................... 46 1989
</TABLE>
Ronald B. McNeill has served as a director of PPD since its incorporation
in 1989 and served as PPD's Vice President, Administration until August 1993.
Mr. McNeill currently serves as Vice President of Liberty Commons Nursing Home,
Inc. and of J.A. McNeill & Sons Inc. Mr. McNeill is also a partner in S&R
Partnership, a developer of retirement facilities.
W. Travis Porter, III has served as a director of PPD since February 1994.
Mr. Porter has been a partner in Porter and Steel, PLLC, a law firm, since
February 1990.
Patti S. Manuel has served as a director of PPD since September 1994. Ms.
Manuel currently serves as President -- Sales and Marketing, Sprint Business
Services Group for Sprint Communications L.P., a telecommunications company, a
position she has held since June 1994. Ms. Manuel was President -- Business
Services for Sprint Communications L.P. from January 1993 to June 1994 and prior
to that was Vice President -- Sales for Sprint Communications L.P.
Information Concerning the PPD Board of Directors and Its Committees
The business of PPD is under the general management of the Board of
Directors as provided by the laws of North Carolina and the Bylaws of PPD.
During the year ended December 31, 1995, the Board of Directors held five formal
meetings, excluding actions that were taken by unanimous written consent during
the year. Each member of the Board attended at least 75% of the 1995 meetings of
the Board of Directors and Board committees of which he was a member.
The Board currently has no Nominating Committee, but, pursuant to the
Merger Agreement, shall establish such a committee consisting of the Chief
Executive Officer of PPD, as chairman, one PPD director who was a PPD director
prior to the Merger and one PPD director who was an APBI officer or director
prior to the Merger. See "The Merger -- The Merger Agreement -- Board of
Directors and Management of PPD After the Merger".
The Board of Directors has recently established an Audit Committee and a
Compensation Committee. The Audit Committee currently consists of Dr. Mario, Mr.
Porter and Ms. Manuel. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of PPD and
reviewing with the independent auditors the scope and results of the audits, the
internal accounting controls of PPD, audit practices and the professional
services furnished by the internal auditors. The Compensation Committee
currently consists of Drs. Mario and Bondurant and John A. McNeill, Jr. The
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Compensation Committee is responsible for reviewing and approving all
compensation arrangements for the officers of PPD and for administering PPD's
Equity Compensation Plan and Stock Option Plan for Non-Employee Directors.
Pursuant to the Merger Agreement, there is to be one PPD director who was
formerly an APBI officer or director on each committee of the PPD Board of
Directors until the 1998 Annual Meeting of Shareholders of PPD.
Director Compensation
Directors who are employees of PPD receive no compensation for serving on
the Board of Directors. Non-employee directors of PPD who were not shareholders
of PPD prior to its initial public offering receive a fee of $5,000 for each
meeting of the Board of Directors attended in person and $1,500 for each meeting
of the Board of Directors participated in telephonically. In addition, under
PPD's Stock Option Plan for Non-Employee Directors, each member of PPD's Board
of Directors who is not a full- or part-time employee of PPD, who was not such
an employee at any time during the 12 months immediately preceding his or her
election to the Board and who was not a shareholder of PPD on the date such plan
was adopted shall automatically be granted a fully vested option to purchase
5,000 shares of Common Stock, at an exercise price equal to the fair market
value as of the date of grant, on the later of the date he or she becomes a
director or the effective date of PPD's initial public offering in January 1996.
Executive Compensation
Summary Compensation
The following table sets forth total compensation paid by PPD to the Named
Executive Officers for their services in all capacities during the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
NAME AND PRINCIPAL ------------------ ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION
------------------------------------------------ ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Fredric N. Eshelman............................. 1995 $375,768 -- $355,439(1)
Vice Chairman and Chief Executive Officer 1994 289,017 -- 600,571(2)
Peter J. Wise................................... 1995 178,438 -- 12,307(3)
President and Chief Operating Officer 1994 177,623 -- 8,320(3)(4)
Terrence W. Mischler............................ 1995 160,574 20,000 8,716(5)
Senior Vice President of Governmental and 1994 153,168 16,000 4,225(5)
International Affairs
Joshua S. Baker................................. 1995 122,064 -- --
Senior Vice President, Operations 1994 78,503(6) -- --
</TABLE>
- ---------------
(1) Represents premiums with respect to life insurance paid by PPD of $31,716,
401(k) plan matching contributions of $7,249 and an S corporation dividend
distribution of $316,474 sufficient to pay income taxes on the earnings of
PPD that were treated as having been earned by the individual as a
shareholder.
(2) Represents premiums with respect to life insurance paid by PPD of $28,898,
401(k) plan matching contributions of $3,576 and an S corporation dividend
distribution of $568,097 sufficient to pay income taxes on the earnings of
PPD that were treated as having been earned by the individual as a
shareholder.
(3) Represents an S corporation dividend distribution sufficient to pay income
taxes on the earnings of PPD that were treated as having been earned by the
individual as a shareholder.
(4) During 1993, PPD granted 110,250 shares of restricted Common Stock to Dr.
Wise. On the date of the grant, the value of such shares was approximately
$292,000.
(5) Represents 401(k) plan matching contributions.
(6) Dr. Baker began his employment with PPD in May 1994.
Employment Agreements
Fredric N. Eshelman and Peter J. Wise each entered into an Employment
Agreement with PPD on July 1, 1995. Each of such Employment Agreements provides
that the rights and obligations of PPD under such agreement will be assigned by
PPD to the successors in interest of PPD. Dr. Eshelman's Employment Agreement
expires on June 30, 1997. It provides for an annual base salary of $395,000 and
a one-time cash
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payment of $211,540 to be made prior to the end of 1995. The Employment
Agreement also entitles Dr. Eshelman to an annual cash bonus in an amount to be
determined by the Compensation Committee. Dr. Wise's Employment Agreement
expires on June 30, 1996 and provides for an annual base salary of $190,000. In
addition, Dr. Wise is entitled to an annual cash bonus in an amount to be
determined by the Compensation Committee.
Terrence W. Mischler entered into an Employment Agreement with PPD in
October 1995. The Employment Agreement expires in October 1996 and provides for
an annual base salary of $170,000. The Employment Agreement also provides that
the rights and obligations of PPD under such agreement may be assigned by PPD to
the successors in interest of PPD.
Rudy C. Howard entered into an Employment Agreement with PPD in October
1995, to serve as Chief Financial Officer, Vice President Finance, Secretary and
Treasurer. The Employment Agreement expires on September 30, 1997 and provides
for an annual base salary of $160,000. The Employment Agreement also provides
that in the event of a change of control of PPD that leads to the termination of
Mr. Howard's employment for reasons other than just cause as provided in the
Employment Agreement, Mr. Howard shall be paid upon such termination an amount
equal to twice the annual salary to which Mr. Howard is entitled at the time of
such termination.
Report of the Compensation Committee on Executive Compensation
PPD's Compensation Committee was formed in October 1995, and is composed
entirely of three outside directors who review, evaluate and approve a
compensation system for PPD's executive officers. It is the Compensation
Committee's intent to survey the compensation policies and practices of other
pharmaceutical and biotechnology companies, including other contract research
organizations (the "Survey Companies"), in order to establish a compensation
system which is competitive to that provided by such other companies and which
rewards executive performance.
Executive Pay Policy. At the time the Compensation Committee was formed,
all of PPD's executive officers already had entered into employment agreements
with PPD which establish their current base salaries. In addition, some of the
employment agreements provide for annual cash bonuses in amounts to be
determined by the Compensation Committee. Since the Committee was not
established until late 1995, the Committee has not had sufficient time to
establish a comprehensive compensation system for PPD's executive officers and
therefore did not approve any substantial bonuses in 1995. The Committee
believes that PPD's executive officers were fairly compensated in 1995.
Specific Compensation Programs. The Compensation Committee intends to
establish a compensation policy for PPD's executive officers which will include
a mix of base salary, annual cash bonus awards and long-term incentive
compensation in the form of stock options. The compensation system will be
performance oriented and shall be intended to achieve long-term shareholder
returns. Base salaries for the Chief Executive Officer and other executive
officers will be reviewed on a regular basis and at such times as new employment
agreements, if any, are entered into by PPD with its executive officers. The
salary ranges will be competitive for similar positions at the Survey Companies.
The Committee will award cash bonuses based upon appropriate performance
targets set in advance by the Compensation Committee. In determining bonuses for
PPD's executive officers, the Committee will consider a number of factors,
including PPD's earnings performance, market share, quality of strategic plans
and leadership in connection with specific projects and programs.
The Committee intends to develop a comprehensive long-term incentive plan
which will include stock option awards and possibly other forms of long-term
incentive compensation.
PPD's executive officers also participate in other benefit programs
provided by PPD to its employees generally, including its 401(k) retirement
plan, medical plan and other such benefit plans, subject to the eligibility
requirements of the plans.
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Performance Evaluation. The Compensation Committee will meet without the
Chief Executive Officer to evaluate his performance, and to evaluate the
performance of other executive officers. Decisions on executive officers'
salaries and salary increases will be based on individual performance
evaluations.
The Chief Executive Officer's base salary in 1995 was paid pursuant to an
employment agreement approved by the Board of Directors of PPD prior to
establishment of the Compensation Committee. The cash bonus to be paid to the
Chief Executive Officer under the terms of his employment agreement was deferred
until 1996. No stock options or other long-term incentive awards were made to
the Chief Executive Officer or any other executive officer in 1995.
Submitted by: THE COMPENSATION COMMITTEE
Ernest Mario, Ph.D., Chairman
John A. McNeill, Jr.
Stuart Bondurant, M.D.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Drs. Mario and Bondurant and
John A. McNeill, Jr. None of such persons was at any time during the fiscal year
ended December 31, 1995 or at any other time an officer or employee of PPD,
except that Mr. McNeill served as PPD's President from 1989 until July 1990 and
as Chairman of the Board of PPD from 1989 until July 1993. No executive officer
of PPD serves as a member of the Board of Directors or Compensation Committee of
any entity which has one or more executive officers serving as a member of PPD's
Board of Directors or Compensation Committee.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of shares of PPD Common Stock as of June 30, 1996, by (i) each person known by
PPD to own beneficially more than 5% of the outstanding shares of Common Stock,
(ii) each director and director nominee of PPD, (iii) each of PPD's Chief
Executive Officer and three most highly compensated executive officers other
than the Chief Executive Officer whose cash compensation for the year ended
December 31, 1995 exceeded $100,000 (collectively, the "Named Executive
Officers"), and (iv) all current directors and executive officers of PPD as a
group. Except as indicated in footnotes to this table, the persons named in this
table have sole voting and investment power with respect to all shares of PPD
Common Stock indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED OWNED(1)
- ------------------------------------------------------------------------ ------------ ----------
<S> <C> <C>
Fredric N. Eshelman..................................................... 3,045,878 33.0%
John A. McNeill, Jr..................................................... 1,522,939 16.5
Ronald B. McNeill....................................................... 1,522,939 16.5
Ernest Mario............................................................ 711,783 7.7
Peter J. Wise(2)........................................................ 115,212 1.2
Joshua S. Baker(3)...................................................... 20,000 *
Terrence W. Mischler(4)................................................. 11,000 *
W. Travis Porter, III(5)................................................ 9,500 *
Patti S. Manuel(5)...................................................... 5,000 *
Stuart Bondurant(5)..................................................... 5,000 *
All directors and executive officers as a group (11 persons)(6)......... 7,018,351 75.2
</TABLE>
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- ---------------
* Less than one percent.
(1) As of June 30, 1996, PPD had 9,243,595 shares of Common Stock outstanding.
Share ownership in each case includes shares issuable upon exercise of
outstanding options that may be exercised within 60 days after June 30, 1996
for purposes of computing the percentage of PPD Common Stock owned by such
person but not for purposes of computing the percentage owned by any other
person.
(2) Includes 3,000 shares held by Dr. Wise's wife.
(3) Includes 20,000 shares of PPD Common Stock issuable pursuant to options.
(4) Includes 10,000 shares of PPD Common Stock issuable pursuant to options.
(5) Includes 5,000 shares of PPD Common Stock issuable pursuant to options.
(6) Includes shares referenced in footnotes (2)-(5). Also includes 4,100 shares
and 45,000 additional shares underlying options held by executive officers
other than the Named Executive Officers.
As noted in the table above, PPD's executive officers and directors own
approximately 75% of the outstanding shares of Common Stock. Accordingly, such
persons are in a position to influence the election of PPD's directors and the
outcome of corporate actions requiring shareholder approval, such as the
approval of the Merger Agreement and the Merger Transactions.
CERTAIN TRANSACTIONS
PPD currently leases its principal executive offices in Wilmington, North
Carolina under various leases with LOI Building, Inc. ("LOI"). Each of John A.
McNeill, Jr. and Ronald B. McNeill, directors of PPD, owns 7.3% of the capital
stock of LOI. Total annual payments under such leases in 1993, 1994 and 1995
were approximately $390,000, $430,000 and $341,000, respectively. Upon
commencement of the new lease in connection with the planned relocation of PPD's
principal executive offices, PPD will be released from all obligations under its
leases with LOI.
Fredric N. Eshelman, the Chief Executive Officer of PPD, owns 50% of the
capital stock of E.M. Associates, Inc. ("Associates") and each of John A.
McNeill, Jr. and Ronald B. McNeill, directors of PPD, owns 25% of the capital
stock of Associates. Associates operates a clinical investigation review board
which, in compliance with FDA regulations, evaluates research activities
involving human subjects to ensure the protection of such subjects. In 1993,
1994 and 1995, PPD incurred expenses to Associates for certain investigation
review board services rendered by Associates of approximately $183,000, $191,000
and $102,000, respectively.
In January 1996, PPD effected a reorganization, pursuant to which, among
other things, (i) certain shareholders of the Corporation received distributions
aggregating $5,471,000, representing substantially all of PPD's previously
earned and undistributed Subchapter S income through September 30, 1995 and the
amount necessary to allow such shareholders to pay taxes related to such income;
(ii) certain shareholders of PPD received an aggregate of 147,245 shares of
Common Stock in the mergers pursuant to which Pharmaceutical Product Development
Clinical Research Unit, Inc. and PPD-Europe, Inc. became wholly owned
subsidiaries of PPD; and (iii) the shareholders of record as of October 30, 1995
received a dividend of 62 shares of Common Stock per share of Common Stock.
DESCRIPTION OF CAPITAL STOCK
Common Stock
PPD currently has authorized 30 million shares of Common Stock, par value
$.10 per share, which number is proposed to be increased to 95 million. See "The
Merger Transactions -- Approval of Amendment to PPD's Articles of Incorporation
to Increase Authorized Shares". Following the Merger, approximately 21,214,379
shares of PPD Common Stock will be issued and outstanding. Holders of Common
Stock are entitled to one vote for each share held of record on all matters
which are submitted to a vote of shareholders and are not entitled to cumulative
voting in the election of directors. Subject to any preferential rights of
holders of Preferred Stock, holders of Common Stock are entitled to receive
dividends, if any, as declared from time to time by the Board of Directors out
of assets legally available for such purpose. See "Summary -- Market Prices and
Dividend Policies". On dissolution of PPD, holders of Common Stock are entitled
to a pro rata portion of all assets available for distribution after payment of
creditors and the liquidation preference of
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any outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights or other rights to subscribe for additional shares. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of the Merger will be, fully paid and nonassessable.
Preferred Stock
PPD has authorized 5 million shares of Preferred Stock, par value $.10 per
share. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of PPD is authorized from time to time to
designate by resolution one or more classes or series of Preferred Stock and the
powers, preferences and rights, and relative participating, optional or other
special rights and qualifications, limitations or restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
class or series or the designation of such class or series. The issuance of
Preferred Stock or the existence of the unissued Preferred Stock could have the
effect of delaying, deferring or preventing a change in control of PPD. PPD has
no present plan to issue any shares of Preferred Stock.
Certain Provisions of PPD's Restated Articles of Incorporation and Bylaws
General
Certain provisions of PPD's Restated Articles of Incorporation and Bylaws
summarized below may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a shareholder might
consider in its best interest. The following summary of such provisions is not
intended to be complete and is qualified in all respects by the provisions of
PPD's Restated Articles of Incorporation and Bylaws.
Classification of Board of Directors
Pursuant to PPD's Bylaws, the Board of Directors of PPD is currently
divided into three classes, as nearly equal in number as may be, with terms
expiring in succession at annual meetings of PPD's shareholders. As a result of
the classification of the Board of Directors of PPD, approximately one-third of
the members of the Board of Directors is elected each year and two annual
meetings are required for PPD's shareholders to change a majority of the members
constituting the Board of Directors.
PPD's shareholders are being asked to approve an amendment to eliminate
classification of the Board. See "The Merger Transactions -- Approval of
Amendment to PPD's Bylaws to Provide for Annual Election of Directors".
Nomination and Removal of Directors; Filling of Vacancies
The Bylaws provide that nominations for the election of directors may only
be made by the Board of Directors, a nominating committee of the Board of
Directors or by any shareholder entitled to vote generally in the election of
directors where such shareholder complies with certain notice provisions. In
addition, the Restated Articles of Incorporation and the Bylaws provide that (i)
a director may be removed from office with cause by the affirmative note of 75%
of all eligible votes present in person or by proxy at a meeting of shareholders
at which a quorum is present, (ii) a director may be removed from office without
cause by the affirmative vote of 75% of all eligible votes present in person or
by proxy at a meeting of shareholders at which a quorum is present, provided
that removal without cause is recommended to the shareholders by the Board of
Directors pursuant to a vote of not less than 75% of the directors then in
office and (iii) vacancies on the Board of Directors may be filled only by the
remaining directors. The purpose of these provisions is to prevent a majority
shareholder from circumventing the classified board systems by removing the
directors and filling the vacancies with new individuals selected by that
shareholder. Accordingly, these provisions may have the effect of impeding
efforts to gain control of the board by anyone who obtains a controlling
interest in PPD's Common Stock.
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Amendment of Restated Articles of Incorporation
The Restated Articles of Incorporation provide that they may not be amended
except pursuant to the affirmative vote of 75% of all eligible votes present in
person or by proxy at a meeting of shareholders at which a quorum is present,
provided that such provision shall not apply, and the provisions of North
Carolina law otherwise applicably shall apply, to an amendment approved by the
Board of Directors of PPD by resolution adopted by two-thirds of all
disinterested directors then in office.
Amendment of Bylaws
The Bylaws may be amended or repealed and new Bylaws may be adopted by the
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present or by the
shareholders at any regular or special meeting of shareholders at which a quorum
is present if the votes cast favoring such action exceed the votes cast opposing
such action, provided that (a) any provision of the Bylaws adopted, amended or
repealed by the shareholders may not be readopted, amended or repealed by the
Board of Directors, but only by the affirmative vote of 75% of all eligible
votes present at a meeting of shareholders at which a quorum is present, unless
such Bylaw authorizes the Board of Directors to readopt, amend or repeal that
particular Bylaw, and (b) the Board of Directors shall not have power to adopt a
Bylaw (i) changing the statutory requirement for a quorum of shareholders or
action by shareholders, (ii) providing for the management of PPD otherwise than
by the Board of Directors or the committees, thereof, (iii) except as otherwise
provided in the Bylaws, increasing or decreasing the fixed number for the size
of the Board of Directors or range of Directors, or changing from a fixed number
to a range, or vice versa, or (iv) classifying and staggering the election of
directors.
Supermajority Vote Requirement
The Restated Articles of Incorporation provide that, except as set forth in
the next sentence, the affirmative vote or the consent of the holders of not
less than 75% of the outstanding shares of stock of PPD entitled to vote on a
particular matter shall be required (a) to adopt any agreement for, or to
approve, the merger or consolidation of PPD or any affiliate of PPD with or into
any other person, (b) to authorize any sale, transfer, or exchange to any other
person of all or substantially all of the assets of the corporation or any other
affiliate, or (c) to authorize the issuance or transfer by PPD or any affiliate
of any voting securities of PPD or any affiliate in exchange or payment for the
securities or assets of any other person, if such authorization is otherwise
required by law or by agreement between PPD and any national securities exchange
or by any other agreement to which PPD or any affiliate is a party. The Restated
Articles of Incorporation provide, however, that the foregoing voting
requirement shall not apply, and the provisions of North Carolina law otherwise
applicable shall apply, to (a) any transaction described in the previous
sentence if the Board of Directors by resolution shall have approved such
transaction by a two-thirds vote of all directors then in office or (b) any such
transaction if the other party to such transaction is a corporation of which a
majority of the outstanding shares of all classes of stock entitled to vote in
elections of directors is owned of record or beneficially by PPD or its
affiliates. The requirement of a supermajority vote of shareholders to approve
such transactions may discourage a change in control of PPD by allowing
shareholders holding less than a majority of the shares of Common Stock to
prevent a transaction favored by those shareholders holding a majority of such
shares. Also, the Board of Directors could cause the supermajority vote to be
required to approve such transactions, thereby enabling management to retain
control over the affairs of PPD and their positions with PPD.
Constituencies
The Restated Articles of Incorporation provide that in evaluating the
merits of any transaction described above under the heading "Supermajority Vote
Requirement", or any offer of a person to make a tender or exchange offer for
any equity security of PPD, the Board of Directors shall, in connection with the
exercise of its judgment in determining what is in the best interest of PPD and
its shareholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effects on the employees, customers,
suppliers, and other constituents of PPD and its affiliates, and on the
communities in which PPD and its affiliates operate or are located. This
constituency provision may discourage or make more difficult certain
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acquisition proposals or business combinations and, accordingly, may affect the
ability of PPD's shareholders to benefit from certain transaction opposed by
PPD's Board of Directors.
Special Meetings of Shareholders
The Bylaws provide that special meetings of the shareholders, for any
purposes, unless otherwise prescribed by statute, may be called only by the
President, the Chairman of the Board, the Chief Executive Officer, a majority of
the Board of Directors then in office or the holders of not less than 75% of all
the outstanding shares of PPD entitled to vote at a meeting. As a result, this
provision, taken together with the restriction on the removal of directors,
would restrict the shareholders from compelling the consideration of proposals
over the opposition of the Board of Directors.
Shareholder Proposals
The Bylaws provide that shareholders who desire to bring business before a
meeting of shareholders must follow specified procedures, including advanced
written notice to PPD. This provision may make it more difficult for shareholder
proposals to be considered at shareholder meetings.
Registration Rights
Pursuant to a Registration Rights Agreement entered into with all of PPD's
shareholders prior to its initial public offering (the "Holders"), PPD agreed
that commencing January 24, 1997, the Holders will have the right on up to two
occasions to request that PPD use its reasonable efforts to register under the
Securities Act shares of Common Stock held by the Holders. If any such
registration is to be made other than on Form S-3, the Holders must request
registration of at least 1,041,270 shares (or any lesser number of shares if the
anticipated aggregate merger price would exceed $10 million). If any such
registration is to be made on Form S-3, the Holders must request registration of
such number of shares that would result in an anticipated aggregate merger price
of $2 million. PPD will not be required to effect a registration of shares
pursuant to a request of Holders within 180 days following the effective date of
a registration statement pertaining to a public offering of securities for the
account of PPD and PPD may defer a registration for a period of 60 days if in
the good faith opinion of the Board of Directors of PPD such registration would
interfere with any material transaction then being pursued by PPD.
In addition, if PPD registers any of its securities under the Securities
Act, subject to certain limitations, the Holders will have the right to have
their shares of Common Stock included in such registration. Such incidental
registration rights are subject to the right of the managing underwriters of any
underwritten offering to limit the number of the Holders' shares to be included
in such offering.
PPD will be required to bear the expenses of all such registration, other
than underwriting discounts and commissions.
In connection with the Merger, it is anticipated that the Registration
Rights Agreement will be amended to include as Holders John D. Bryer, Kenneth H.
Harper, Joseph H. Highland, John H. Timoney and Stephen L. Waechter (the "New
Holders"). The proposed amendment will also provide that, unless otherwise
agreed among the Holders, the shares of stock to be registered (other than
pursuant to an over allotment) shall be allocated 16% (but in any event not
greater than 400,000 shares) to the New Holders, and that any over allotment
shall be allocated pro rata among the Holders based upon the total number of
shares held.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Wachovia Bank of
North Carolina, N.A.
CERTAIN INFORMATION CONCERNING MERGER SUB
Wilmington Merger Corp., a North Carolina corporation and a wholly owned
subsidiary of PPD ("Merger Sub"), is a corporation recently organized in
connection with the Merger, and has not conducted any other business. The
principal executive offices of Merger Sub are located at 115 North Third Street,
5th Floor, Wilmington, North Carolina 28401, and its telephone number at that
address is (910) 251-0081.
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CERTAIN INFORMATION CONCERNING APBI
BUSINESS
Company Overview
APBI is a holding company providing financial and operational support for
its subsidiaries which include Pharmaco International Inc. (formerly Pharmaco
LSR International Inc.); Clinix International Inc., operating under the trade
name of the Chicago Center for Clinical Research ("CCCR"); and APBI
Environmental Sciences Group, Inc., operating under the trade name ENVIRON.
Together, these companies provide a broad range of research and consulting
services in the life and environmental sciences. Services provided include
clinical research and development through Pharmaco International Inc. and CCCR,
and assessment and management of chemical and environmental health risk through
ENVIRON. These services are provided under contract to clients in the
pharmaceutical, general chemical, agrochemical, biotechnology, and other
industries throughout the world.
In early 1995, APBI announced the adoption of a strategic plan focusing on
the growth and expansion of its clinical development services and environmental
consulting businesses. APBI believes that these core businesses provide the best
opportunities for profitable growth and enhancement of shareholder value.
Consistent with its strategic plan, APBI has undertaken a mix of divestiture and
acquisition initiatives aimed at redefining the type of services offered by
APBI.
APBI was incorporated in September 1986 under the laws of the State of
Delaware and has grown through internal expansion and acquisitions.
Life Sciences Group
APBI's Life Sciences Group provides services through Pharmaco International
Inc., a wholly owned subsidiary of APBI, and its wholly owned European
subsidiaries (collectively "Pharmaco"); and Clinix International Inc.
("Clinix"), currently operating through one division using the trade name CCCR.
Pharmaco is a leading full-service CRO providing services to customers
worldwide in the pharmaceutical, biotechnology and medical device industries.
Pharmaco's services support clinical development from Phase I through Phase V
and include clinical trials management, biostatistical analysis, data
management, analytical chemistry, packaging of clinical trial drugs, regulatory
consulting, and Food and Drug Administration ("FDA") liaison services. These
services provide a variable cost alternative to the fixed costs associated with
in-house pharmaceutical and biotechnology company research and development.
Pharmaco is committed to offering high-quality, outsourced clinical research and
development services and reducing drug development time.
Clinix was established in 1995 as a wholly owned subsidiary of APBI. In
August 1995, Clinix acquired the business and substantially all of the assets of
CCCR, a nationally recognized organization which conducts clinical trials in the
pharmaceutical and food and nutrition industries. The consideration for the
acquisition consisted of 634,188 shares of APBI's common stock, with an
estimated value of $4.0 million at the time of the acquisition, and the
assumption of substantially all of CCCR's outstanding liabilities. APBI believes
the acquisition of CCCR is of strategic importance in enhancing and expanding
the range of clinical development services offered through its Life Sciences
Group.
On November 21, 1995, APBI sold to Huntingdon International Holdings plc
("Huntingdon") its toxicology laboratories, located in New Jersey and Suffolk,
England. In connection with the sale of the New Jersey toxicology laboratory,
which operated as a division of Pharmaco International Inc., Huntingdon acquired
substantially all of the assets of the laboratory and assumed substantially all
related liabilities. In connection with the sale of the toxicology laboratory
located in Suffolk, England, Huntingdon acquired all of the capital stock of
Pharmaco LSR Ltd., a wholly owned subsidiary of APBI. APBI received as
consideration cash proceeds of $32.5 million, plus an additional $6.0 million
for an equal amount of cash conveyed to Huntingdon as part of the sale. The
consideration received also included APBI's acquisition of Huntingdon's
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Phase I clinical center located in Leicester, England, at an agreed-upon value
of $4.5 million. The cash proceeds from this transaction were used to pay off
APBI's term loan and revolving credit facility.
The performance of APBI's toxicology division had been below expectations
in recent years, and the sale of the toxicology division furthered APBI's
strategic plan to refocus on its clinical development services in the Life
Sciences Group.
Environmental Sciences Group
The Environmental Sciences Group provides services through APBI
Environmental Sciences Group, Inc., operating under the trade name ENVIRON.
ENVIRON is a multidisciplinary environmental and health sciences consulting
firm that provides a broad range of services relating to the presence of
hazardous substances in the environment, in drugs and medical devices, in
consumer products, and in the workplace. Services provided by ENVIRON are
concentrated in the assessment and management of chemical risk and are
characterized by engagements supporting private sector clients with complex,
potentially high-liability concerns.
Astrix Software Technology ("ASTRIX") was a division which developed and
marketed data analysis software systems for use in analytical laboratory
settings. In furtherance of its strategic business refocus, the division was
sold on August 11, 1995, in a management buy-out led by Astrix employees. In
exchange for the assets of Astrix, APBI received a note for $0.3 million, which
was equivalent to the net book value of the division.
Environmental Testing and Certification Corp. ("ETC") was APBI's former
environmental analytical laboratory division. APBI's two-year divestiture effort
with respect to its investment in this division was substantially completed
during 1995.
Industry Overview
Life Sciences Group
New Drug Development. APBI's Life Sciences Group focuses on the
development of pharmaceutical, chemical, biotechnology, and other products
through the clinical testing of the effects of pharmaceutical products on
humans. The services offered are designed to facilitate the timely progression
of these products through the development pipeline and to secure marketing
approval. Before a new prescription drug may be marketed, it must first undergo
extensive testing and regulatory review to determine its safety and efficacy.
The development process consists of two stages: pre-clinical and clinical.
Pre-clinical Research. Pre-clinical research consists of laboratory and
animal testing, generally over a one- to three-year period, to determine the
toxicity and biological safety of the drug. As previously discussed, APBI
provided this service until November 21, 1995, when it sold its two toxicology
laboratories to Huntingdon.
Clinical Research. In the United States, a drug sponsor must file an
Investigational New Drug Application ("IND") with the United States FDA before
the commencement of human testing of a drug. The IND includes pre-clinical
testing results and sets forth the sponsor's plans for conducting human clinical
trials. The design of these plans is also referred to as the clinical study
protocol. Human clinical trials may begin 30 days after the IND is filed, unless
notified otherwise by the FDA.
Phase I (6 to 12 months in duration). Phase I studies are frequently
"first time in human" studies, which are generally conducted on 20 to 80 healthy
volunteers, primarily to test for safety in treating a particular disease, and
to determine the absorption, distribution, metabolism and excretion of a
particular product in people. During Phase I development, single- and
multiple-dose tolerance tests are conducted, which serve to establish safe
dosage ranges.
Phase II (1 to 2 years in duration). During Phase II, drugs are
administered to a limited number of patients, typically 100 to 200, with a
targeted disease or condition, primarily to investigate therapeutic efficacy.
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These trials may include dose-ranging studies to establish optimal dosages and
usually include testing against a placebo or a currently marketed drug.
Phase III (1 to 3 years in duration). During Phase III, the drug is tested
in hundreds or thousands of patients with the targeted symptoms or disease.
Phase III studies establish more clearly the drug's efficacy and safety, and may
also include drug interaction testing with other medications likely to be
administered to patients with that disease. Clinical data are generally
submitted to the FDA, or the equivalent regulatory bodies in Europe and
elsewhere, at the end of Phase III for the purpose of registering the drug in
the United States or other jurisdictions.
Phase I, II, and III trials are generally of three types: (i) open-label
trials, in which both the patient and the investigating physician know which
drug is being administered, (ii) single blind trials, in which the patient does
not know which drug (or placebo) is being administered, and (iii) double blind
trials, in which neither the patient nor the investigator knows which drug (or
placebo) is being administered. Phase III trials that occur before regulatory
submissions are made are sometimes referred to as Phase IIIa trials.
Phase IIIb and IV (1 to 4 years in duration). Once a drug is close to
being or has been approved for general distribution, it continues to be
evaluated through pre- and post-market surveillance studies. These studies may
involve the accumulation of data from several thousand users of the drug to
monitor adverse reactions and further to confirm the drug's safety. The Phase
IIIb (trials that occur after regulatory submissions are made) and IV studies
may require less frequent clinical monitoring and oversight than Phase I, II,
and IIIa studies.
Phase V. Phase V studies are conducted after approval for general
distribution and are designed to generate data to support additional clinical
indications. The methodology used for these studies is similar to that of Phase
IV trials.
Companies in the pharmaceutical and biotechnology industries worldwide are
outsourcing a more significant portion of their drug development services to the
CRO industry. APBI believes a number of factors will cause the outsourcing trend
to continue, including the following:
Increased Time Pressures. Time pressures are leading pharmaceutical
and biotechnology companies to outsource to CROs drug development services,
in which success is predicated on the rapid enrollment of patients and the
reduction of the drug development time. Reducing the time it takes to get a
new drug to market reduces costs, maintains margins, accelerates revenue
realization, and can secure market positioning.
Cost Containment Pressures. Drug companies are looking at more
efficient ways to conduct business to ease margin pressures as a result of
various influences, including efforts by managed care organizations to
control prices, foreign price controls, patent expirations, increased
competition from generic drugs, and more stringent regulatory requirements.
Sustaining Quality. Drug companies and experienced clinical
development staff have required the CRO industry to develop
state-of-the-art data systems which can be integrated into clinical
development management ensuring data quality and efficiency.
Globalization of Research and Development. Many companies are
attempting to maximize the return from a given drug by pursuing regulatory
approvals in multiple countries simultaneously rather than sequentially.
This globalization of clinical research and development activities has
increased the demand for global CRO services, as the drug companies may
look to CROs for expertise and knowledge of the regulations in countries
other than the U.S. and to manage trials based on those requirements.
Biotechnology Industry Growth. The biotechnology industry has
developed a number of key drugs requiring FDA market approval.
Biotechnology companies typically do not have the in-depth experience or
resources to conduct clinical trials. Accordingly, many biotechnology
companies are seeking CROs to perform the trials to avoid the costs of
expanding into the clinical research area.
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Consolidation in the Pharmaceutical Industry. In the past several
years, many pharmaceutical companies have merged or formed corporate
alliances with each other and with biotechnology companies. Once
consolidated, the companies have further streamlined by taking advantage of
the economies-of-scale created by reducing jobs and outsourcing to variable
cost CROs.
Regulatory Pressures. As discussed below, many countries have enacted
laws and regulations requiring the testing of drugs, biologicals, and other
substances prior to obtaining governmental approval to market them. Many
companies in the pharmaceutical and biotechnology industries have
determined that it is more cost-effective to use service companies in the
CRO industry to perform certain, or all, of the required testing because of
such companies' familiarity and expertise with applicable laws and
regulations.
Environmental Sciences Group
The environmental industry has long been dependent upon governmental
programs and regulations developed in response to concerns regarding the safety
of chemicals in the air, water, food, consumer products, and land. Historically,
much of the growth experienced by environmental firms has come from assisting
private sector clients to respond to the regulatory systems that have been put
into place at both the federal and state levels.
For the next several years, APBI believes that the environmental industry
will find continued, but more limited, opportunities to grow. To what extent new
or existing regulations will provide a growing base of business depends largely
on how the differences between the views of the current Congress and the
President are resolved and on the outcome of the Congressional and Presidential
elections in November 1996. In addition, after many years of dealing with
problems created in the past, general industry, especially the manufacturing,
industrial, and chemical concerns, is now able to turn its attention to current
operations and prevention of future environmental issues. The industry's
proactive approach will create new and expanding opportunities for the
environmental industry. For example, leaders in industry are already developing
programs to incorporate safety, health, and environmental considerations into
their product and process design. A growing area for the environmental industry
to provide services is in assisting companies to incorporate environmental and
public health concerns into plans for effective corporate strategic growth.
APBI believes that international opportunities for environmental industry
growth will continue to expand as the world moves toward a global economy.
Companies seeking to enter the world economy will need assistance in developing
environmental management systems and in monitoring these programs for compliance
with international standards. In addition, as world markets become more
developed, opportunities will increase for the environmental industry to assist
private firms in merger and acquisition planning and in general evaluation and
management of environmental and public health risks.
Regulatory Environment
The market for the services offered in both APBI's Life Sciences Group and
Environmental Sciences Group has developed as a result of significant laws and
regulations governing the development and testing of certain drugs and hazardous
substances and the impact of hazardous substances on the environment.
Many countries require safety testing prior to obtaining governmental
approval to market various substances, including pharmaceutical products,
industrial chemicals, and agrochemicals. The most significant laws and
regulations concern the safety of pharmaceutical products. The results of
clinical tests conducted upon pharmaceutical products must be submitted to
appropriate government agencies, such as the FDA in the U.S., the European
Committee for Proprietary Medicinal Products and national regulatory agencies in
Europe, and the Ministry of Health and Welfare in Japan, as part of the relevant
pre-market approval process in individual countries.
Manufacturers of industrial chemicals and agrochemicals must also comply
with toxicological testing requirements in connection with the pre-market
approval process. In recent years, heightened concern over the presence of
potentially toxic substances in the environment has focused attention on the
need to evaluate the
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effects of existing and new chemical substances. As a result, regulations have
been enacted in many jurisdictions expanding the regulatory process for
industrial chemical and agrochemical products, including the Toxic Substances
Control Act ("TSCA") and the Federal Insecticide, Fungicide & Rodenticide Act in
the United States ("FIFRA"), and the council Directive 91/414/EEC in Europe.
The management and remediation of hazardous substances in the environment
are also subject to extensive federal legislation in the U.S., including the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA", commonly known as the "Superfund" legislation) and the Superfund
Amendment and Reauthorization Act of 1986 ("SARA"), which address problems
involving the remediation of past waste disposal practices; the Resource
Conservation and Recovery Act of 1976 ("RCRA") and the Hazardous Solid Waste
Amendments of 1984, which regulate the management of newly created wastes; the
Safe Drinking Water Act of 1974; the Clean Water Act; the Occupational Safety
and Health Act ("OSHA"); and the 1990 Clean Air Act Amendments. In addition,
state authorities have enacted significant environmental legislation, including
California's Safe Drinking Water and Toxic Enforcement Act of 1986 and New
Jersey's Industrial Site Recovery Act ("ISRA", formerly "ECRA").
Services Offered
Life Sciences Group
Pharmaco provides a full range of clinical research and development
services, including clinical trials management and study design, biostatistical
analysis, data management, regulatory affairs, medical writing, quality
assurance services, consulting services, peer review, clinical trial laboratory
services, analytical chemistry, and packaging of clinical trial drugs. These
services are designed to facilitate timely progression of the clients' products
through the development pipeline and to secure marketing approval. Pharmaco's
services are provided separately or as integrated packages of two or more
services. Through the CCCR division of Clinix, the Life Sciences Group
participates in and conducts clinical trials in the pharmaceutical and food and
nutrition industries. During 1995, $134.0 million or 73.1% of APBI's net
revenues were generated by the Life Sciences Group. Of such revenues,
approximately $39.1 million were generated by APBI's former toxicology
operations.
Clinical Trials Management. APBI's Life Sciences Group offers complete
services for design, placement, performance, and management of clinical trial
programs, following Good Clinical Practice guidelines, which is a crucial
element in obtaining regulatory approval for drugs and medical devices. APBI has
significant clinical trials experience in the areas of:
<TABLE>
<S> <C>
Analgesia................................ Acute and chronic pain modeling
Biotechnology............................ Growth hormone, multiple sclerosis,
sepsis, wound healing
Cardiovascular disease................... Congestive heart failure, global survival
trials
Central nervous system disease........... Schizophrenia, depression, anxiety,
obsessive-compulsive disorders, panic
disorders
Dermatology.............................. Wound healing, acne, hair loss
Food and Nutrition....................... Fat substitutes, beta carotene,
oligofructose, fibers
Gastroenterology......................... Duodenal ulcer, gastric ulcer,
gastro-esophageal reflux disease, H.
pylori, nonsteroidal anti-inflammatory
drug induced ulcers
Infectious disease....................... Acute and critical
Oncology................................. Ovarian, lung cancer
Rheumatology............................. Rheumatoid and osteoarthritis
Women's health........................... Hormone replacement, oral contraception
</TABLE>
Through Pharmaco, APBI manages every aspect of clinical trials in Phases I
through V, including protocol development, case report form design,
identification and recruitment of investigators, site initiation, monitoring and
data collection, patient enrollment, interpretation of trial results, and report
preparation.
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Pharmaco performs Phase I studies in APBI's 200-bed facility in Austin, Texas,
and in the 52-bed Leicester Clinical Research Centre ("LCRC") facility in
Leicester, England. The Clinical Development Services division of Pharmaco is
experienced in monitoring from one to as many as hundreds of investigative sites
involving over 8,000 patients in multinational trials conducted simultaneously
in North America and Europe.
Biostatistical Analysis and Data Management. The Biostatistics division of
Pharmaco provides a range of services, including statistical consulting, data
management, and analysis and reporting of study results. The programmers, data
analysts and statisticians are supported by state-of-the-art computing systems
linked in a global wide area network. Pharmaco has developed computerized
systems for the collection, review and correction of clinical data to reduce the
time required to finalize study data. These systems are part of Pharmaco's
commitment to providing error-free data in a timely manner. Pharmaco's
statisticians are also working on advanced statistical techniques that will
increase the ability to detect treatment results when more traditional
techniques fail. The data processed and the analyses are crucial components of
the documents submitted to regulatory agencies for product approval.
Analytical Laboratory Services. Through its Laboratory division, Pharmaco
performs analytical laboratory services in its laboratory located in Richmond,
Virginia. As part of such services, the laboratory develops, validates, and
conducts the trace quantitative measurements of pharmaceutical compounds and
their metabolites in biological samples collected during clinical trials. Data
from the bioanalytical projects support the pharmacokinetic evaluation
throughout the various clinical phases.
The laboratory complex includes a new 38,000-square-foot state-of-the-art
facility. Comprehensive measurement services include Gas Chromatography/Mass
Spectrometry, Liquid Chromatography/Mass Spectrometry, High Performance Liquid
Chromatography, Gas Chromatography, Radioimmunoassay, and Enzyme Linked
Immunosorbant Assay. Support services include HIV positive sample handling,
sample/data management for kinetic studies from multi-center trials, and
sample/data archiving.
Other Clinical Management Services. Pharmaco provides comprehensive
regulatory services in the United States and throughout Europe. APBI provides
regulatory strategy formulation and assists clients in preparing regulatory
filings and in responding to regulatory agency inquiries.
Pharmaco also provides packaging and pharmaceutical handling services. APBI
receives large quantities of a study drug, which it labels, packages, and
distributes along with other supplies. Based on study design, Pharmaco can
provide a just-in-time distribution scheme for drugs which can reduce costs for
sponsors in clinical trials of expensive or rare investigational drugs. All
procedures are performed in accordance with Good Manufacturing Practice and Good
Laboratory Practice.
Environmental Sciences Group
APBI Environmental Sciences Group currently provides health and
environmental sciences and engineering consulting services through its ENVIRON
division. During 1995, the Environmental Sciences Group generated 26.9% of
APBI's net revenues.
ENVIRON is a leading provider of multidisciplinary consulting services in
the chemical risk assessment and risk management field. ENVIRON provides
services primarily to private sector clients facing potentially high liability
as a result of the presence of hazardous substances in the environment, in drugs
and medical devices, in consumer products, and in the workplace. ENVIRON's
engagements typically involve providing creative, multidisciplinary solutions to
complex problems.
ENVIRON provides services primarily in two areas: (1) health sciences and
(2) environmental sciences and engineering. ENVIRON's health sciences staff
includes professionals trained in toxicology, epidemiology, chemistry,
biochemistry, microbiology, industrial hygiene, risk assessment, and allied
fields. Its environmental sciences and engineering staff includes professionals
trained in hydrogeology; geology; environmental chemistry; environmental,
chemical and civil engineering; and ecotoxicology, ecology, and natural
resources. Approximately 54% of ENVIRON's employees have advanced degrees at the
master's level or above. Of those with advanced degrees, approximately 24% have
attained their Ph.D.
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ENVIRON offers services in the following areas:
Chemical Risk Assessment and Risk Management. ENVIRON assesses the
potential risk of injury to human health and the environment associated
with industrial chemicals during all stages of the manufacturing process
and disposal. It also provides assistance in determining exposures and the
potential health impact of chemicals present in food, consumer products,
pharmaceuticals, medical devices, and the workplace.
The chemical risk assessment services provided by ENVIRON typically
involve two components. ENVIRON analyzes toxicological and biological data
to assess the inherent hazard or toxicological properties of industrial
chemicals and other substances. In addition, ENVIRON assesses the physical-
chemical properties of industrial chemicals and other substances in the
media in which they are found to evaluate the fate and transport of such
substances in the environment and the potential for exposure. The
assessments performed by ENVIRON are generally used to evaluate the
potential for public health risk and ecological damage. ENVIRON also
assists clients in developing workplace standards for industrial chemicals
and prepares assessments of risks resulting from occupational exposure. In
addition, ENVIRON conducts audits to determine compliance with specific
laws regulating chemical releases into air, water, and other environmental
media, and to obtain permits for manufacturing or processing facilities.
ENVIRON provides such services in a variety of project areas,
including complex hazardous waste sites, current and former industrial
manufacturing facilities, leaking underground storage tanks, municipal and
hazardous waste disposal facilities, incinerators, abandoned mine sites,
pesticide-contaminated agricultural land, and large-scale spills and
releases. In performing assessments, ENVIRON also analyzes the potential
for exposure at the project site and the surrounding environment.
Environmental Liability Assessments. ENVIRON performs environmental
liability assessments of industrial properties, commercial and residential
developments, undeveloped parcels of land and hazardous waste sites to
identify practices that could result in significant exposure or liability.
These services include environmental audits to determine compliance with
current and anticipated federal, state, and local regulations, and to
estimate the present value of environmental liabilities. Such assessments
have been performed across a broad range of industries, including iron and
steel, pulp and paper, mining, oil and gas, textiles, lumber and wood,
plastics, leather, and electronics.
Site Investigation and Remediation. ENVIRON assists clients in
determining the nature and extent of contamination at industrial and
hazardous waste sites through the collection and analysis of soil, water,
and sediment samples. ENVIRON's services in this area also include the
evaluation and analysis of the cost-effectiveness of various alternative
remediation strategies designed to protect human health and the
environment. ENVIRON also designs the selected remedial strategy, hires
subcontractors as appropriate and provides oversight of the implementation
of the strategy. Such services are often provided in connection with the
negotiation and resolution of disputes that relate to the apportionment of
liability arising under various federal, state, and local statutes, or
private contracts.
Litigation Support. ENVIRON provides expert technical assistance and
strategic support to clients who are or who anticipate becoming involved in
litigation relating to environmental, occupational, and product safety
issues. These services cut across substantially all of its practice areas.
Services provided in this area include reviewing environmental data and
waste handling records, allocating liability among multiple site owners,
developing information on state-of-the-art waste disposal practices,
determining the timing of contaminant release events, evaluating sampling
programs and remedial measures developed for contaminated sites, reviewing
toxicological and epidemiological data associated with the use of consumer
products, and establishing relationships between exposure and disease or
injury. ENVIRON's senior staff members have extensive experience providing
expert testimony in the areas of toxicology, risk assessment, and
contaminant releases.
Product Safety Regulation. ENVIRON provides strategic scientific
support and regulatory affairs guidance in the pre-market approval process
for and subsequent use of various products, including drugs
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and pharmaceuticals, medical devices, food additives, consumer products,
agricultural chemicals, and biotechnology products.
Air Quality. ENVIRON offers a full spectrum of air quality services,
including: air emissions and dispersion modeling from industrial facilities
and hazardous waste sites, including siting studies and air toxics impact
evaluations; air pollution compliance assistance, including compliance
auditing, regulatory analysis, and obtaining local and state permits, as
well as federal Title V operating permits; ambient and indoor monitoring
program design and implementation; process engineering; emergency release
modeling and off-site consequence analysis; analysis of the potential
regional air quality impacts of alternative control strategies, including
advanced vehicles, alternative and reformulated fuels and other mobile and
stationary source control measures; and leak detection and repair services,
including monitoring equipment recommendations, software/data base
management system design, program management consulting, and field
services.
Other Environmental Services. ENVIRON also provides a variety of
other services that complement its primary service areas. Such services
include facility siting and permitting, water quality assessments, waste
management, emergency planning, and evaluation of environmental management
systems. Although such other services have historically represented a
relatively small percentage of ENVIRON's net revenues, APBI believes that
it will have opportunities to expand its business in these areas in the
future.
Investment in EnSys Environmental Products, Inc. ("EnSys")
APBI owns 729,600 shares of EnSys common stock and warrants to acquire up
to an additional 866,667 shares of EnSys common stock. EnSys develops
proprietary biotechnology-based analytical systems for on-site detection of
hazardous chemicals in soil, water and other environmental samples. The EnSys
methodology provides for prompt, low-cost screening of environmental samples at
the field sampling site or in a laboratory setting. Each of the common stock
shares included in the warrants has a purchase price of $7.50 per share and each
of the warrants is exercisable for a period of three years from October 27,
1993. APBI owns approximately 12% of the EnSys common stock excluding warrants
and approximately 23% if both common stock and warrants are considered. APBI's
investment in EnSys is recorded at $1.0 million, based on a write-down of the
investment to the market price of EnSys common stock as quoted on the National
Market System of the National Association of Securities Dealers Automated
Quotation System at December 31, 1995. The $2.6 million difference between the
fair value and the previous carrying value was reported as a loss in APBI's
statement of operations in 1995. Subsequent differences in 1996 are reported as
a separate component of shareholders' equity.
Marketing
A substantial portion of APBI's new business is derived from current or
former clients and referrals by such clients. Marketing activities by the
operating divisions of Pharmaco and Clinix involve senior executives and other
experienced personnel specialized in all aspects of U.S., European, and global
clinical drug development. ENVIRON conducts separate marketing activities at
each of its office locations, and believes that its regional presence enables
its professionals to gain a greater knowledge of regional environmental issues,
a better understanding of regional laws and regulations, and a more constructive
working relationship with regional governmental agency personnel. Because of the
technical nature of APBI's business, most marketing activities at each of APBI's
operating divisions are conducted by technical and scientific personnel, with
initial contacts frequently followed up by personal visits to clients' offices.
APBI sponsors and encourages the participation by its personnel in a
variety of scientific endeavors, including the presentation of papers by its
professional staff at meetings of professional societies and major conferences
and the publication of scientific articles in respected journals. APBI believes
such activities enhance its reputation for professional excellence. APBI's core
marketing efforts are complemented through advertising in trade journals and
exhibits at scientific conferences.
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Clients
Overview
During the past fiscal year, APBI provided services to over 1,200 clients,
including some of the largest American, European, and Japanese pharmaceutical
and industrial chemical companies. During each of the past three years, no
single client has contributed more than 10% of APBI's net revenues. In 1995,
APBI's ten largest clients accounted for approximately 35% of APBI's net
revenues. One client accounted for 12.2% of the net revenues of the Life
Sciences Group and another client accounted for 14.6% of the net revenues of the
Environmental Sciences Group.
In 1995, 26% of APBI's net revenues were derived from clients outside the
U.S., in particular from Europe and Japan, and related principally to biological
safety testing conducted by APBI's former toxicology operations. A majority of
the net revenues of Pharmaco and Clinix's clinical research services operations
and virtually all of the net revenues of ENVIRON currently are generated by
clients in the United States.
The table below sets forth the geographic sources of APBI's consolidated
net revenues from continuing operations for the past three fiscal years:
<TABLE>
<CAPTION>
PERCENT OF NET
REVENUES
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
United States................................................... 74% 72% 72%
Europe.......................................................... 18 22 21
Japan and other................................................. 8 6 7
</TABLE>
Life Sciences Group
The principal clients for the clinical research services offered by
Pharmaco and Clinix include mainly the large pharmaceutical companies,
particularly companies that are growing and expanding into the biotechnology and
medical device industries. In addition, APBI's Life Sciences Group also serves,
to a lesser extent, certain other industries such as those producing food
additives and personal and healthcare products.
Environmental Sciences Group
ENVIRON's clients come from a wide variety of industrial companies. A
significant portion of these engagements is initiated by lawyers whose clients
are engaged in merger, acquisition, or real estate transactions, or who become
involved or anticipate becoming involved in litigation. ENVIRON also provides
services to investment banks, lenders, insurance firms, trade associations, and
to a lesser extent, state and local government agencies.
Backlog
The Life Sciences Group maintains an order backlog for clinical research
studies and analytical laboratory services. Such services are generally
performed on a project-by-project basis in accordance with defined protocols
established pursuant to written agreements entered into with clients. Due to the
technical nature of the services provided by Pharmaco and Clinix, the
negotiation and execution of a written agreement for a particular project may
extend over a period of months. Historically, APBI reported backlog as
consisting of only anticipated net revenues from signed contracts. However,
Pharmaco frequently initiates work on a particular project after it has entered
into a letter of intent with the client relating to the project, but prior to
the negotiation and execution of a written agreement. Accordingly, commencing
with the fourth quarter of 1995, reported backlog consists of anticipated net
revenues from uncompleted projects which have been authorized by the client not
only through signed contracts but also through signed letters of intent.
Pharmaco's order backlog, as described herein, excludes the portion of order
backlog that represents amounts paid to subcontractors. The order backlog of the
Life Sciences Group for the services described above under written agreements,
including signed letters of intent and net of subcontractor costs, was $103.5
million at December 31, 1995, compared to $90.6 million at December 31, 1994.
Backlog at December 31, 1994,
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excludes backlog from APBI's former toxicology division of $30.6 million.
Backlog at December 31, 1995, includes backlog of APBI's 1995 acquisitions (CCCR
and LCRC) of $7.5 million.
Computations of order backlog can be affected by a number of factors.
Clients have the right to terminate studies after initiation, and premature
terminations (generally as a result of unexpected test results) can result in
unplanned periods of excess capacity. APBI's written agreements generally
require clients to make all scheduled payments through the termination date and
to pay certain extra costs incurred in connection with the early termination
thereof. In addition, such agreements may also require the payment of a separate
early termination fee.
The Environmental Sciences Group's net revenues, including all net revenues
of ENVIRON, are not represented by an order backlog, as the Environmental
Sciences Group engagements are generally of an indefinite duration in which
services are performed on a time-and-expenses basis, and clients are billed at
fixed hourly rates for each staff member involved in an assignment, rather than
on a project basis.
Competition
APBI's general strategy is to differentiate itself from competition by
providing the broadest range of services with the highest degree of scientific
and technical expertise. Each of APBI's subsidiaries and operating divisions,
however, competes on the basis of the particular services it provides.
Pharmaco's Clinical Development Services, Biostatistics and Laboratory
divisions compete principally against the leading CROs and analytical
laboratories. In Phase I research, Pharmaco typically competes against a few
well-established companies, such as Hazleton Laboratories Corporation, a
subsidiary of Corning Incorporated; Harris Laboratories; and Phoenix
International, as well as major pharmaceutical companies that maintain in-house
clinical testing facilities. Competitive factors in Phase I research include the
quality of the CRO's facility, ability to recruit subjects on a timely basis,
reliability of clinical procedures, and timeliness and accuracy of final report
productions. In clinical development trials, Pharmaco competes against a number
of large CROs, including G.H. Besselaar and Associates, a subsidiary of Corning
Incorporated; Quintiles Transnational Corp.; PAREXEL International Corporation;
ClinTrials Research Inc.; and PPD. APBI believes that Pharmaco is the third
largest full-service CRO in the world. Competitive factors in clinical
development trials include medical and scientific expertise in applicable
therapeutic areas, the ability to recruit principal investigators, and the
ability to organize and manage studies on a global basis so as to meet scheduled
enrollment requirements. APBI believes that the ability to provide
biostatistical, regulatory, and other peripheral services, such as the
analytical laboratory services provided by Pharmaco's laboratory located in
Richmond, Virginia, also enhances Pharmaco's ability to attract clinical
development trials.
APBI believes that Clinix is the largest private clinical investigational
site, capable of conducting over 70 trials simultaneously. Clinix's major
competitors are other large investigator sites, including reSearch for Health
Inc. and GFI Pharmaceutical Services Inc. (which was recently acquired by
Collaborative Clinical Research, Inc.).
ENVIRON competes with many firms, ranging from small local firms to large
national firms. ENVIRON competes principally on the basis of reputation,
scientific and technical expertise, experience and qualifications of
professional staff, quality of services, ability to handle complex problems, and
its risk assessment orientation. A large percentage of ENVIRON's business is
generated by existing or former clients. ENVIRON believes that pricing is
generally not the primary factor in attracting the types of engagements on which
it focuses, which typically involve providing creative, multidisciplinary
solutions and significant value-added services.
Government Regulations
Pharmaco and Clinix conduct all clinical research and development in
accordance with Good Clinical Practice ("GCP") guidelines. GCP guidelines have
not been formally adopted as regulations by the FDA or by similar regulatory
authorities outside the U.S. However, regulatory authorities may require that
clinical development studies be based on or in accordance with GCP. Certain
provisions of GCP have been included
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in regulations adopted by the FDA. Several countries within the European
Community have adopted GCP as part of their regulations. GCP guidelines set the
standards ensuring the quality and integrity of the clinical development and
testing process and seek to protect the rights and safety of clinical subjects.
The industry standard for conducting pre-clinical and laboratory testing is
embodied in regulations called Good Laboratory Practice ("GLP"). GLP has been
adopted by the EPA and the FDA in the U.S., by the Department of Health in the
United Kingdom, and by similar regulatory authorities in other parts of the
world. GLP stipulates requirements for facilities, equipment, and professional
staff. The regulations mandate standardized procedures for controlling studies,
for recording and reporting data, and for retaining appropriate records. To help
assure compliance, APBI has established a quality assurance unit at its
laboratory facility. This unit monitors ongoing compliance with GLP regulations
by auditing test data and conducting regular inspections of testing procedures.
The consulting services provided by ENVIRON are not significantly regulated
by any governmental authority at this time.
Potential Liability and Insurance
APBI's services involve significant risk of liability for negligence and
professional malpractice. APBI's business could be adversely affected if it were
required to pay material damages, or to incur significant defense costs, in
connection with a lawsuit for which it did not have adequate insurance coverage
and for which it was not adequately indemnified by the client for whom it
performed services. In particular, APBI's clinical research operations and its
environmental risk management services each involve engagements with significant
risks of liability for personal injury, environmental and property damage, and
economic loss.
APBI currently maintains liability insurance on a "claims made" basis for
professional acts, errors and omissions. As of December 31, 1995, this insurance
policy includes a $1,000,000 self-insurance retention. See "Investment
Considerations -- Considerations with Respect to APBI's Business -- Potential
Liability and Insurance".
Employees
As of December 31, 1995, APBI had over 1,350 full-time equivalent
employees, of whom 980 were employed in the Life Sciences Group, 330 were
employed in the Environmental Sciences Group, and the remainder were in APBI's
corporate headquarters. Of APBI's employees, approximately 330 had advanced
degrees. None of APBI's employees is represented by a labor union or is subject
to a collective bargaining agreement. APBI has never experienced a work stoppage
and believes that its employee relations are satisfactory.
Foreign and Domestic Operations
Set forth in Note 18 to APBI's consolidated financial statements for each
of fiscal years 1995, 1994 and 1993 are APBI's revenues, operating profit or
loss, and assets attributable to each geographic area in which APBI operates.
Properties
APBI's Life Sciences Group owns and operates a 52-bed Phase I facility in
Leicester, England. This facility, which was acquired by APBI as part of the
divestiture of its toxicology operations, is a modern, state-of-the-art
building. APBI also operates a 200-bed Phase I facility in Austin, Texas. APBI's
Environmental Sciences Group's only owned property is a former ETC laboratory
facility located in Houston, Texas. A sales contract has been entered into with
respect to this property and closing is expected to occur in the third quarter
of 1996. The Houston property is mortgaged as collateral for APBI's long-term
revolving credit facility. (See Note 9 to APBI's consolidated financial
statements.) All other facilities are leased. APBI's operations occupy
approximately 470,000 square feet of office space worldwide, including over
50,000 square feet of office space
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located outside of the United States. APBI believes that its facilities have
adequate capacity to handle significant additional business growth.
The locations of the principal operating facilities of APBI as of December
31, 1995, were as follows:
<TABLE>
<CAPTION>
LIFE SCIENCES GROUP ENVIRONMENTAL SCIENCES GROUP
------------------------------------------ ------------------------------------------
<S> <C>
Austin, Texas(1) Arlington, Virginia(2)
Richmond, Virginia Princeton, New Jersey
Chicago, Illinois Emeryville, California
Columbia, Maryland Irvine, California
Triangle Township, North Carolina Novato, California
Chelmsford, England Houston, Texas
Cambridge, England
Leicester, England
Brussels, Belgium
Paris, France
Karlsruhe, Germany
</TABLE>
- ---------------
(1) In November 1995, APBI entered into a sale-leaseback transaction related to
its Austin, Texas facilities. See Note 9 to APBI's consolidated financial
statements.
(2) ENVIRON has an option to lease additional space in this building in 1998.
Legal Proceedings
In the normal course of business, APBI is a party to various claims and
legal proceedings. Although the ultimate outcome of these matters is presently
not determined, management of APBI, after consultation with legal counsel, does
not believe that the resolution of these matters will have a material effect
upon APBI's financial condition or results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion set forth in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements which reflect the current view of APBI's management with respect to
certain future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, and actual results
may differ materially. Factors that could cause or contribute to such
uncertainties include the effect on financial performance and future events of
competitive pricing in the markets in which APBI offers its clinical development
and environmental consulting services, economic conditions generally and in
APBI's industry segments, as well as those factors discussed elsewhere herein
and in APBI's other periodic reports and registration statements filed with the
Commission. See "Investment Considerations".
General
During 1995, APBI's Life Sciences Group, which consists of Pharmaco and,
since August 1995, CCCR, generated annual net revenues of $134.0 million, up
$4.9 million or 3.8% from a year ago. Net revenues for APBI's Environmental
Sciences Group were $49.3 million, compared with $45.8 million (from continuing
operations) in 1994, an increase of 7.7%
During 1995, APBI reported a loss from continuing operations of $5.3
million, or $0.19 per share, compared to income from continuing operations of
$2.9 million, or $0.10 per share in 1994. Including the loss from discontinued
operations and the extraordinary loss from the early extinguishment of debt, the
net loss in 1995 totaled $7.9 million, equivalent to $0.28 per share, compared
with a net loss of $10.0 million, or $0.36 per share, in 1994.
In early 1995, APBI announced the adoption of a strategic plan focusing on
the growth and expansion of its clinical development services and environmental
consulting businesses. APBI believes that these core businesses provide the best
opportunities for profitable growth and enhancement of shareholder value.
Consistent with its strategic plan, APBI has undertaken a mix of divestiture and
acquisition initiatives aimed at redefining the type of services offered by
APBI.
In August of 1995, APBI, through its newly formed subsidiary, Clinix
International Inc., acquired the business and assets of CCCR, a nationally
recognized organization which conducts clinical trials in the pharmaceutical and
food and nutrition industries. The consideration consisted of 634,188 shares of
APBI common stock valued at $4.0 million, together with the assumption or
retirement of substantially all of CCCR's outstanding indebtedness and other
related liabilities. APBI believes that the acquisition of CCCR is of strategic
importance in enhancing and expanding the range of clinical development services
offered through its Life Sciences Group.
APBI completed a sale-leaseback transaction involving Pharmaco's owned real
estate in Austin, Texas, on November 13, 1995. Total gross proceeds from the
transaction were $12.0 million. The facilities were leased back to APBI under a
bond-type net lease in which APBI retained responsibility for operating and
maintenance costs. The initial term of the operating lease is fifteen years,
followed by four five-year renewal options. The net proceeds from the
sale-leaseback transaction were used to repay the remaining mortgage balance on
the Austin, Texas properties, and the remaining cash was applied to pay down
APBI's outstanding long-term debt.
On November 21, 1995, APBI sold to Huntingdon its toxicology laboratories,
located in New Jersey and Suffolk, England. In connection with the sale of the
New Jersey toxicology laboratory, which operated as a division of Pharmaco
International Inc., Huntingdon acquired substantially all of the assets of the
laboratory and assumed substantially all related liabilities. In connection with
the sale of the toxicology laboratory located in Suffolk, England, Huntingdon
acquired all of the capital stock of Pharmaco LSR Ltd., a wholly owned
subsidiary of APBI. APBI received as consideration cash proceeds of $32.5
million, plus an additional $6.0 million for an equal amount of cash conveyed to
Huntingdon as part of the sale. The consideration received also included APBI's
acquisition of Huntingdon's Phase I clinical center located in Leicester,
England, at an
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agreed-upon value of $4.5 million. The cash proceeds from this transaction were
used to pay off APBI's term loan and revolving credit facility.
APBI, through APBI Environmental Sciences Group, continues to own preferred
and common stock of PACE Incorporated ("PACE") representing approximately 36% of
PACE's weighted average preferred and common stock outstanding. This investment
has been reflected as a discontinued operation since 1993. (See Note 4 to APBI's
Consolidated Financial Statements.) During the fourth quarter of 1995, PACE sold
substantially all of its laboratories in a series of transactions and currently
PACE is engaged in winding up its remaining business operations. It is not
anticipated that equity holders will receive any distributions as part of PACE's
dissolution. In the fourth quarter of 1995, APBI wrote off its remaining
investment in PACE, of approximately $3.6 million, and accrued its estimated
exposure for guarantees on leases.
Revenue Recognition
APBI records revenues from fixed-price contracts extending over more than
one accounting period on a percentage-of-completion basis. Revenues from
time-and-material contracts are recognized by multiplying billable rates by
hours delivered, plus pass-through expenses incurred. Pass-through costs
generally include subcontractor costs which consist of investigator fees, travel
and certain other contract costs that are reimbursed by the client. Such
subcontractor costs are deducted in determining net revenue.
The majority of APBI's clinical studies contracts are either fixed price or
subject to soft ceilings which cannot be exceeded without client approval.
Since, in many cases, APBI bears the risk of cost overruns, unbudgeted costs in
connection with performing these contracts may have a detrimental effect on
APBI's financial results. If it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated loss is charged
against income in the period in which the determination is made. In addition,
clients generally may terminate a study at any time, which may cause unplanned
periods of excess capacity and reduce revenues and earnings. To offset the
effects of early terminations, contracts of significant size are often subject
to the payment of an early-termination fee.
All of APBI's continuing businesses routinely subcontract with other
organizations in the course of providing services. Pharmaco contracts with
outside physicians in connection with multi-center clinical trials and with
other outside service providers for laboratory analysis and other specialized
services. These costs are passed through to clients and, in accordance with
industry practice, are included in gross revenues. Because APBI's use of
subcontractor services varies significantly from project to project, changes in
gross revenues may not be indicative of business trends. Accordingly, APBI views
net revenues from services, which is gross revenues less the cost of
pass-through subcontractor services, as its primary measure of revenue growth.
APBI performs services for a number of clients located in foreign
jurisdictions, with client contracts denominated in either dollars or (in the
case of services performed by APBI's European operations) pounds sterling and
other local currencies. Foreign currency translations are a factor in
determining the level of APBI's revenues and expenses. See "-- Exchange Rate
Fluctuations and Exchange Controls".
Results of Operations
Year Ended December 31, 1995 Versus Year Ended December 31, 1994
Total net revenues increased 4.8% to $183.3 million in 1995 from $174.9
million in 1994. APBI's Life Sciences Group, which includes Pharmaco and Clinix,
generated total net revenues of $134.0 million, up $4.9 million or 3.8% from a
year ago. Net revenues from APBI's Environmental Sciences Group were $49.3
million, compared with $45.8 million in 1994, an increase of $3.5 million or
7.7%.
After elimination of the net revenues from divested businesses, including
APBI's former toxicology operations, total net revenues increased 12.2% to
$144.2 million as compared to $128.5 million in 1994. Results of operations
which exclude the results of the divested businesses are considered the results
of APBI's ongoing operations.
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Net revenues from the ongoing Life Sciences Group operations were $94.9
million, an increase of 14.7% from 1994. The growth in APBI's ongoing Life
Sciences Group operations was primarily a result of an increase in the number of
contracts under management and in the size of such contracts in the worldwide
clinical development and biostatistics divisions. The clinical development and
biostatistics divisions, accounting for $57.5 million, or 60.6%, of APBI's
ongoing net revenues in the Life Sciences Group, reported an increase in net
revenues of $8.3 million or 16.9%. The acquisitions of CCCR and the Phase I
facility in Leicester, England, contributed net revenues of $2.3 million in
1995.
ENVIRON, APBI's environmental consulting business, is the sole ongoing
operation in the Environmental Sciences Group. ENVIRON reported net revenues of
$49.3 million, up $4.4 million, or 9.8%, as a result of increased demand for
their services in an otherwise sluggish marketplace.
Direct costs increased 4.1% to $127.8 million in 1995 from $122.8 million
in 1994, but declined slightly as a percentage of net revenues to 69.7% from
70.2%. In the Life Sciences Group, direct costs decreased as a percentage of net
revenues to 70.2% from 71.8%. The overall improvement in direct costs as a
percentage of net revenues resulted from improved cost controls and higher labor
utilization. In the Environmental Sciences Group, direct costs as a percentage
of net revenues increased to 68.6% from 65.8% in 1994. The increase in direct
costs as a percentage of net revenues is primarily attributable to the start-up
of the new Marin County office in California.
Selling, general, and administrative expenses increased 11.6% to $49.8
million in 1995 from $44.6 million in 1994. As a percentage of net revenues,
selling, general, and administrative expenses increased to 27.2% from 25.5% last
year. Of the $5.2 million increase, $1.5 million was due to the impact of
inclusion of businesses acquired in 1995 which had no corresponding expenses in
1994. The 1995 impact of higher depreciation and amortization relating to
computer hardware and software, primarily the new accounting system, was $1.2
million. The largest components of selling, general and administrative expense
are compensation and associated benefits. These labor costs increased $2.5
million in 1995 due to the full-year impact in 1995 of 1994 new hires, primarily
in the areas of information technology, and the addition of sixteen people to
Pharmaco's business development group in the last six months of 1995.
APBI recorded a charge of $19.3 million in 1995 relating to the book loss
on the sale of the toxicology business in the fourth quarter. Of that amount,
$17.0 million represents a write-off of the net assets of the divested
businesses in excess of the proceeds received from Huntingdon. The remaining
$2.3 million charge recorded consists of $1.2 million of transaction costs, $1.3
million of severance costs and relocation costs associated with moving the
European headquarters from Suffolk, England to Cambridge, England, and $0.6
million projected to be incurred in connection with changing the name of
Pharmaco to Pharmaco International Inc., net of a $0.8 million gain recorded as
a result of the settlement of APBI's defined benefit pension plan.
APBI recorded special charges of $5.0 million in the fourth quarter of
1995. Included in this charge was a $3.4 million expense to write down to market
APBI's EnSys investment and the write-off of other non-productive assets. In
addition, APBI recorded severance charges totaling $1.2 million relating to the
downsizing of its corporate overhead structure. The remaining $0.4 million
non-cash expense relates primarily to accrued lease loss reserves related to
underutilization of the Richmond laboratory facility.
APBI's operating loss of $18.6 million reflects an unfavorable variance of
$26.0 million as compared to last year's operating income of $7.4 million. The
change is due principally to the $19.3 million charge previously described
relating to the sale of the toxicology business and the $5.0 million in special
charges recorded in the fourth quarter of 1995. APBI's operating income from its
ongoing businesses, exclusive of APBI's former toxicology operations, would have
been $7.1 million, reflecting an increase of 40.8% over the operating income of
$5.0 million in 1994. As a percentage of ongoing net revenues, operating income
increased to 4.9% from 3.9% last year.
Net interest and other expenses of $2.8 million in 1995 were comparable to
such expenses in 1994. APBI repaid substantially all of its long term debt in
the fourth quarter of 1995 from the cash proceeds generated by the toxicology
divestiture and the sale-leaseback transaction.
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APBI recorded an income tax benefit from continuing operations of $16.1
million in 1995, compared with a provision of $1.9 million in 1994. The
effective tax rate from continuing operations for 1995 was 75.2%, compared with
the 1994 effective tax rate of 39.5%. The 1995 results were favorably impacted
by the reversal of previously recorded deferred tax charges associated with
APBI's U.K. toxicology operations, which were sold to Huntingdon. As a result of
the sale, APBI will not be liable for the payment of those previously recorded
deferred taxes. Excluding the benefit recorded upon reversal of the previously
recorded deferred tax charges, the effective tax rate for 1995 would have been
26.9%. See Note 11 of Notes to APBI's Consolidated Financial Statements.
During 1995, APBI recorded a $1.7 million charge, net of tax, relating to
the write-off of its remaining investment in ETC, its environmental testing
business, and also recorded a $0.9 million charge, net of tax, for the early
extinguishment of debt that includes an early prepayment charge on the repayment
of its long-term debt and a write-off of the unamortized deferred financing
costs associated with its long-term facility.
Year Ended December 31, 1994 Versus Year Ended December 31, 1993.
Net revenues from continuing operations increased $19.5 million (12.6%) in
1994 from 1993. Of such increase, $13.9 million was attributable to APBI's life
sciences business, and $5.6 million was attributable to APBI's continuing
environmental sciences business.
All operating divisions of the life sciences business contributed to the
growth in net revenues during 1994. Net revenues from U.S. clinical development
services increased $3.6 million (12.8%) to $31.6 million compared to 1993, as
the average size, function and geographic scope of the clinical trials performed
continued to grow. Similarly, net revenues from European clinical development
services increased $0.8 million (8.6%) to $9.7 million in 1994. The
Biostatistics division of Pharmaco, which analyzes data collected from in-house
studies as well as studies conducted by APBI's clients, reported an increase in
net revenues of $1.8 million (32.1%) to $7.4 million as compared to 1993, due to
more aggressive marketing efforts by Pharmaco. Net revenues from Pharmaco's
clinical and laboratory business (Phase I and analytical laboratory studies)
increased $4.8 million (16.2%) to $34.5 million in 1994, as a result of an
increase in the volume of projects. Worldwide toxicology services, which was
subsequently sold in 1995, contributed to the revenue increase with net revenues
from Pharmaco's United Kingdom toxicology business increasing $1.1 million
(3.9%) to $30.2 million in 1994 compared to 1993, while the U.S. toxicology
business reported an increase in net revenues of $1.8 million (13.2%) to $15.8
million in 1994. The increase in the United Kingdom net revenues included an
increase of $0.6 million as a result of an increase in value of the pound
sterling as compared to the U.S. dollar.
The $5.6 million increase in net revenues in APBI's Environmental Sciences
Group was generated by an increased volume of consulting services provided by
ENVIRON. ENVIRON's net revenues increased 15.7% to $44.9 million in 1994 as
compared to 1993 due primarily to increased demand for professional services.
Net revenues generated by the Environmental Sciences Group also included
licensing fees received for environmental laboratory software developed by
APBI's former Astrix Software Technology division.
Direct costs increased in 1994 by $7.4 million (6.5%) over 1993. Of such
increase, $4.4 million was attributable to APBI's Life Sciences Group and $3.0
million was attributable to APBI's Environmental Science Group. The increase in
the direct costs of Pharmaco related to the overall increase in business
experienced by all operating divisions. As a percentage of net revenues, direct
costs of the Life Sciences Group decreased to 71.8% in 1994 from 76.7% in 1993.
Similarly, in the environmental sciences business, the percentage of direct
costs to net revenues decreased to 65.8% in 1994 from 67.3% in 1993 due to
higher consultant utilization rates.
Selling, general and administrative expenses decreased $2.1 million (4.6%)
to $44.6 million in 1994 compared to $46.8 million in 1993. As a percentage of
net revenues, selling, general and administrative expenses decreased to 25.5% in
1994 as compared to 30.1% in 1993. The decrease was attributable to additional
accounts receivable reserves of approximately $5.9 million recorded in 1993.
Minimal charges were recorded in 1994. This decrease was partially offset by
increased marketing expenses incurred by Pharmaco and by increased corporate
general and administrative expenses. The increase in corporate general and
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administrative expenses related to APBI's investment in a new accounting system.
Corporate expenses also were impacted by approximately $0.8 million in expenses
related to a new financing facility, which was negotiated in 1994, and other
professional fees.
APBI incurred restructuring charges of $9.4 million in 1993. No comparable
charges were incurred in 1994. The 1993 charges primarily related to the
reengineering of APBI's two former toxicology laboratories in the United States
and the United Kingdom and related staff reductions to bring costs in line with
reduced revenues.
Operating income from continuing operations increased $23.6 million to $7.4
million in 1994 from a loss of $16.2 million in 1993 as a result of the
previously mentioned factors.
Interest expense, net of interest income, increased to $2.7 million in 1994
from $1.6 million in 1993 as a result of higher average balances outstanding
from the refinancing of the principal credit facility in May and an increase in
interest rates.
APBI recorded a net loss from discontinued operations of $12.9 million in
1994. Of that amount, $12.1 million related to a write-down of the carrying
value of APBI's investment in its discontinued ETC division, consisting
primarily of its interest in PACE Incorporated. APBI recorded a net loss of $0.5
million relating to the divestiture of Paragon, which was completed in the
second quarter of 1994. The remainder of the net loss from discontinued
operations was attributable to the $0.3 million in net losses generated by the
operations of Paragon prior to its sale.
APBI recorded a provision of $1.9 million for income taxes from continuing
operations in 1994 compared to a benefit of $3.4 million in 1993. The effective
tax rate from continuing operations for 1994 of 39.5% increased from 19.9% in
1993, in part, because of foreign net operating losses for which no related tax
benefit was recorded, due to uncertainty over APBI's ability to realize such
benefit.
Quarterly Results
APBI's quarterly results have been, and are expected to continue to be,
subject to fluctuations. Quarterly results can fluctuate as a result of a number
of factors, including the commencement, completion or cancellation of large
contracts, progress of ongoing contracts, acquisitions, the timing of start-up
expenses for new offices and changes in the mix of services. Since a large
percentage of APBI's operating costs are relatively fixed, variations in the
timing and progress of large contracts can materially affect quarterly results.
Exchange rate fluctuations may also influence these results. APBI believes that
comparisons of its quarterly financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
Three Months Ended March 31, 1996, versus Three Months Ended March 31,
1995. Net revenues decreased 18.3% to $37.4 million in the first quarter of
1996 from $45.8 million for the same period last year, with the decrease in
revenues being attributable to the sale of APBI's toxicology operations in
November 1995. APBI's Life Sciences Group, which includes Pharmaco and Clinix,
generated total net revenues of $25.6 million, down $7.8 million or 23.4% from a
year ago. Net revenues from APBI's Environmental Sciences Group were $11.8
million, compared with $12.4 million in 1995, a decrease of $0.6 million or
4.7%.
After elimination of the net revenues from APBI's former toxicology
operations ($10.7 million in the first quarter of last year), total net revenues
increased 6.6% as compared to 1995. Results of operations which exclude the
results of the divested businesses are considered the results of APBI's ongoing
operations.
Net revenues from the ongoing Life Sciences Group businesses increased
12.8% from 1995. The growth in APBI's ongoing Life Sciences Group was due in
part to an increase in the size and scope of contracts in the European clinical
development and biostatistics business. The net revenues from APBI's European
clinical and biostatistics business increased 23.0% to $3.1 million. An increase
in demand for APBI's analytical chemistry services resulted in a strong net
revenue increase at the Richmond, Virginia, laboratory. Net revenues in Richmond
increased 36.8% to $4.3 million as compared to the $3.1 million in revenues for
the same period last year. The acquisitions of CCCR and the Phase I facility in
Leicester, England, both completed in the second half of 1995, contributed net
revenues of $2.6 million in the quarter.
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The decrease in net revenues from ENVIRON, APBI's environmental consulting
business and the sole ongoing operation in the Environmental Sciences Group, is
due in part to a slowdown in the environmental consulting industry due to the
political uncertainties in this election year.
Direct costs decreased 23.3% to $25.1 million in 1996 from $32.7 million
last year and declined as a percentage of net revenues to 67.1% from 71.5%. In
the Life Sciences Group, direct costs decreased as a percentage of net revenues
to 63.8% from 72.1%. The decrease in direct costs is principally due to this
divestiture of the Company's toxicology business in the fourth quarter last
year. In the first quarter of 1995, the worldwide toxicology business reported
direct costs of $8.2 million or 76.3% of its net revenues. On an ongoing basis,
which excludes the impact of the toxicology business, Life Sciences direct costs
of 63.8% compare favorably to 70.1% last year, due to higher labor utilization
and a focused effort to control costs across all business segments. In the
Environmental Sciences Group, direct costs as a percentage of net revenues
increased to 74.3% from 70.0% last year. The increase in direct costs as a
percentage of net revenues is attributable to lower consultant utilization. In
the first quarter of 1996, ENVIRON's consultant utilization was 72.0% compared
to a utilization rate of 79.0%, for the same period last year.
Selling, general, and administrative expenses decreased 10.4% to $10.4
million from $11.6 million in 1995. As a percentage of net revenues, selling,
general, and administrative expenses increased to 27.7% from 25.3% last year.
After factoring out the selling, general, and administrative expenses associated
with the divested toxicology business ($3.0 million in the first quarter of
1995), selling, general, and administrative expenses increased approximately
21.0% or $1.8 million in the first quarter this year as compared to the first
quarter of 1995. Selling, general, and administrative expenses from the Chicago
Center for Clinical Research and the Leicester Phase I laboratory comprise $0.9
million of the increase and the Company has incurred incremental rent expense of
$0.3 million associated with the sale-leaseback of its real estate in Austin,
Texas, (this increase is partially offset by lower interest expense). The
remaining increase of $0.6 million is primarily attributable to the recent
investment in Pharmaco's business development and marketing groups. During the
later half of 1995, Pharmaco expanded its business development group by sixteen
people.
Operating income increased $0.4 million (32.0%) to $1.9 million in the
first three months of 1996 as compared to $1.5 million for the first three
months of 1995. As a percentage of net revenues, operating income increased to
5.2% in 1996 compared to 3.2% in 1995.
APBI reported net interest income of $0.1 million compared to net interest
expense of $0.8 million last year. In the first quarter this year, APBI had
approximately $9.0 million cash invested with no long-term bank debt. At the end
of the first quarter of 1995, APBI had $35 million of debt outstanding at an
annual interest rate of approximately 9.25%.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1995, were $11.3 million compared
to $7.9 million at December 31, 1994. The $3.4 million increase is primarily due
to proceeds from the sale of APBI's toxicology operations ($32.5 million),
proceeds from the sale-leaseback of its Austin facilities ($12.0 million) and an
increase in cash from operating activities ($10.8 million), offset primarily by
the repayment of debt ($44.5 million) and capital expenditures ($7.6 million).
Cash provided from operations in 1995 increased $9.0 million from 1994. The
increase was primarily attributable to a $2.1 million decrease in net loss and a
favorable change in net operating assets of $19.0 million, offset by a decrease
in non-cash expenses net of non-cash gains of $12.1 million. Cash collection
efforts and cash disbursements processing were centralized into one location at
the beginning of 1995. These efforts have resulted in improvements in cash
management as evidenced by a decrease in accounts receivable of $5.5 million
during the year, as compared to an increase during 1994 of $14.0 million, and an
increase in accounts payable and accrued liabilities of $7.9 million during
1995, compared to a decrease in 1994 of $3.1 million.
During the three months ended March 31, 1996, APBI experienced a net
decrease in cash from operating activities of $3.8 million, primarily due to a
decrease in accounts payable and accrued expenses, offset by
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increases in advance billings. Capital expenditures totaled $1.5 million. APBI
experienced an increase in cash from financing activities of $2.5 million,
caused primarily by proceeds received from the exercise of stock options. Most
of such proceeds were received from employees of APBI's former toxicology
operations, who generally had until February 1996 to exercise stock options
which were exercisable at the date those operations were sold in November 1995.
The net change in non-cash activity from 1994 to 1995 of $12.1 million
relates primarily to the non-cash portion of the loss on sale of business of
$17.0 million, representing the net book value of the net assets sold in excess
of the cash proceeds received. In addition, the change was affected by the write
down of APBI's investment in EnSys of $2.6 million, the write off of the
unamortized portion of deferred financing costs of $1.0 million, and an increase
in depreciation and amortization expense of $0.8 million. These changes were
offset by a change in deferred income taxes of $21.4 million, a decrease in the
provision for loss on disposal of discontinued operations of $9.1 million and a
change in the net gain on disposition of property and equipment of $2.9 million,
relating primarily to the sale-leaseback of APBI's Austin facilities.
APBI generated cash from investing activities during 1995 of $38.5 million
as a result of the cash proceeds received from the sale of APBI's toxicology
operations of $32.5 million, cash received from the sale-leaseback of APBI's
Austin facilities of $12.0 million and cash received from the sale of a separate
facility in Austin for $2.2 million. Cash was used in investing activities for
capital expenditures totaled $7.6 million and for acquisition costs of $0.5
million. Acquisition costs were primarily related to the purchase of CCCR in
August 1995. Proceeds from the property sales and the sale of business were used
to repay the related mortgages and APBI's outstanding loan balances. Net cash of
$45.5 million was used in financing activities during 1995 primarily to repay
APBI's revolving line of credit and long-term debt.
APBI plans to spend approximately $8.0 million for capital expenditures in
1996. These funds will be used primarily for the purchase of computer hardware
and software to continually upgrade and improve APBI's technological systems.
APBI anticipates financing these expenditures through internally generated
funds.
In 1994, APBI obtained a $25.0 million term loan and a $20.0 million
revolving line of credit term loan facility. APBI used the cash proceeds from
the disposition of its toxicology operations and the sale-leaseback transaction
to repay, in full, the entire outstanding balance of the term loan and line of
credit. APBI has retained, as its primary credit facility, the secured revolving
line of credit which accrues interest at the prime rate plus 1.0%. The variable
rate is subject to reduction if certain covenants related to financial
performance are met. As a result of APBI's performance during the first and
second quarters of 1995, the variable rate was reduced from 1.5% to 1.0% over
prime. The unused portion of the loan is available to provide working capital
and for general corporate purposes through May 1997. As of December 31, 1995,
there were no borrowings outstanding under the line of credit.
The line-of-credit loan agreement provides an additional $5.0 million for
letters of credit to back guarantees or insurance policies. At December 31,
1995, open letters of credit were issued for $0.7 million.
During 1995, APBI had available a $3.0 million master lease agreement to
provide a means to lease rather than acquire certain equipment for use in the
United States without drawing on its principal credit facility. At December 31,
1995, APBI had leased equipment totaling $1.9 million under this facility. As of
March 31, 1996, APBI has $1.5 million of credit available under an amended
master lease agreement.
APBI believes that cash flow generated by its own operating activities,
together with its current borrowing capacity, is sufficient to finance its
world-wide operations and the normal growth of its business at least through
1996. Further growth of APBI's business also may be funded through additional
borrowings, the sale of non-strategic assets or through issuance of shares of
common stock by APBI.
New Accounting Pronouncements
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 for Long-lived Assets to be Disposed
of". SFAS No. 121 requires that long-lived assets and certain identifiable
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intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. APBI implemented early adoption of SFAS No. 121,
effective January 1, 1995. The adoption of this statement had no material effect
on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation", which provides companies the option to account for employee stock
compensation awards based on their estimated fair value at the date of grant,
resulting in a charge to income in the period the awards are granted, or to
present pro forma footnote disclosure describing the effect to APBI's net income
and net income per share data. SFAS No. 123 is effective for APBI's 1996
financial statements. APBI has not yet determined what impact, if any, the
adoption of SFAS No. 123 will have on APBI's financial position or disclosure to
its financial statements.
Other pronouncements issued by the FASB with future effective dates are
either not applicable or not material to the consolidated financial statements
of APBI.
Effects of Inflation
Management does not believe that inflation has had a significant impact on
APBI's results of operations during the periods presented.
Exchange Rate Fluctuations and Exchange Controls
Contracts between APBI's United Kingdom subsidiaries and their clients are
generally denominated in pounds sterling. Because substantially all of the
United Kingdom subsidiaries' expenses, such as salaries, services, materials and
supplies, are paid in pounds sterling, such subsidiaries' earnings are not
materially affected by fluctuations in exchange rates. However, APBI's
consolidated financial statements are denominated in dollars and, accordingly,
changes in the exchange rate between the pound sterling and the dollar will
affect the translation of such subsidiaries' financial results into dollars for
purposes of reporting APBI's consolidated financial results, and also affect the
dollar amounts actually received by APBI's from such subsidiaries.
The results of operations of the United Kingdom subsidiaries denominated in
pounds sterling have been translated from pounds sterling into dollars using the
following exchange rates:
<TABLE>
<CAPTION>
POUND STERLING U.S. DOLLAR
PER PER POUND
YEAR U.S. DOLLAR STERLING
------------------------------------------------------------- -------------- -----------
<S> <C> <C>
1995......................................................... 0.633 1.580
1994......................................................... 0.651 1.536
1993......................................................... 0.665 1.503
</TABLE>
The rates in the above table represent the average of the 13 rates that
were in effect in the beginning of the relevant year and at the end of each
calendar month during such year, as quoted in The Wall Street Journal.
The following table sets forth, for the fiscal years indicated, the
percentage of APBI's revenues from continuing operations recorded in pounds
sterling based on the average rates for the periods indicated in the conversion
table above:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NET
REVENUES IN
POUNDS
YEAR STERLING
------------------------------------------------------------------------ --------------
<S> <C>
1995.................................................................... 17.7%
1994.................................................................... 18.9
1993.................................................................... 19.8
</TABLE>
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Approximately 4.5% of APBI's total net revenues were generated by its
European clinical development services businesses, excluding its United Kingdom
clinical development services subsidiary, primarily in Belgium, France and
Germany. As a result of APBI's sale of its toxicology operations, the percentage
of APBI's revenues recorded in pounds sterling will be significantly lower in
1996. However, because APBI is currently expanding its foreign operations, it is
anticipated that the percentage of APBI's total net revenues denominated in
foreign currencies may increase in the future.
There are no exchange controls currently in effect in any country in which
APBI's subsidiaries conduct operations on the payment of dividends or otherwise
restricting the transfer of funds outside such countries by a company resident
in such countries. Although APBI performs services for clients located in a
number of foreign jurisdictions, to date, APBI has not experienced any
difficulties in receiving funds remitted from foreign countries. However, if any
such jurisdictions were to impose or modify existing exchange control
restrictions on the remittance of funds to APBI, such restrictions could have an
adverse effect on APBI's business. See "Investment
Considerations -- Considerations with Respect to APBI's Business -- Exchange
Rate Fluctuations and Exchange Controls".
112
<PAGE> 117
COMPARISON OF THE RIGHTS OF HOLDERS
OF PPD COMMON STOCK AND APBI COMMON STOCK
If the Merger is consummated, stockholders of APBI will become shareholders
of PPD, a North Carolina corporation, and the rights of such stockholders will
be governed by applicable North Carolina law, including the North Carolina
Business Corporation Act (the "North Carolina Law"), and by the Restated
Articles of Incorporation and Bylaws of PPD. Although it is not practical to
compare all the differences between the North Carolina Law and applicable
Delaware law and between the PPD and APBI charter documents, the following is a
summary of certain of those differences that may significantly affect the rights
of APBI's stockholders. See also the matters discussed under the heading
"Certain Information Concerning PPD -- Description of Capital Stock".
SIZE OF THE BOARD OF DIRECTORS
Under North Carolina law, although changes in the number of directors must
in general be approved by a majority of the outstanding shares, the Board of
Directors may: (i) increase or decrease the number of directors by not more than
30% during any 12-month period; or (ii) fix the exact number of directors within
a stated range set forth in the articles of incorporation or bylaws. Delaware
law permits the board of directors alone to change the authorized number, or the
range, of directors by amendment to the bylaws, unless the directors are not
authorized to amend the bylaws or the number of directors is fixed in the
certificate of incorporation (in which case a change in the number of directors
may be made only by amendment to the certificate of incorporation following
approval of such change by the stockholders). The APBI Certificate of
Incorporation provides that the number of directors of APBI will be as specified
in its Bylaws and authorizes the Board of Directors to make, alter, amend or
repeal the Bylaws. The ability to alter the size of the board of directors
without stockholder approval enables a company to respond quickly to a potential
opportunity to attract the services of a qualified director or to eliminate a
vacancy for which a suitable candidate is not available. The APBI Bylaws
provide, consistent with Delaware law, that the size of the Board may be changed
or a definite number fixed either with the approval of a majority of the
then-authorized number of APBI directors acting alone or the affirmative vote of
the holders of at least 66 2/3% of the voting power of all shares of APBI Common
Stock.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one to which a certain number, but not all, of the
directors are elected on a rotating basis each year. A North Carolina
corporation may classify its board into two, three or four classes. This method
of electing directors makes changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a lengthier
and more difficult process. PPD's Board is currently classified into three
classes, each serving three-year terms, although at the PPD Special Meeting the
shareholders are being asked to approve an amendment to eliminate the
classification of the PPD Board. See "The Merger Transactions -- Approval of
Amendment to PPD's Bylaws to Provide for the Annual Election of Directors" and
"Certain Information Concerning PPD -- Management". Delaware law also permits a
classified board of directors, with staggered terms under which one-half or
one-third of the directors are elected for terms of two or three years,
respectively. Effective June 20, 1996, an amendment to the APBI Certificate of
Incorporation was approved to eliminate classification of its Board of
Directors.
POWER TO CALL SPECIAL STOCKHOLDER MEETINGS
Under North Carolina law, a special meeting of shareholders may be called
by the board of directors, by the holders of shares entitled to cast not less
than 10% of the votes at such meeting of a private company and by such
additional persons as are authorized by the articles of incorporation or the
bylaws. PPD's Bylaws provide that special meetings of the shareholders of PPD,
unless otherwise prescribed by statute, may be called by PPD's President, its
Chief Executive Officer, its Chairman of the Board, a majority of its Board of
Directors then in office or the holders of not less than 75% of all outstanding
shares of PPD capital stock entitled to vote at the meeting. Under Delaware law,
a special meeting may be called by the board of directors or by any other person
authorized to do so in the certificate of incorporation or the bylaws. The
Certificate of
113
<PAGE> 118
Incorporation of APBI provides that special meetings of the stockholders of APBI
may be called only by the Chairman of APBI's Board of Directors or by its
President or Secretary on a written request of a majority of its then-authorized
number of directors or by the holders of 10% of the voting power of the
outstanding shares of APBI Common Stock.
STOCKHOLDER ACTION BY WRITTEN CONSENT
In North Carolina, shareholders may not act by written consent unless such
consent is unanimous. Delaware law allows stockholders to act by a written
consent signed by the holders of at least a majority of the outstanding voting
shares. The APBI Certificate of Incorporation contains a provision eliminating
the ability of stockholders to act by written consent.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
In the last several years, a number of States have adopted special laws
designed to make certain kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
shareholders, more difficult. Under Section 203 of the Delaware General
Corporation Law, certain "business combinations" by Delaware corporations with
"interested stockholders" are subject to a three-year moratorium unless
specified conditions are met. Under Article 9A of the North Carolina Business
Corporation Act, certain business combinations with a majority shareholder are
subject to specified conditions, but there is no equivalent provision to Section
203, which addresses business combinations with a significant but not majority
shareholder.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person becomes an interested stockholder. With certain exceptions, an
interested stockholder is a person or group who owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years. For purposes of Section 203, the term "business
combination" is defined broadly to include mergers with or caused by the
interested stockholder, sales or other dispositions to the interested
stockholder (except proportionately with the other stockholders) of assets of
the corporation or a subsidiary equal to 10% or more of the aggregate market
value of the corporation's consolidated assets or its outstanding stock, the
issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for
transfers which do not increase the interested stockholder's proportionate
ownership of any class or series of the corporation's or such subsidiary's
stock), or receipt by the interested stockholder (except proportionately as a
stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or a
subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date on which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the date such person becomes an interested stockholder, the board approves
the business combination and it is also approved at a stockholder meeting by
66 2/3% of the voting stock not owned by the interested stockholder.
In addition, APBI's Certificate of Incorporation contains "fair price"
provisions designed to achieve a measure of assurance that any multi-step
attempt to acquire APBI is made on terms which offer similar treatment to all
stockholders. The "fair price" provisions generally require that certain
transactions (such as mergers, sales of material assets, certain
recapitalizations of reclassifications and the like) involving APBI and
114
<PAGE> 119
a holder of 10% or more of APBI's outstanding voting stock (an "Interested
Stockholder") must be approved either (i) by vote of a majority of the directors
then in office who are not affiliated with the Interested Stockholders or (ii)
by the vote of 66 2/3% of all of the then-outstanding shares of voting stock of
APBI as a single class. The foregoing requirements would not be applicable to a
transaction with an Interested Stockholder which meets certain procedural and
other conditions, including the payment of a "fair price" based on the higher of
the price previously paid by the Interested Stockholder for securities of APBI
within the two-year period prior to the proposed transaction or the then-fair
market value of such securities at the time the stockholder became an Interested
Stockholder.
The Articles of Incorporation of PPD do not contain any provisions
comparable to those described in the immediately preceeding paragraph.
Article 9A of the North Carolina Business Corporation Act denies voting
rights to "control shares" unless affirmatively reinstated by the vote of the
holders of a majority of the voting stock, not including the control shares.
"Control shares" consist of all shares held by a person acquiring shares
resulting in holdings of equal to or in excess of one-fifth, one-third or a
majority of all voting power. Like Section 203, Article 9A only applies to
certain public companies. PPD has opted out of Article 9A.
INDEMNIFICATION AND LIMITATION OF LIABILITY
North Carolina and Delaware have similar laws respecting indemnification by
a corporation of its officers, directors, employees and other agents. The laws
of both States also permit corporations to adopt a provision in their charters
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the director's fiduciary duty of care. There
are nonetheless certain differences between the laws of the two States with
respect to indemnification and limitation of liability.
The PPD Restated Articles of Incorporation eliminate the liability of
directors to the fullest extent permissible under North Carolina law. North
Carolina law does not permit the elimination of monetary liability where such
liability is in connection with: (i) a proceeding by or in the right of the
company in which the director was adjudged liable to it; (ii) any proceeding in
which the director was adjudged liable because he or she improperly received
personal benefit; (iii) activities which, at the time taken, the director knew
or believed to be clearly in conflict with the best interests of the
corporation; or (iv) liability for improper distributions, loans or guarantees.
The APBI Certificate of Incorporation likewise eliminates the liability of
directors to the fullest extent permissible under Delaware law, as such law
exists currently or as it may be amended in the future. Under Delaware law, such
provision may not eliminate or limit director monetary liability for: (i)
breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law; (iii) the payment of unlawful dividends
or unlawful stock repurchases or redemptions; or (iv) transactions in which the
director received an improper personal benefit.
The limitation of liability provisions permissible under North Carolina and
Delaware law also may not limit a director's liability for violation of, or
otherwise relieve directors from the necessity of complying with, Federal or
State securities laws, or affect the availability of non-monetary remedies such
as injunctive relief or rescission.
North Carolina law requires indemnification when the individual was wholly
successful, on the merits or otherwise. Delaware law, on the other hand,
requires indemnification when the individual was successful, on the merits or
otherwise.
North Carolina and Delaware corporations may include in their charter a
provision which extends the scope of indemnification through agreements, bylaws
or other corporate action beyond that specifically authorized by statute. The
charters of PPD and APBI each include such a provision. The indemnification and
limitation of liability provisions of Delaware law, and not North Carolina law,
will apply to actions of the directors and officers of APBI prior to the Merger.
115
<PAGE> 120
DIVIDENDS AND REPURCHASES OF SHARES
North Carolina law dispenses with the concepts of par value of shares as
well as statutory definitions of capital, surplus and the like. The concepts of
par value, capital and surplus are retained under Delaware law.
Under North Carolina law, a corporation may not make any distribution
(including dividends, whether in cash or other property, and redemptions or
repurchases of its shares) if it would result in either: (i) the corporation
being unable to pay its debts as they become due; or (ii) the corporation's
assets being less than the sum of its liabilities plus any preferential
liquidation rights of shareholders.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation.
STOCKHOLDER DERIVATIVE SUITS
Both North Carolina and Delaware law provide that a shareholder may only
bring a derivative action on behalf of the corporation if he or she was a
shareholder of the corporation at the time of the transaction in question, or if
his or her stock thereafter devolved upon him or her by operation of law. North
Carolina law also provides that the plaintiff must have held the corporation's
stock for at least one year, bring the action within two years of the
transaction of which he or she complains, and deposit sufficient surety, in the
court's discretion, to indemnify the corporation for expenses. Delaware does not
have similar time limits or a bonding requirement with respect to stockholder
derivative suits, which could have the effect of limiting the ability of
shareholders to sue PPD in such an action after the Merger.
APPRAISAL RIGHTS
Under both North Carolina and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transaction. In North Carolina, appraisal rights are also available for certain
amendments to a company's articles of incorporation. Under Delaware law, such
appraisal rights are not available (i) with respect to amendments to the
certificate of incorporation, (ii) with respect to the sale, lease or exchange
of all or substantially all of the assets of a corporation, (iii) with respect
to a merger or consolidation by a corporation the shares of which are either
listed on a national securities exchange or are held of record by more than
2,000 holders if such stockholders receive in the transaction only shares which
are so listed or held of record, plus cash in lieu of fractional shares, or (iv)
to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
116
<PAGE> 121
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock of PPD
offered hereby will be passed upon for PPD by Wyrick, Robbins, Yates & Ponton
L.L.P., Raleigh, North Carolina.
EXPERTS
The combined financial statements of PPD as of December 31, 1995 and 1994
and for each of the three years in the period ended December 31, 1995 included
in this Prospectus and Registration Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The consolidated financial statements and schedules of APBI and its
subsidiaries as of December 31, 1995 and for each of the three fiscal years
ended in the period ended December 31, 1995, included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
117
<PAGE> 122
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
Report of Independent Accountants.................................................... F-2
Combined Balance Sheets as of December 31, 1995 and 1994............................. F-3
Combined Statements of Operations for the Years Ended December 31, 1995, 1994 and
1993.............................................................................. F-4
Combined Statements of Shareholders' Equity for the Years Ended December 31, 1995,
1994 and 1993..................................................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and
1993.............................................................................. F-6
Notes to Combined Financial Statements............................................... F-7
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995... F-17
Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and
1995 (unaudited).................................................................. F-18
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and
1995 (unaudited).................................................................. F-19
Notes to Consolidated Financial Statements........................................... F-20
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................. F-21
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and
1993.............................................................................. F-22
Consolidated Balance Sheets as of December 31, 1995 and 1994......................... F-23
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1995, 1994 and 1993............................................................... F-24
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993..................................................................... F-25
Notes to Consolidated Financial Statements........................................... F-26
Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts.................................. F-47
Consolidated Condensed Statements of Operations for the Three-Month Periods Ended
March 31, 1996 and 1995 (unaudited)............................................... F-48
Consolidated Condensed Balance Sheets as of March 31, 1996 (unaudited) and December
31, 1995.......................................................................... F-49
Consolidated Condensed Statements of Cash Flows for the Three-Month Periods Ended
March 31, 1996 and 1995 (unaudited)............................................... F-50
Notes to Consolidated Condensed Financial Statements................................. F-51
</TABLE>
F-1
<PAGE> 123
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Pharmaceutical Product Development, Inc. and Combined Affiliates
We have audited the accompanying combined balance sheets of Pharmaceutical
Product Development, Inc., its affiliates and its consolidated subsidiaries as
of December 31, 1995 and 1994 and the related combined statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1995, 1994
and 1993. 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 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Pharmaceutical
Product Development, Inc., its affiliates and its consolidated subsidiaries as
of December 31, 1995 and 1994, and the combined results of their operations and
their cash flows for the years ended December 31, 1995, 1994 and 1993, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 22, 1996
F-2
<PAGE> 124
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 2,261 $ 1,860
Marketable securities.............................................. 242 203
Accounts receivable and unbilled services.......................... 15,837 10,398
Investigator advances.............................................. 648 2,212
Prepaid expenses and other current assets.......................... 125 306
------- -------
Total current assets....................................... 19,113 14,979
------- -------
Furniture and equipment, net......................................... 4,538 3,105
Goodwill............................................................. 2,949 2,709
Other assets......................................................... 904 300
------- -------
$27,504 $21,093
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................... $ 1,879 $ 1,144
Accounts payable................................................... 1,991 2,113
Payable to investigators........................................... 3,588 3,402
Other accrued expenses............................................. 2,380 932
Unearned income.................................................... 5,346 3,276
------- -------
Total current liabilities.................................. 15,184 10,867
------- -------
Long-term debt, less current maturities.............................. 2,899 4,736
------- -------
Commitments and contingencies (Notes 8 and 12)
Shareholders' equity:
Common stock....................................................... 694 692
Additional paid-in capital......................................... 1,317 1,098
Unrealized gain (loss) on marketable securities.................... 6 (19)
Retained earnings.................................................. 7,477 3,889
------- -------
9,494 5,660
Unearned compensation.............................................. (73) (170)
------- -------
Total shareholders' equity................................. 9,421 5,490
------- -------
$27,504 $21,093
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 125
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Professional fee income........................... $ 54,447 $ 40,737 $ 31,046
Less reimbursed costs............................. 16,184 11,875 10,211
--------- --------- ---------
Net revenue............................. 38,263 28,862 20,835
--------- --------- ---------
Operating expenses:
Direct costs.................................... 19,523 15,867 12,522
Selling, general and administrative............. 13,151 8,442 4,260
Depreciation and amortization................... 1,478 1,001 471
--------- --------- ---------
34,152 25,310 17,253
--------- --------- ---------
Income from operations.................. 4,111 3,552 3,582
Other income (expense), net....................... 200 (33) (10)
--------- --------- ---------
Net income.............................. $ 4,311 $ 3,519 $ 3,572
======== ======== ========
Pro forma data (unaudited) (Note 1):
Net income, as reported......................... $ 4,311 $ 3,519 $ 3,572
Pro forma income tax expense.................... 1,775 1,498 1,445
--------- --------- ---------
Pro forma net income............................ $ 2,536 $ 2,021 $ 2,127
======== ======== ========
Pro forma earnings per share.................... $ .35 $ .28 $ .31
======== ======== ========
Pro forma weighted average number of
shares outstanding........................... 7,279,249 7,268,296 6,954,779
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 126
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
PPD- PPD- (LOSS)
PPD CRU EUROPE ADDITIONAL ON TOTAL
COMMON COMMON COMMON PAID-IN MARKETABLE RETAINED UNEARNED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL SECURITIES EARNINGS COMPENSATION EQUITY
------ ------ ------ ---------- ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992......... $630 $ 3 $ (620) $ 362 $ 375
Three-for-one stock split on PPD-
CRU's common stock effected as
a stock dividend............... 9 (2) (7)
Issuance of 384,300 shares of PPD
common stock recorded as a
dividend to existing
shareholders................... 39 785 (824)
Issuance of 110,250 shares of PPD
common stock as compensation... 11 281 $ (292)
Amortization of unearned
compensation................... 24 24
Net income....................... 3,572 3,572
Dividends........................ (1,496) (1,496)
------ ------ ---------- -------- ------------ -------------
Balance, December 31, 1993......... 680 12 444 1,607 (268) 2,475
Adjustment to beginning balance
for change in accounting method
(Note 1)....................... $ 16 16
Change in unrealized gain
(loss)......................... (35) (35)
Amortization of unearned
compensation................... 98 98
Issuance of 26,044 PPD-CRU common
stock for acquisition of
WARS........................... 2 798 800
Minority interest of 26,044
shares of PPD-CRU common stock
related to WARS acquisition.... (2) (144) (146)
Net income....................... 3,519 3,519
Dividends........................ (1,237) (1,237)
------ ------ ---------- ---------- -------- ------------ -------------
Balance, December 31, 1994......... 680 12 1,098 (19) 3,889 (170) 5,490
Change in unrealized gain
(loss)......................... 25 25
Amortization of unearned
compensation................... 97 97
Transfer of minority interest
into affiliated group.......... 2 168 170
Net income....................... 4,311 4,311
Dividends........................ (723) (723)
Sale of 2,814 shares of
PPD-Europe common stock to PPD
shareholders................... $ -- 51 51
------ ------ ------ ---------- ---------- -------- ------------ -------------
Balance, December 31, 1995......... $680 $ 14 $ -- $1,317 $ 6 $ 7,477 $ (73) $ 9,421
======= ======= ======= ======== ========= ======= =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 127
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 4,311 $ 3,519 $ 3,572
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................ 1,478 1,001 471
Stock compensation amortization.............................. 97 98 24
Gain on sale of PRP.......................................... (261)
Changes in assets and liabilities:
Receivables and unbilled services.......................... (5,394) (1,168) (4,102)
Advance payments to investigators and payables to
investigators............................................. 1,750 (2,653) 2,004
Prepaid expenses and other current assets.................. 257 (17) (132)
Goodwill and other assets.................................. (732) (161) 1
Accounts payable........................................... (199) 1,081 299
Other accrued expenses..................................... 1,454 34 (24)
Unearned income............................................ 2,070 (2,128) 1,929
------- ------- -------
Net cash provided by (used in) operating activities..... 4,831 (394) 4,042
------- ------- -------
Cash flows from investing activities:
Purchase of equipment........................................... (2,500) (1,594) (706)
Proceeds from sale of assets.................................... 8 69 3
Purchase of marketable securities............................... (14) (13) (106)
Net cash paid in acquisitions................................... (205) (1,881)
Proceeds from sale of PRP....................................... 222
------- ------- -------
Net cash used in investing activities................... (2,489) (3,419) (809)
------- ------- -------
Cash flows from financing activities:
Net borrowings (payments) on revolving credit agreement......... (92) 173 (61)
Proceeds from long-term debt.................................... 2,771
Principal payments on long-term debt............................ (1,177) (339) (242)
Cash dividends paid............................................. (723) (1,237) (1,496)
Issuance of PPD-Europe common stock............................. 51
------- ------- -------
Net cash provided by (used in) financing activities..... (1,941) 1,368 (1,799)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.............. 401 (2,445) 1,434
Cash and cash equivalents:
Beginning of year............................................... 1,860 4,305 2,871
------- ------- -------
End of year..................................................... $ 2,261 $ 1,860 $ 4,305
======= ======= =======
Supplemental disclosure of cash flow information:
Cash payments for interest...................................... $ 369 $ 181 $ 121
======= ======= =======
Supplemental schedule of noncash transactions:
Three-for-one stock split accounted for as a stock dividend..... $ 7
=======
Issuance of 384,300 shares of restricted common stock as
compensation................................................. $ 292
=======
Dividend attributable to stock issuance......................... $ 824
=======
Unrealized gain (loss) on marketable securities, net............ $ 25 $ (19)
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 128
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Pharmaceutical Product Development, Inc. ("PPD") (along with its affiliates
the "Company") is a clinical research organization providing a broad range of
integrated product development services in the United States and certain
services in Europe to complement the research and development activities of the
pharmaceutical and biotechnology industries.
ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of PPD, its
consolidated subsidiaries, Gabbay Group Limited (see Note 2) and Pharmaceutical
Research Plus ("PRP"), and its affiliates, Pharmaceutical Product
Development-Clinical Research Unit, Inc. ("PPD-CRU") and PPD Europe, Inc.
("PPD-Europe"). PPD, PPD-CRU and PPD-Europe are affiliated through common
management and majority ownership.
PPD owned 79.8% of PRP which was sold to the minority shareholder on
September 13, 1995. Proceeds from the sale were $222 resulting in a gain of $261
during the year ended December 31, 1995.
PPD-CRU has a 30.95% ownership in Laboratory Associated Businesses, LTD.
("LAB"), which is accounted for using the equity method.
All significant intercompany accounts and transactions have been eliminated
in combination and consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of unrestricted cash accounts, including
commercial paper, which are not subject to withdrawal restrictions or penalties,
and all highly liquid debt instruments with a maturity of three months or less
at the date of purchase.
The Company maintains demand deposits with financial institutions, the
balances of which from time-to-time exceed the maximum federally insured amount.
The Company participates in an investment program whereby excess funds held by
the bank are automatically invested in commercial paper on a daily basis. At
December 31, 1995 and 1994, the Company had an investment of $1,371 and $1,029,
respectively.
PPD has an agreement under certain projects with two major customers to pay
certain expenses related to a project under a grant administration program. The
funds are provided by the major customers and disbursed by PPD to the recipient
upon approval by the major customers. At December 31, 1995 and 1994, PPD held
$1,154 and $223, respectively, for this purpose, which is reported as cash and
cash equivalents in the accompanying combined balance sheets.
MARKETABLE SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The classification of securities is
generally determined at the date of purchase. Upon adopting the Statement, the
Company reclassified securities as needed and recorded a fair value adjustment
amounting to $16, for the unrealized gain on securities available for sale.
Subsequent to January 1, 1994, all marketable securities of the Company have
been classified as available for sale and have been reported at fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity. The Company intends to hold these securities for an indefinite period of
time. Gains and losses on sales of investment securities, computed based on
specific identification of adjusted cost of each security, are included in other
income at the time of the sales.
F-7
<PAGE> 129
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
Revenues are earned by performing services under contracts from various
companies. These revenues are recorded as costs are incurred and include
estimated earned fees or profits calculated on the basis of the relationship
between costs incurred and total estimated costs (percentage-of-completion
method of accounting). These estimated costs are reviewed and revised
periodically throughout the lives of the contracts with adjustment to profits
resulting from such revisions being recorded on a cumulative basis in the period
in which the revisions are made. 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. Certain contracts contain
provisions for price redetermination for cost overruns. Such redetermined
amounts are included in revenue when realization is assured and the amounts can
reasonably be determined. The Company's exposure to credit loss in the event
that payment is not received for revenue recognized equals the outstanding
receivables and unbilled services balance. Although no collateral is required,
the Company has experienced no credit losses to date and does not anticipate
future credit losses.
INVESTIGATOR PAYMENTS
Investigator payments are recognized based upon the status of the work
completed as a percentage of the total procedures required under the contract or
based on patient enrollment over the term of the contract. Billings and payments
are based on predetermined contractual agreements which may differ from the
accrual of the expense. Payments made in excess of the accrued expenses are
classified as investigator advances and accrued expenses in excess of amounts
paid are classified as payables to investigators. Included in reimbursed costs
in the accompanying combined statements of operations are principally the
contracted physicians' costs.
UNBILLED SERVICES AND UNEARNED INCOME
In general, prerequisites for billings are established by contractual
provisions including predetermined payment schedules, the achievement of
contract milestones or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but clients have not been
billed. Similarly, advance billings represents amounts billed in excess of
revenue recognized.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed
principally by accelerated methods based on estimated service lives of assets
which range from 5 to 7 years. The cost of leasehold improvements is being
amortized using the straight-line method over the shorter of the estimated
service lives or the terms of the related leases. Repairs and maintenance are
charged to expense as incurred. Upon disposition, the asset and related
accumulated depreciation are relieved and any gains or losses are reflected in
operations.
GOODWILL AND OTHER ASSETS
The excess of cost over the fair value of the net assets acquired
("goodwill") of $2,823 and $444 relates to the acquisitions of Wisconsin
Analytical and Research Services, Ltd. ("WARS") and Gabbay Group Limited,
respectively (see Note 2). Goodwill is amortized on a straight-line basis over
15 years. Other intangible assets included in other assets are amortized on a
straight-line basis over their estimated useful lives. Accumulated amortization
of intangible assets was $318 and $210 at December 31, 1995 and 1994,
respectively. The Company evaluates impairment of goodwill based on whether it
is probable that undiscounted future cash flows will be less than the carrying
value.
F-8
<PAGE> 130
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The financial statements of the Company for periods prior to the initial
public offering, described in Note 15, do not include a provision for income
taxes because the taxable income or loss of the Company up until December 31,
1995 is included in the income tax returns of the individual shareholders under
the S corporation election. For informational purposes, the statements of
operations include a pro forma income tax provision on taxable income for
financial reporting purposes using statutory federal and state rates that would
have resulted if the Company had filed corporate tax returns during these
periods.
In January 1996, prior to the effectiveness of the initial public offering
of the Company's common stock described in Note 15, the Company elected to no
longer be treated as an S corporation for tax purposes. Accordingly, the Company
will be subject to federal and state income taxes and will recognize deferred
taxes in accordance with Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109 requires companies
subject to income taxes to adjust their deferred tax assets and liabilities
based on temporary differences between financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Based upon temporary differences
existing as of December 31, 1995, the estimated deferred tax assets would be
insignificant.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the accumulated foreign currency translation adjustments account in
shareholders' equity.
EARNINGS PER SHARE
In connection with the S corporation termination, the statements of
operations include pro forma earnings per share of common stock based on the pro
forma net income for all periods presented divided by the pro forma weighted
average number of common shares outstanding. Pro forma weighted average shares
outstanding assumes the issuance of sufficient shares at $18 per share, after
aggregate estimated offering expenses and underwriting discounts, to pay the S
corporation distribution as of December 31, 1995.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," during 1996. The impact of adopting
this statement is not expected to have a significant effect on the Company's
financial statements.
F-9
<PAGE> 131
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS
Certain financial statement items have been reclassified from prior years
to conform to the current year's format with no effect on previously reported
net income.
2. ACQUISITIONS
On May 17, 1994, PPD-CRU acquired WARS for a total consideration of $4,060.
PPD-CRU issued 26,044 shares of common stock and paid $3,260 in the form of cash
and notes payable. PPD-CRU may be required to make additional payments of up to
$180 per year, contingent upon the results of WARS operations over a three year
fiscal period ending September 30, 1996. PPD-CRU intends to record amounts paid,
if any, under this provision as additional purchase consideration in the period
any such amount is determinable. No payments were due to the former WARS
shareholders based on WARS operating results for the years ended September 30,
1995 and 1994.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchased assets and liabilities have been recorded at their
estimated fair value at the date of the acquisition. The results of operations
of WARS are included in the accompanying combined statements of operation since
the date of acquisition. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets.................................................. $ 1,790
Equity investment............................................... 46
Fixed assets.................................................... 1,058
Other assets.................................................... 163
Accounts payable and accrued liabilities........................ (1,277)
Long-term debt.................................................. (543)
Goodwill........................................................ 2,823
-------
$ 4,060
=======
</TABLE>
The following unaudited pro forma financial information assumes the
acquisition of WARS occurred at the beginning of the year presented for the 1993
and 1994 presentations.
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Revenue................................................................ $42,750 $35,230
======= =======
Net income............................................................. $ 3,506 $ 3,069
======= =======
</TABLE>
On August 1, 1995, PPD and PPD-Europe (an S corporation formed in
connection with this transaction), completed the acquisition of Gabbay Group
Limited for $306 in cash and $241 in assumed debt. Gabbay Group Limited, a
clinical research organization, is located in Southampton, England. Ownership
interests in Gabbay Group Limited are 79% and 21% for PPD and PPD-Europe,
respectively. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchased assets and liabilities have been recorded
at their estimated fair value at the date of acquisition. The purchase price
resulted in goodwill of $444. For the years ended December 31, 1995 and 1994,
Gabbay Group Limited had net sales of approximately $1,241 and $1,200,
respectively, and net income (loss) of approximately $6 and $(18), respectively.
The results of operations of Gabbay are included in the accompanying combined
statement of operations for the year ended December 31, 1995, since the date of
acquisition.
F-10
<PAGE> 132
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. MARKETABLE SECURITIES
The estimated market value and aggregate cost of marketable securities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Estimated market value.............................................. $242 $203
Aggregate cost...................................................... 236 222
---- ----
Gross unrealized gains (losses)..................................... $ 6 $(19)
==== ====
</TABLE>
4. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
Accounts receivable and unbilled services consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Trade:
Billed......................................................... $ 7,260 $ 7,751
Unbilled....................................................... 8,525 2,464
------- -------
15,785 10,215
Other............................................................ 52 183
------- -------
$15,837 $10,398
======= =======
</TABLE>
5. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------ ------
<S> <C> <C>
Furniture and fixtures........................................... $3,872 $2,459
Office equipment................................................. 794 714
Computer equipment............................................... 2,038 1,365
Motor vehicles................................................... 48 --
Leasehold improvements........................................... 481 379
Construction in progress......................................... 230 --
------ ------
7,463 4,917
Less accumulated depreciation and amortization................... 2,925 1,812
------ ------
$4,538 $3,105
====== ======
</TABLE>
F-11
<PAGE> 133
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
A summary of the Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Term notes payable to bank in monthly installments of $35,
including interest ranging from 6.35% to 7.34% through
December 1996, with one balloon payment of all remaining
principal due in December 1996............................... $ 772 $ 1,132
4% notes payable to shareholders of PPD-CRU in three annual
installments of $315, $315 and $630 beginning January 1,
1995......................................................... 945 1,260
Prime (8.5% at December 31, 1995) less 0.5%, $750 line of
credit reducing $150 annually and expiring January 1, 2000;
interest payable monthly..................................... -- 750
Prime (8.5% at December 31, 1995) less 0.25%, $250 line of
credit expiring April 25, 1996; interest payable monthly..... 173 173
Prime (8.5% at December 31, 1995) less 0.5%, $2,600 line of
credit reducing $520 annually and expiring January 1, 2000;
interest payable monthly..................................... 2,210 2,565
Prime (8.5% at December 31, 1995) less 0.5% $1,000 line of
credit expiring May 1996; interest payable monthly........... 421 --
6.75% note payable to bank in annual installments of $20
(subject to changes in dollar to pounds exchange rate) plus
interest with final payment of remaining principal and
interest due in July 2000.................................... 97 --
Note payable with interest based on the base lending rate of
the Royal Bank of Scotland plc plus 3%; principal and
interest due December 1998................................... 39 --
6.75% note payable to Gabbay shareholders in two installments
of $60 and $61 plus interest in February 1996 and August
1996, respectively........................................... 121 --
------- -------
4,778 5,880
Less current maturities........................................ (1,879) (1,144)
------- -------
$ 2,899 $ 4,736
======= =======
</TABLE>
In connection with the above term notes and lines of credit, the Company
has entered into a general security agreement in which the term notes and lines
of credit are collateralized by all assets now owned or hereafter acquired and
guaranteed by certain shareholders of the Company. In addition, the Company has
agreed to comply with certain restrictions including, among other things,
maintenance of certain financial ratios, limitations on incurring additional
debt, limitations on material changes in management and limitations on becoming
a party to mergers, consolidations, or other reorganizations. As of December 31,
1995, the Company was not in compliance with certain of the covenants. The
Company was relieved of the responsibility of compliance with these covenants by
virtue of repayment and refinancing of these notes on February 7, 1996 (see Note
15).
F-12
<PAGE> 134
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT (Continued)
Aggregate maturities required on long-term debt at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996............................................................. $1,879
1997............................................................. 1,632
1998............................................................. 579
1999............................................................. 540
2000............................................................. 148
------
$4,778
======
</TABLE>
7. SHAREHOLDERS' EQUITY
Shareholders' equity at December 31, 1992, 1993, 1994 and 1995 consisted of
the following:
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
-------------------- ADDITIONAL GAIN (LOSS)
OUTSTANDING PAID IN ON MARKETABLE RETAINED UNEARNED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS COMPENSATION
----------- ------ ---------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992
PPD, $.10 stated value.... 6,300,000 $630 $ (620) $ 448
PPD-CRU, $.10 stated
value................... 29,597 3 (86)
------ ---------- --------
Combined............. $633 $ (620) $ 362
====== ======= ======
December 31, 1993
PPD, $.10 stated value.... 6,794,550 $680 $ 446 $1,716 $ (268)
PPD-CRU, $.10 stated
value................... 118,387 12 (2) (109)
------ ---------- -------- ------------
Combined............. $692 $ 444 $1,607 $ (268)
====== ======= ====== ==========
December 31, 1994
PPD, $.10 stated value.... 6,794,550 $680 $ 446 $ (19) $4,046 $ (170)
PPD-CRU, $.10 stated
value................... 118,387 12 652 (157)
------ ---------- ------------- -------- ------------
Combined............. $692 $1,098 $ (19) $3,889 $ (170)
====== ======= ========== ====== ==========
December 31, 1995
PPD, $.10 stated value.... 6,794,550 $680 $ 446 $ 6 $7,386 $ (73)
PPD-CRU, $.10 stated
value................... 118,387 14 820 91
PPD-Europe, $1 stated
value................... 2,814 51
------ ---------- ------------- -------- ------------
Combined............. $694 $1,317 $ 6 $7,477 $ (73)
====== ======= ========== ====== ==========
</TABLE>
PPD-CRU had 1,000,000 authorized shares at December 31, 1995, 1994 and
1993. At December 31, 1995, PPD-Europe had 100,000 authorized shares.
PPD had 30,000,000 authorized shares of Common Stock at December 31, 1995,
1994 and 1993.
PPD has authorized 5,000,000 shares of $.10 par value Preferred Stock. No
shares of Preferred Stock are issued or outstanding.
F-13
<PAGE> 135
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. OPERATING LEASES
The Company leases facilities under agreements classified as operating
leases. Rent expense for 1995, 1994 and 1993 totaled $1,265, $747 and $710,
respectively.
The following is a schedule by years of the future minimum payments at
December 31, 1995 required under these agreements:
<TABLE>
<S> <C>
1996............................................................. $1,689
1997............................................................. 740
1998............................................................. 547
1999............................................................. 557
2000............................................................. 539
Thereafter....................................................... 217
------
$4,289
======
</TABLE>
9. SIGNIFICANT CUSTOMERS
The Company had several significant customers for which they provided
services under specific contractual arrangements.
The following sets forth the net revenue generated by customers who
accounted for more than 10% of the Company's net revenue during each of the
periods presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
CUSTOMERS 1995 1994 1993
- ------------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
A............................................................ $4,841 $6,766 $8,036
B............................................................ * * 2,411
C............................................................ * 2,937 *
</TABLE>
- ---------------
* Less than 10% of net revenue.
At December 31, 1995 and 1994, these customers represented 18% and 39%,
respectively, of outstanding account receivables and unbilled services.
10. RELATED PARTY TRANSACTIONS
The Company is related through common ownership with E.M. Associates, Inc.
which provides investigative review board services to the Company. The Company
had transactions with E.M. Associates, Inc. of $102, $191 and $183 in expenses
for the years ended December 31, 1995, 1994 and 1993, respectively.
Several of the Company's shareholders collectively own 14.6% of LOI
Building, Inc. ("LOI"), which leases operating facilities to PPD. Rent paid to
LOI for the years ended December 31, 1995, 1994 and 1993, totaled $341, $430 and
$390, respectively.
PPD-CRU rents a building from LAB. Rent paid to LAB for the years ended
December 31, 1995 and 1994 totaled $186 and $112, respectively.
11. PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan which requires
contributions from the Company each year equal to 50% of the amount contributed
by each employee up to 5% of the employee's wages. Any additional contribution
to the plan is at the discretion of the Company's Board of Directors. The
F-14
<PAGE> 136
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PROFIT-SHARING PLAN (Continued)
Company can terminate the plan at any time. Contributions to the plan were $242,
$129 and $127 for the years ended December 31, 1995, 1994 and 1993,
respectively.
12. CONTINGENCIES
It is the policy of the Company to act as self-insurer for insurable risks
related to malpractice and certain other risks. Since no claims have occurred,
no losses have been charged to operations for the years ended December 31, 1995,
1994 and 1993.
13. RESTRICTED STOCK ISSUANCES
In 1993, PPD issued 494,550 shares of stock to two individuals. In one of
the issuances, 110,250 shares were issued as compensation to an individual,
which provides that unless PPD's stock is sold publicly or PPD's stock or assets
are sold entirely to another party, the individual must provide certain services
to PPD as Chief Operating Officer, for a minimum period of three years or lose
all rights to the stock. Compensation expense is being recognized ratably over
the three-year service period in an amount equal to the fair value of the stock
at issuance. Compensation expense recognized in 1995, 1994 and 1993 totaled $97,
$98 and $24, respectively. In the other issuance, an individual acquired 384,300
shares of PPD's stock directly from PPD and another 315,000 shares of PPD's
stock directly from the individual shareholders. The individual paid the
shareholders directly for the entire 699,300 shares. As such, the accompanying
combined financial statements reflect a dividend of $824 in 1993 for the fair
market value of the 384,300 shares issued by PPD.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
MARKETABLE SECURITIES
The fair value of marketable securities is estimated based on quoted market
prices of the mutual funds comprising marketable securities.
LONG-TERM DEBT
The carrying amount of long-term debt, which bears interest at a floating
rate, approximates the fair value.
The estimated fair value of the Company's financial instruments as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- ------
<S> <C> <C>
Cash and cash equivalents....................................... $2,261 $2,261
Marketable securities........................................... 242 242
Long-term debt.................................................. 4,778 4,778
</TABLE>
F-15
<PAGE> 137
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS
REORGANIZATION
In January 1996, the Company completed an initial public offering of its
common stock resulting in net proceeds of approximately $37.2 million. In
conjunction with the Company's initial public offering, on January 23, 1996 PPD
and PPD-Europe were merged in a transaction that will be accounted for similar
to a pooling of interests. PPD-CRU became a wholly owned subsidiary of PPD. The
reorganization had no material effect on PPD's financial position or results of
operations as presented herein.
CAPITAL STOCK TRANSACTIONS
In conjunction with the Company's initial public offering, on January 23,
1996 the following capital stock transactions were effected: (i) an amendment to
the Articles of Incorporation of the Company increasing the number of authorized
common shares to 30,000,000 and authorizing 5,000,000 shares of preferred stock;
(ii) a stock split of 63 shares for 1 share (effected in the form of a 6,200%
stock dividend) for all PPD common stock; (iii) the conversion of the 122,000
outstanding shares of PPD-CRU common stock into 144,431 shares of PPD common
stock at an offering price of $18 per share; and (iv) the conversion of 10,785
outstanding shares of PPD-Europe common stock into 2,814 shares of PPD common
stock at an offering price of $18 per share. All numbers of common shares and
per share amounts in the accompanying financial statements have been
retroactively adjusted to reflect this stock split and conversions.
EQUITY COMPENSATION PLAN
PPD has implemented an equity compensation plan in connection with its
initial public offering of common stock. The plan permits the award of options
to buy shares of PPD's common stock or the grant of other stock-based awards to
executives and other key employees.
Options and other stock-based awards would be considered common stock
equivalents and could affect earnings per share depending on the number of
options and awards granted and the market price of the stock compared to the
exercise price.
LONG-TERM DEBT REPAYMENT
On February 7, 1996 the Company repaid $254 and refinanced $3,297 in notes
payable with a new note that is payable in full on February 19, 1997.
F-16
<PAGE> 138
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 5,012 $ 2,261
Marketable securities............................................... 27,010 242
Accounts receivable and unbilled services........................... 17,735 15,837
Investigator advances............................................... 541 648
Prepaid expenses and other current assets........................... 380 125
----------- ------------
Total current assets........................................ 50,678 19,113
----------- ------------
Furniture and equipment, net........................................ 5,374 4,538
Goodwill, net....................................................... 2,904 2,949
Other assets........................................................ 364 904
----------- ------------
$59,320 $ 27,504
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................ $ 4,036 $ 1,879
Accounts payable.................................................... 1,699 1,991
Payable to investigators............................................ 5,080 3,588
Other accrued expenses.............................................. 3,203 2,380
Unearned income..................................................... 3,552 5,346
----------- ------------
Total current liabilities................................... 17,570 15,184
----------- ------------
Long-term debt, less current maturities............................... 76 2,899
----------- ------------
Shareholders' equity:
Preferred stock.....................................................
Common stock........................................................ 924 694
Additional paid-in capital.......................................... 39,842 1,317
Unrealized gain on marketable securities............................ 6
Foreign currency translation adjustment............................. (11)
Retained earnings................................................... 919 7,477
----------- ------------
41,674 9,494
Unearned compensation............................................... (73)
----------- ------------
Total shareholders' equity.................................. 41,674 9,421
----------- ------------
$59,320 $ 27,504
========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 139
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Professional fee income............................................... $ 19,040 $ 11,843
Less reimbursed costs................................................. 7,087 3,091
---------- ----------
Net Revenue......................................................... 11,953 8,752
Operating Expenses:
Direct costs........................................................ 6,384 4,528
Selling, general and administrative................................. 3,828 2,643
Depreciation and amortization....................................... 467 285
---------- ----------
10,679 7,456
Income from operations.............................................. 1,274 1,296
Other income (expense), net........................................... 284 (47)
---------- ----------
Income before income tax expense...................................... 1,558 1,249
Income tax expense.................................................... 639
---------- ----------
Net income............................................................ $ 919 $ 1,249
========= =========
Earnings per share.................................................... $ 0.11
=========
Weighted average number of shares outstanding......................... 8,672,978
=========
Pro forma data:
Net income, as reported............................................. $ 1,249
Pro forma income tax expense........................................ 547
----------
Pro forma net income................................................ $ 702
=========
Pro forma earnings per shares....................................... $ 0.10
=========
Pro forma weighted average number of shares outstanding............. 7,278,941
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE> 140
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1996 1995
-------- ------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 919 $1,249
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 467 285
Accretion of investment discounts................................. (42)
Stock compensation amortization................................... 24
Loss on sale of equipment......................................... 20
Gain on sale of investments....................................... (8)
Changes in assets and liabilities:
Receivables and unbilled services............................... (1,898) (322)
Advance payments and payables to investigators.................. 1,599 (156)
Prepaid expenses and other current assets....................... (255) (93)
Goodwill and other assets....................................... 529 (19)
Accounts payable................................................ (292) 148
Other accrued expenses.......................................... 823 381
Unearned income................................................. (1,794) 183
-------- ------
Net cash provided by operating activities.................... 68 1,680
-------- ------
Cash flows from investing activities:
Purchase of equipment................................................ (1,271) (612)
Proceeds from sale of assets......................................... 3 3
Purchase of investments.............................................. (26,978)
Sale of investments.................................................. 244
-------- ------
Net cash used in investing activities............................. (28,002) (609)
-------- ------
Cash flows from financing activities:
Proceeds from long-term debt......................................... 2,958
Principal payments on long-term debt................................. (3,624) (88)
Cash dividends paid.................................................. (5,859)
Net proceeds from issuance of common stock........................... 37,210
-------- ------
Net cash provided by (used in) financing activities.......... 30,685 (88)
-------- ------
Net increase in cash and cash equivalents.............................. 2,751 983
Beginning of period.................................................. 2,261 1,860
-------- ------
End of Period........................................................ $ 5,012 $2,843
======== ======
Supplemental disclosure for cash flow information:
Cash payments for interest........................................... $ 84 $ 36
======== ======
Cash payments for taxes.............................................. $ 558 $ 0
======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 141
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES: The significant accounting policies followed by
Pharmaceutical Product Development, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have been
prepared in accordance with Rule 10-01 of Regulation S-X, and in management's
opinion, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. The accompanying financial statements do not
purport to contain all the necessary financial disclosures that might otherwise
be necessary in the circumstances and should be read in conjunction with the
consolidated financial statements and notes thereto in the Company's Annual
report for the year ended December 31, 1995. The results of operations for the
three month period ended March 31, 1996 are not necessarily indicative of the
results to be expected for the full year.
Use of Estimates in the Preparation of Financial Statements. 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.
Certain 1995 financial statement amounts have been reclassified to conform
with the 1996 presentation.
2. BASIS OF PRESENTATION: The accompanying unaudited consolidated
financial statements include the accounts of Pharmaceutical Product Development,
Inc., and its wholly owned subsidiaries, Pharmaceutical Product
Development-Clinical Research Unit, Inc. and Gabbay Group Limited. All
significant intercompany items have been eliminated.
3. EARNINGS PER SHARE: Earnings per share are calculated by dividing net
income by the weighted average number of shares outstanding during the period.
Outstanding stock options have not been included in the computation of net
income per share since the effect is not material.
4. PRO FORMA NET INCOME AND NET INCOME PER SHARE: Prior to January 1996,
the Company had elected to be treated as a S corporation for income tax purposes
and accordingly did not incur any expense or liability for corporate income
taxes. Effective January 1, 1996, the Company revoked its S corporation election
and began reporting as a C corporation. For the quarter ended March 31, 1995 the
Statement of Operations includes a pro forma income tax provision as well as a
pro forma earnings per share computation. Pro forma weighted average shares
outstanding assumes the issuance of sufficient shares at the net per share
proceeds of the Company's initial public offering in January 1996 ($16.18) to
repay the indebtedness ($5.5 million) incurred by the Company in making the
final S corporation distribution.
F-20
<PAGE> 142
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Applied Bioscience International Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Applied
Bioscience International Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These consolidated financial statements and
the schedule referred to below are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule 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 Applied
Bioscience International Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
Index to Consolidated Financial Statements and Financial Statement Schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Washington, D.C.,
February 22, 1996
F-21
<PAGE> 143
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
LIFE SCIENCES REVENUES, net of subcontractor costs of $24,144,
$21,370 and $13,730, respectively........................... $133,970 $129,099 $115,154
ENVIRONMENTAL SCIENCES REVENUES, net of subcontractor costs of
$7,230, $4,564 and $3,056, respectively..................... 49,283 45,763 40,190
-------- -------- --------
Net revenues.................................................. 183,253 174,862 155,344
-------- -------- --------
DIRECT COSTS -- LIFE SCIENCES................................. 93,997 92,692 88,295
DIRECT COSTS -- ENVIRONMENTAL SCIENCES........................ 33,791 30,095 27,047
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 49,821 44,642 46,783
LOSS ON SALE OF BUSINESS...................................... 19,308 -- --
SPECIAL CHARGES AND RESTRUCTURING COSTS....................... 4,982 -- 9,365
-------- -------- --------
201,899 167,429 171,490
-------- -------- --------
OPERATING (LOSS) INCOME....................................... (18,646) 7,433 (16,146)
INTEREST:
Expense.................................................. (3,054) (3,190) (1,959)
Income................................................... 220 508 392
OTHER INCOME (EXPENSE)........................................ 18 (13) 394
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES................................................ (21,462) 4,738 (17,319)
(BENEFIT) PROVISION FOR INCOME TAXES.......................... (16,134) 1,873 (3,446)
-------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS...................... (5,328) 2,865 (13,873)
-------- -------- --------
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income tax
benefit of $0, $128 and $1,157, respectively........... -- (285) (5,787)
Estimated loss on disposal of discontinued operations,
net of income tax benefit of $2,036, $227 and $2,654,
respectively........................................... (1,716) (12,588) (6,346)
-------- -------- --------
LOSS FROM DISCONTINUED OPERATIONS............................. (1,716) (12,873) (12,133)
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY ITEM............................ (7,044) (10,008) (26,006)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of income tax benefit of $475........................... (897) -- --
-------- -------- --------
NET LOSS...................................................... $ (7,941) $(10,008) $(26,006)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.......... 28,457 28,129 28,254
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
(Loss) income from continuing operations................. $ (0.19) $ 0.10 $ (0.49)
Loss from discontinued operations........................ (0.06) (0.46) (0.43)
Extraordinary loss....................................... (0.03) -- --
-------- -------- --------
LOSS PER COMMON SHARE......................................... $ (0.28) $ (0.36) $ (0.92)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 144
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 11,304 $ 7,944
Accounts receivable, net............................................ 54,426 63,585
Supply inventories.................................................. 231 1,163
Income tax receivable............................................... 825 2,297
Prepaid expenses and other current assets........................... 5,545 6,077
Deferred tax asset.................................................. 4,756 --
-------- --------
Total current assets........................................... 77,087 81,066
PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and
amortization........................................................... 21,515 82,905
GOODWILL, less accumulated amortization.................................. 10,041 5,738
OTHER ASSETS............................................................. 6,514 11,971
-------- --------
Total assets................................................... $115,157 $181,680
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................ $ 322 $ 2,406
Accounts payable.................................................... 7,089 6,156
Accrued liabilities................................................. 26,749 25,172
Advance billings.................................................... 9,536 23,649
-------- --------
Total current liabilities...................................... 43,696 57,383
LONG-TERM DEBT........................................................... 572 42,884
DEFERRED INCOME TAXES.................................................... -- 11,348
DEFERRED RENT AND OTHER.................................................. 3,010 1,357
-------- --------
Total liabilities.............................................. 47,278 112,972
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 9, 13 and 14)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 40,000,000 shares authorized,
29,724,000 and 29,520,000 shares issued and outstanding,
respectively....................................................... 297 295
Paid-in capital..................................................... 69,598 68,826
Retained earnings................................................... 3,144 12,062
Treasury stock, at cost, 713,000 and 1,347,000 shares,
respectively....................................................... (4,335) (9,355)
Unrealized loss on investments...................................... -- (728)
Cumulative translation adjustment................................... (425) (1,561)
Deferred compensation............................................... (400) (831)
-------- --------
Total stockholders' equity..................................... 67,879 68,708
-------- --------
Total liabilities and stockholders' equity..................... $115,157 $181,680
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-23
<PAGE> 145
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- UNREALIZED CUMULATIVE
PAR PAID-IN RETAINED TREASURY LOSS ON TRANSLATION DEFERRED
SHARES VALUE CAPITAL EARNINGS STOCK INVESTMENTS ADJUSTMENT COMPENSATION
------ ----- ------- -------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992.......... 29,367 $294 $68,719 $48,147 $ -- $-- $ (2,819) $ (2,421)
Net loss........................ -- -- -- (26,006) -- -- -- --
Issuance of 22,728 shares....... 23 -- 84 -- -- -- -- --
Income tax provision from
exercise of stock options and
deferred compensation
amortization.................. -- -- (176) -- -- -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- -- -- 1,017
Common stock repurchased of
1,440,000 shares.............. -- -- -- -- (10,184) -- -- --
Sale of 84,329 treasury shares
to employee savings plan...... -- -- -- (71) 754 -- -- --
Translation adjustments......... -- -- -- -- -- -- (748) --
------ ---- ------- -------- ------- ----- ------- -------
BALANCE, December 31, 1993.......... 29,390 294 68,627 22,070 (9,430) -- (3,567) (1,404)
Net loss........................ -- -- -- (10,008) -- -- -- --
Issuance of 129,565 shares...... 130 1 448 -- -- -- -- --
Income tax provision from
exercise of stock options and
deferred compensation
amortization.................. -- -- (249) -- -- -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- -- -- 573
Sale of 8,437 treasury shares to
employees savings plan........ -- -- -- -- 75 -- -- --
Unrealized loss on EnSys
investment.................... -- -- -- -- -- (728) -- --
Translation adjustments......... -- -- -- -- -- -- 2,006 --
------ ---- ------- -------- ------- ----- ------- -------
BALANCE, December 31, 1994.......... 29,520 295 68,826 12,062 (9,355) (728) (1,561) (831)
Net loss........................ -- -- -- (7,941) -- -- -- --
Issuance of 176,771 shares...... 177 2 708 -- -- -- -- --
Issuance of 634,188 treasury
shares in connection with
acquisition accounted for
under the purchase method..... -- -- -- (977) 5,020 -- -- --
Issuance of restricted stock
units......................... 60 -- 405 -- -- -- -- (405)
Forfeiture of restricted stock
units......................... (33) -- (567) -- -- -- -- 567
Cancellation and reissuance of
stock options................. -- -- 173 -- -- -- -- (173)
Income tax benefit from exercise
of stock options and deferred
compensation amortization..... -- -- 53 -- -- -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- -- -- 442
Realized loss on EnSys
investment.................... -- -- -- -- -- 728 -- --
Sale of business................ -- -- -- -- -- -- 1,699 --
Translation adjustments......... -- -- -- -- -- -- (563) --
------ ---- ------- -------- ------- ----- ------- -------
BALANCE, December 31, 1995.......... 29,724 $297 $69,598 $ 3,144 $(4,335) $ -- $ (425) $ (400)
====== ==== ======= ======== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 146
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (7,941) $(10,008) $(26,006)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.............................. 11,754 10,960 12,996
Deferred income taxes...................................... (18,204) 3,235 (234)
Loss on sale of business................................... 16,991 -- --
Provision for loss on disposal of discontinued
operations............................................... 3,752 12,815 9,000
(Gain) loss on disposition of property and equipment....... (2,741) 113 --
Impairment of investment in EnSys.......................... 2,638 -- --
Early extinguishment of debt............................... 955 -- --
Deferred compensation expense.............................. 442 573 1,017
Write off of goodwill...................................... -- -- 2,890
Change in assets and liabilities:
Decrease (increase) in accounts receivable, net....... 5,502 (13,958) 10,291
Decrease (increase) in supply inventories, prepaid
expenses and other current assets................... 255 (1,572) (73)
Change in current income taxes........................ 1,472 5,115 (7,985)
Increase in other assets.............................. (1,236) (3,854) (668)
Change in assets and liabilities of discontinued
operations, net..................................... (1,593) (2,009) 1,623
Increase (decrease) in accounts payable and
accrued liabilities................................. 7,860 (3,076) 9,121
(Decrease) increase in advance billings............... (9,081) 3,529 931
-------- -------- --------
Net cash provided by operating activities............. 10,825 1,863 12,903
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (7,617) (14,495) (19,028)
Proceeds from sale of business............................. 32,500 -- --
Proceeds from sale of property and equipment............... 14,150 -- --
Acquisition costs.......................................... (536) -- --
Investment in EnSys........................................ -- -- (188)
-------- -------- --------
Net cash provided by (used in) investing activities... 38,497 (14,495) (19,216)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank (repayments) borrowings, net............... (1,687) (16,929) 9,598
Line of credit (repayments) borrowings, net................ (12,800) 12,800 --
Repayment of long-term debt................................ (31,720) (12,885) (5,822)
Other long-term borrowings................................. -- 26,903 10,195
Proceeds from issuance of common stock..................... 710 449 85
Purchase of treasury stock................................. -- -- (10,184)
Sale of treasury stock to employee benefit plan............ -- 75 683
Other...................................................... 45 (249) (176)
-------- -------- --------
Net cash (used in) provided by financing activities... (45,452) 10,164 4,379
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................... (510) (137) (346)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 3,360 (2,605) (2,280)
CASH AND CASH EQUIVALENTS, beginning of the year................ 7,944 10,549 12,829
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of the year...................... $ 11,304 $ 7,944 $ 10,549
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 147
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Applied Bioscience International Inc. and its subsidiaries, collectively,
(the "Company") provide a broad range of research and consulting services in two
business segments: life sciences and environmental sciences. Services provided
in the life sciences segment include worldwide clinical research and development
of pharmaceutical products and medical devices, biostatistical analysis and
analytical laboratory services. Environmental sciences services include
assessment and management of chemical and environmental health risk, site
investigation and remediation planning, and litigation support. Such services
are provided through both segments under contract to clients in the
pharmaceutical, general chemical, agrochemical, biotechnology and other
industries. The environmental sciences segment also markets services to clients
in the industrial, manufacturing and oil and gas industries. The Company's life
sciences services, which represent 73.1% of the Company's business based on net
revenues, are marketed primarily in the United States and Europe. The remaining
26.9% of the Company's net revenues are derived from its environmental sciences
segment which are primarily domestic.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
SPECIAL CHARGES AND RESTRUCTURING COSTS
In the fourth quarter of 1995, the Company recorded special charges of
$4,982,000, primarily related to the impairment of certain investments and
assets and in the effort to reduce costs and improve efficiencies. These charges
included approximately $3,405,000 associated with the impairment of the
Company's available-for-sale investment (see Note 7) and other assets,
$1,195,000 related primarily to severance costs and $382,000 related to accrued
lease losses and other miscellaneous costs.
In 1993, the Company recorded a provision for business restructuring
totaling $9,365,000, primarily related to re-engineering the Company's
toxicology business. These charges included approximately $6,640,000 associated
with severance and costs related to the Company's reduction in work force and
$2,725,000 which primarily related to consulting fees incurred which were
associated with the design and implementation of reorganized reporting lines and
responsibilities.
REVENUE RECOGNITION
The Company records revenues from fixed-price contracts extending over more
than one accounting period on a percentage-of-completion basis. Revenues from
time-and-material contracts are recognized as billable rates multiplied by hours
delivered, plus pass-through expenses incurred. Pass-through expenses generally
include subcontractor costs which consist of investigator fees, travel and
certain other contract costs that are reimbursed by the client. Accordingly,
such subcontractor costs are deducted in determining net revenues.
If it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged against income in
the period in which the determination is made. Clients generally may terminate a
study at any time, which may cause unplanned periods of excess capacity and
reduced revenues and earnings. To offset the effects of early terminations, with
respect to contracts of significant size the Company attempts to negotiate the
payment of an early termination fee.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
F-26
<PAGE> 148
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Supplemental cash flow information and non-cash investing activities are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
CASH PAID (RECEIVED):
Interest, net of amounts capitalized......... $ 3,338 $ 3,619 $1,766
======= ======
Income taxes, net............................ $(2,299) $(6,355) $1,226
======= ======
</TABLE>
The non-cash assets and liabilities acquired, including the acquisition of
the Chicago Center for Clinical Research (see Note 2) and the Phase I clinical
center received as consideration for the sale of the toxicology operations (see
Note 3) are as follows:
<TABLE>
<CAPTION>
1995
-------
<S> <C>
ACQUISITION:
Fair value of assets acquired................................. $ 7,530
Liabilities assumed........................................... (3,175)
NON-CASH CONSIDERATION RECEIVED:
Fair value of assets acquired................................. $ 5,098
Liabilities assumed........................................... (598)
</TABLE>
SUPPLY INVENTORIES
Supply inventories are stated at the lower of cost or market.
PROPERTY AND EQUIPMENT
Depreciation is recorded using the straight-line method, based on estimated
useful lives of 20 to 50 years for buildings, 5 to 12 years for laboratory
equipment, 3 to 5 years for computers and related equipment, and 4 to 10 years
for furniture and equipment. Leasehold improvements are amortized over the
shorter of the respective lives of the leases or the useful lives of the
improvements. Property under capital leases is amortized over the life of the
lease or the service life, whichever is shorter. The Company evaluates
impairment of its property and equipment based on whether it is probable that
undiscounted future cash flows from operations are expected to be less than the
asset's carrying value.
GOODWILL
The excess of the purchase price of the businesses acquired over the fair
value of net tangible assets and identifiable intangibles at the date of the
acquisitions has been assigned to goodwill. Goodwill is being amortized over
periods of 15 to 40 years. As of December 31, 1995 and 1994, accumulated
amortization was $1,696,000 and $1,587,000, respectively. The amortization
charges for each of the three years ended December 31, 1995, 1994 and 1993 were
$397,000, $371,000 and $297,000, respectively. The Company evaluates impairment
of goodwill based on whether it is probable that undiscounted future cash flows
will be less than the carrying value.
In 1993, the Company determined that goodwill assigned to its agrochemical
development division, Paragon Global Services ("Paragon," formerly Landis
International Inc.), was impaired and measured the amount of loss based upon the
discounted present value of future cash flows. A full write-off of $2,890,000
was warranted based upon this analysis. In 1994, the Paragon division was sold
and has been presented as a discontinued operation in the accompanying
consolidated financial statements. (See Note 4.)
F-27
<PAGE> 149
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
OTHER ASSETS
Computer software costs and other intangible assets, which are included in
other assets, are being amortized over periods of three to five years. (See Note
7.)
UNBILLED RECEIVABLES AND ADVANCE BILLINGS
Unbilled receivables represent amounts earned for services that have been
rendered but for which clients have not been billed. The account includes
amounts billed in January, as well as amounts which are billable upon contract
execution, achievement of milestones or contract completion. Substantially all
contracts in progress at year end are billable during the subsequent year.
Advance billings represent amounts billed and cash received for services not yet
rendered.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
TRANSLATION OF FOREIGN FINANCIAL STATEMENTS
Assets and liabilities of foreign operations, where the functional currency
is the local currency, are translated into U.S. dollars at the year-end rate of
exchange. Income and expenses are translated at the average rates of exchange
prevailing during the year. Gains or losses from translating foreign currency
financial statements are accumulated in a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included in other
income.
Funds generated by each subsidiary of the Company are generally reinvested
in the country where they are earned.
PER-SHARE INFORMATION
The computation of both primary and fully-diluted loss per-share
information is based on the weighted average number of common shares outstanding
during the year. The inclusion of additional common-equivalent shares, assuming
the exercise of stock options, would have been antidilutive. The primary and
fully-diluted per-share data are the same for all periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company
implemented early adoption of SFAS No. 121, effective January 1, 1995. The
adoption of this statement had no material affect on the Company's consolidated
financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation," which provides companies the option to account for employee stock
compensation awards based on their estimated fair value at the date of grant,
resulting in a charge to income in the period the awards are granted, or to
present pro forma footnote disclosure describing the effect to the company's net
income and net income per share data. SFAS No. 123 is effective for the
Company's 1996 financial statements. The Company has not yet
F-28
<PAGE> 150
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
determined what impact, if any, the adoption of SFAS No. 123 will have on the
Company's financial position or disclosure to its consolidated financial
statements.
Other pronouncements issued by the FASB with future effective dates are
either not applicable or not material to the consolidated financial statements
of the Company.
PERVASIVENESS 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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
2. ACQUISITION:
On August 18, 1995, the Company, through its newly formed subsidiary,
Clinix International Inc., acquired the business and assets of the Chicago
Center for Clinical Research ("CCCR"), a nationally recognized organization
conducting clinical trials in pharmaceuticals, food and nutrition. The
consideration consisted of 634,188 shares of the Company's common stock valued
at $4,043,000, together with the assumption or retirement of substantially all
of CCCR's outstanding indebtedness and other related liabilities. As a result of
this transaction, the Company recorded $4,517,000 in goodwill which is being
amortized on a straight-line basis over a period of 15 years. Pro forma
information is not presented, as the results of operations prior to the date of
acquisition are not material to the Company.
3. SALE OF BUSINESS:
On November 21, 1995, the Company sold its toxicology laboratories located
in New Jersey and Suffolk, England to Huntingdon International Holdings plc
("Huntingdon"). In connection with the sale of the New Jersey toxicology
laboratory, which operated as a division of Pharmaco International Inc.
(formerly Pharmaco LSR International Inc., "Pharmaco"), a wholly owned
subsidiary of the Company, Huntingdon acquired substantially all of the assets
of such laboratory and assumed substantially all related liabilities. In
connection with the sale of the toxicology laboratory located in Suffolk,
England, Huntingdon acquired all of the capital stock of Pharmaco LSR Ltd., a
wholly owned subsidiary of the Company The Company received as consideration
cash proceeds of $32,500,000, plus an additional $6,000,000 for an equal amount
of cash conveyed to Huntingdon as part of the sale. The consideration also
included the Company's acquisition of Huntingdon's Phase I clinical center
located in Leicestershire, England, at an agreed upon value of $4,500,000.
As a result of the disposition, the Company recorded a pre-tax loss on sale
of business of $19,308,000 which is reflected in the accompanying consolidated
statement of operations for the year ended December 31, 1995. The loss reflects
the net book value of the net assets sold in excess of consideration received of
$16,991,000, $1,178,000 of transaction costs, $1,338,000 of severance and
relocation costs, and $581,000 of other costs primarily related to the required
name change of the remaining business, net of a $780,000 gain recorded as a
result of the settlement of the Company's U.K. pension plan. (See Note 12.)
F-29
<PAGE> 151
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SALE OF BUSINESS -- (CONTINUED)
The assets and liabilities sold to Huntingdon are not included in the
accompanying consolidated balance sheet as of December 31, 1995. The results of
operations for the years ended December 31, 1995, 1994 and 1993 include the
following for the disposed business (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Net revenues.................................... $39,102 $46,387 $ 65,864
Operating (loss) income......................... (1,430) 2,409 (16,000)
</TABLE>
4. DISCONTINUED OPERATIONS:
In June 1994, the Company sold Paragon for cash and a note totaling
$525,000. The sale resulted in a loss on disposal before income tax benefits of
$732,000.
In December 1993, the Company adopted a formal plan to sell its
environmental testing laboratory division, Environmental Testing and
Certification Corp. ("ETC"). For the year ended December 31, 1993, the estimated
loss on disposal of ETC before income tax benefits included a provision of
$2,074,000 for estimated operating losses during the phase-out period,
$5,155,000 to write down the net assets to net realizable value and a provision
of $1,771,000 for estimated selling costs. Although it was the Company's desire
to exit the environmental analytical laboratory business completely, it became
apparent during 1994 that the Company would not be able to dispose of its
interest in ETC on terms that it deemed attractive, in part because of the
ongoing consolidation within the environmental analytical laboratory industry.
Based on the Company's belief that a larger network of analytical laboratories
could compete more effectively, and that a minority interest in a larger
laboratory business might provide a better means to pursue divestiture
opportunities, in August 1994, the ETC division of APBI Environmental Sciences
Group, including substantially all of its assets and liabilities, was
consolidated with the business operations of PACE Inc. (an unrelated analytical
laboratory) and Coast-to-Coast Analytical Services, Inc. (another unrelated
analytical laboratory). The combined business operations were operated within
PACE Incorporated ("PACE"), a newly formed entity. As a result of the
combination, the Company, through APBI Environmental Sciences Group, owned
preferred and common stock of PACE representing approximately 36% of the
weighted average preferred and common stock outstanding. Due to the additional
time required to divest ETC and after assessment of the estimated fair value of
APBI's investment in PACE, the Company recorded an additional write down of
$2,533,000 in the third quarter of 1994. In the fourth quarter of 1994, the
Company recorded $9,550,000 in additional writedowns to reduce the carrying
value of the investment to its then estimated net realizable value.
During the fourth quarter of 1995, PACE sold substantially all of its
laboratories in a series of transactions. Net proceeds from such transactions
were used to retire PACE's outstanding bank loan and to partially repay certain
other secured indebtedness. PACE, which is currently winding up its remaining
business operations, does not have sufficient assets to repay its outstanding
liabilities. Accordingly, it is anticipated that equity holders will not receive
any distributions upon completion of PACE's winding up and dissolution.
Effective December 29, 1995, the Company's voting interest was reduced to below
20%, and the Company changed its accounting for the investment from the equity
method to the cost method in accordance with Accounting Principles Board Opinion
No. 18, "The Equity Method of Accounting for Investments in Common Stock."
In the fourth quarter of 1995, the Company wrote off its remaining
investment in PACE of approximately $3,600,000, and accrued its estimated
exposure for guarantees on leases. The Company does not believe that any further
charges will be taken with respect to this investment.
F-30
<PAGE> 152
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DISCONTINUED OPERATIONS -- (CONTINUED)
The operating results of the discontinued operations include net revenues
of $12,045,000 and $24,852,000 for the years ended December 31, 1994 and 1993.
Assets and liabilities of the discontinued operations were as follows as of
December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Accounts receivable, net.......................................... $ 317
Property and equipment, net....................................... 1,542
Other assets...................................................... 12,959
Other liabilities................................................. (12,382)
--------
Net assets of discontinued operations............................. $ 2,436
========
</TABLE>
5. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
TRADE:
Billed.................................................. $31,997 $38,391
Unbilled................................................ 24,984 24,827
Reserve for doubtful accounts........................... (3,319) (3,773)
------- -------
53,662 59,445
OFFICERS AND EMPLOYEES.................................... 395 791
OTHER..................................................... 369 3,349
------- -------
$54,426 $63,585
======= =======
</TABLE>
Receivables from officers and employees include a one-year note and a
ten-year note due from Company employees. The one-year non-interest-bearing note
for $190,500 is collateralized by a mortgage on the employee's former residence
and is due upon demand. The ten-year interest-bearing note, which was
collateralized by a mortgage, was transferred to Huntingdon in November 1995.
(See Note 3.) The balances outstanding under these notes as of December 31, 1995
and 1994 were $190,500 and $345,532, respectively.
6. PROPERTY AND EQUIPMENT:
Property and equipment, stated at cost, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Land.................................................... $ 543 $ 2,794
Buildings and leasehold improvements.................... 10,211 72,244
Furniture and equipment................................. 19,165 41,857
Computers............................................... 15,753 19,352
-------- --------
45,672 136,247
Less -- Accumulated depreciation and amortization....... (24,157) (53,342)
-------- --------
$ 21,515 $ 82,905
======== ========
</TABLE>
F-31
<PAGE> 153
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT -- (CONTINUED)
The annual depreciation and amortization charges on property and equipment
for each of the three years ended December 31, were:
<TABLE>
<S> <C>
1993............................................................ $8,598,000
1994............................................................ 9,372,000
1995............................................................ 9,511,000
</TABLE>
7. OTHER ASSETS:
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ -------
<S> <C> <C>
Computer software, net of accumulated amortization of
$1,890 and $2,289, respectively.......................... $2,728 $ 3,384
Investment in EnSys........................................ 1,008 2,918
Intangible and other assets, net of accumulated
amortization of $2,183 and $2,310, respectively.......... 2,136 2,680
Net noncurrent assets of discontinued operations........... 642 2,989
------ -------
$6,514 $11,971
====== =======
</TABLE>
The annual amortization charges on computer software and intangible assets
for each of the three years ended December 31, 1995, 1994 and 1993 were
$1,846,000, $1,473,000 and $1,329,000.
The Company owns 729,600 shares of EnSys Environmental Products Inc.
("EnSys") common stock and warrants to acquire up to an additional 866,667
shares of EnSys common stock at $7.50 per share. Each of the warrants is
exercisable at any time prior to October 27, 1996. The trading price per share
was $1.63 and $1.88 as of December 31, 1995, and February 22, 1996,
respectively, and $4.00 as of December 31, 1994.
The Company owns approximately 12% of the EnSys common stock excluding
warrants and approximately 23% if both common stock and warrants are considered.
The Company's investment in EnSys is carried at its fair value. The
difference between the fair value and the carrying value of $2,638,000 is
reported as a loss in the consolidated statement of operations in 1995 as the
decline was considered other than temporary. The difference in 1994 was reported
as a separate component of stockholders' equity.
F-32
<PAGE> 154
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Accrued salaries, wages and related costs................. $ 8,153 $ 8,166
Accrued pension........................................... 1,361 1,365
Accrued subcontractor costs............................... 4,524 4,098
Accrued loss on sale of business.......................... 2,395 --
Accrued special charges and restructuring costs........... 2,223 2,652
Net current liabilities of discontinued operations........ 365 553
Other..................................................... 7,728 8,338
------- -------
$26,749 $25,172
======= =======
</TABLE>
9. LONG-TERM DEBT AND LEASE OBLIGATIONS:
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
DESCRIPTION AND INTEREST RATES MATURITY 1995 1994
----------------------------------------------------------- -------- ----- -------
<S> <C> <C> <C>
NOTES:
9.25%................................................. $ -- $21,111
Prime + 1.50% (10% -- 1994)........................... -- 3,889
REVOLVING LINE OF CREDIT................................... 1997 -- 12,800
MORTGAGES:
9%.................................................... -- 489
Prime (8.5% -- 1994).................................. -- 5,942
EQUIPMENT LEASES........................................... 1998 894 1,059
----- -------
894 45,290
LESS CURRENT MATURITIES.................................... (322) (2,406)
----- -------
Total long-term debt............................. $ 572 $42,884
===== =======
</TABLE>
For the years subsequent to December 31, 1995, annual maturities of
obligations under capitalized equipment leases outstanding are (in thousands):
<TABLE>
<S> <C>
1996................................................................. $363
1997................................................................. 355
1998................................................................. 245
----
963
Less imputed interest and executory costs............................ (69)
----
Present value of capital lease obligations including current portion
of $322............................................................ $894
====
</TABLE>
In 1994, the Company executed a $25,000,000 term loan and a $20,000,000
revolving line of credit term loan agreement. The Company used the cash proceeds
from the divestiture described in Note 3 and the sale-leaseback transaction
described in this Note 9 to repay the entire balance of its term loan and the
outstanding balance of its revolving line of credit. The revolving line
continues to provide for borrowings of up to
F-33
<PAGE> 155
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT AND LEASE OBLIGATIONS -- (CONTINUED)
$20,000,000, of which there were no borrowings outstanding as of December 31,
1995. As of December 31, 1994, outstanding borrowings were $12,800,000. The line
is collateralized by substantially all tangible property, the Company's owned
real property in Houston and by a pledge of all the stock owned by the Company.
The Company has also pledged the 729,600 shares of common stock it owns in
EnSys.
The outstanding borrowings on the revolving line of credit, if any, are
payable on May 26, 1997 and bear interest at prime plus 1% (9.5% at December 31,
1995). The variable rate is subject to reduction if certain covenants related to
financial performance are met. As a result of the Company's performance during
the first and second quarters of 1995, the variable rate was reduced from 1.5%
to 1% over prime. Annual commitment fees of 0.5% are payable quarterly based on
the average daily unused portion of the line of credit.
The line-of-credit loan agreement provides an additional $5,000,000 for
letters of credit to back guarantees or insurance policies. At December 31,
1995, open letters of credit were issued for $720,000.
The line-of-credit agreement contains certain financial covenants providing
for, among other things, minimum levels of net worth, the maintenance of certain
financial ratios, and restrictions on additional indebtedness. The agreement
also contains a material adverse change clause which allows the lender to call
the loan in the event of any action, suit or proceeding pending or threatened,
which may have a material adverse effect on the financial condition, assets,
nature of assets or operations of the Company. In management's opinion, there
have been no events which would trigger the material adverse change clause.
The Company incurred financing fees and other financing charges and legal
fees totaling $1,708,000 in connection with obtaining the term loan and line of
credit agreements. The total of these charges was capitalized in other assets
and was being amortized over three years. Upon the early extinguishment of this
debt in November 1995, the unamortized balance of $955,000 and the prepayment
penalty of $417,000 were charged to expense and classified as an extraordinary
loss in the accompanying consolidated statement of operations.
The Company has several capital leases expiring at different dates through
1998. These leases are collateralized by the equipment leased. Interest rates
range from 6% to 9%. At December 31, 1995 and 1994, the capitalized cost of
leased equipment included in property and equipment is $1,513,000 and $1,843,000
net of accumulated depreciation of $832,000 and $846,000, respectively.
Amortization of the capitalized amounts is included in depreciation and
amortization expense.
OPERATING LEASES
The Company is obligated under noncancellable leases expiring at various
dates through 2010 relating to its operating facilities and certain equipment.
Rental expense for all operating leases, net of sublease income, was $6,935,000,
$5,287,000 and $4,823,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The Company completed a sale-leaseback transaction involving Pharmaco's
owned real estate in Austin, Texas on November 13, 1995. Total gross proceeds in
the transaction were $12,000,000 resulting in a pre-tax gain of approximately
$2,100,000. The gain, which has been deferred, is classified as deferred rent
and other in the accompanying consolidated balance sheet and is being amortized
on a straight-line basis over the fifteen year lease term. The facilities are
leased to the Company with all responsibility of operations and maintenance
residing with the Company.
Certain facility leases entered into in 1992 and prior years provided for
concessions by the landlords, including payments for leasehold improvements,
moving expenses, and free rent periods. These concessions have been reflected as
deferred rent and other in the accompanying consolidated financial statements.
The
F-34
<PAGE> 156
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT AND LEASE OBLIGATIONS -- (CONTINUED)
Company is recording rent expense on a straight-line basis for these leases.
Future minimum payments for all lease obligations for years subsequent to
December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................... $ 8,154
1997............................................................... 7,711
1998............................................................... 7,053
1999............................................................... 5,534
2000............................................................... 4,074
2001 and thereafter................................................ 25,712
</TABLE>
10. STOCK PLANS:
STOCK INCENTIVE PROGRAM
In 1995, the Company's Stock Incentive Program (the "Program") was amended
to increase the number of shares of common stock issuable under the Program from
5,000,000 to 6,500,000. These shares of common stock are reserved for issuance
upon the exercise of options or restricted stock units ("RSUs") granted under
the Program. Such options and RSUs typically vest in increments over a period of
three to five years after the date of grant. The Program includes provisions
intended to qualify for special tax benefits for incentive stock options under
United States tax laws and for approved options under United Kingdom tax laws.
On August 15, 1995, the Company granted a total of 60,000 RSUs to two
executive officers. The RSUs vest at the time the average closing price for the
Company's common stock equals or exceeds $10.00 per share for a period of ten
consecutive trading days. The RSUs are forfeited on December 31, 1997, if they
have not vested by that date. The executives are not required to pay any
consideration in exchange for the RSUs. Unearned compensation is amortized to
expense over the vesting period of the RSUs and is adjusted for changes in the
market value of the Company's common stock. Compensation expense related to
these RSUs of $66,000 has been recorded in the accompanying statement of
operations for the year ended December 31, 1995.
On September 19, 1995, the Company entered into a Separation Agreement with
a former senior executive officer of the Company. In connection therewith, the
Company canceled the former executive's unexercised options granted under the
Program and provided the officer with options granted outside of the Program to
purchase up to 147,428 shares of the Company's common stock. Of the options
granted, 92,761 were fully vested at the grant date. The remaining options vest
at various dates through September 13, 1997 and expire on the earlier of
February 11, 2001 or the day immediately following any period of twenty
consecutive trading days in which the last sale for shares of the Company's
common stock for each of such trading days equaled or exceeded $20.00 per share.
The options were granted at the exercise prices established at the original
option grant dates and vary from $5.63 to $15.88. At the grant date of the new
options, 102,000 of the options were priced below fair market value.
Accordingly, the Company recorded compensation expense of $112,000 for the
difference between the fair market value and the exercise price.
In 1995, the Company adopted the "Applied Bioscience International Inc.
Stock Option Plan for Outside Directors" (the "Directors' Plan") which provides
for the issuance of up to 150,000 shares of common stock. Under the Directors'
Plan, each non-employee director receives an annual grant of a ten-year option
to purchase 6,000 shares of common stock beginning with each director's initial
appointment or election to the position of Director. The options are granted at
fair market value and vest over a three-year period, subject to the individual's
continuing service as a director. Similar options are granted automatically to
all new, non-employee directors.
F-35
<PAGE> 157
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK PLANS -- (CONTINUED)
All options issued under the Program and the Directors' Plan were granted
at prices equal to or greater than the market price at the date granted.
Stock option activity related to the Program and the Directors' Plan was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1993........................ 3,399,642 $ 0.79 - 19.13
1994 ACTIVITY:
Options granted.............................. 858,320 $ 4.88 - 7.00
Options exercised............................ (63,022) $ 1.31 - 4.06
Options canceled............................. (1,108,277) $ 5.63 - 19.13
---------- -------------
BALANCE, DECEMBER 31, 1994........................ 3,086,663 $ 0.79 - 19.13
1995 ACTIVITY:
Options granted.............................. 473,216 $ 4.63 - 6.38
Options exercised............................ (156,756) $ 3.75 - 7.00
Options canceled............................. (479,515) $ 5.63 - 16.44
---------- -------------
BALANCE, DECEMBER 31, 1995........................ 2,923,608 $ 0.79 - 19.13
========== =============
AVERAGE PRICE..................................... $6.61
=====
EXERCISABLE AT DECEMBER 31, 1995.................. 1,873,058
==========
AVERAGE PRICE..................................... $7.06
=====
</TABLE>
At December 31, 1995, there were 2,397,401 shares reserved for option
grants under the Program and the Directors' Plan.
In connection with the acquisition of Pharmaco in 1992, the Company granted
112,122 RSUs to certain employees of Pharmaco at no cost. These RSUs were placed
in escrow and were to vest in equal installments over five years. The Company
valued these shares on the date they were granted and was amortizing the cost
over the vesting period. In 1993, upon termination of an employee, certain RSUs
became fully vested. As a result, the full amount of the remaining cost of those
RSUs, approximately $443,000, was amortized and charged to expense. In 1995, the
employment of the employee holding the remaining RSUs was terminated and all
non-vested RSUs were forfeited. As of December 31, 1995, the full value of the
remaining RSUs has been amortized or reversed into equity.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan with 800,000 shares of
common stock reserved for issuance upon the exercise of options granted under
the plan. Options are granted to employees who elect to purchase shares of
common stock at the end of a five or seven-year savings period. Savings are
accumulated through voluntary payroll deductions. The Company contributes a
bonus to each participant's savings account equal to nine monthly contributions
at the end of the five-year period and eighteen monthly contributions at the end
of the seven-year period. When the savings period ends, the employee may elect
to purchase the shares using the savings balance, including the bonus; purchase
some of the shares and receive the savings balance in cash; or receive the
savings and bonus in cash. Those employees electing the five-year savings period
may also elect to leave the savings in their accounts for another two years and
forfeit the option to purchase the shares. The United Kingdom plan, as approved
by the stockholders, was implemented by Pharmaco LSR Ltd. during 1988. The
United States plan has not been implemented.
F-36
<PAGE> 158
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK PLANS -- (CONTINUED)
In connection with the sale of the toxicology operations, options
equivalent in value to the savings balance in the terminated employees' accounts
became immediately exercisable. Options in excess of the savings balance were
forfeited. The exercise period for the vested options extends through April
1996.
Stock option activity related to this plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
SHARES PRICE PER SHARE
-------- ---------------
<S> <C> <C>
BALANCE, December 31, 1993.......................... 260,351 $ 4.06 - 16.88
1994 ACTIVITY:
Options granted................................ 10,955 $ 5.25 - 6.88
Options exercised.............................. (66,543) $ 4.06 - 6.44
Options canceled............................... (38,311) $ 4.06 - 16.88
------ -------------
BALANCE, December 31, 1994.......................... 166,452 $ 4.06 - 16.88
1995 ACTIVITY:
Options granted................................ 4,938 $5.63
Options exercised.............................. (15,522) $4.06
Options canceled............................... (79,819) $4.06
------ -------------
BALANCE, December 31, 1995.......................... 76,049 $ 4.06 - 16.88
====== =============
AVERAGE PRICE....................................... $6.62
=====
EXERCISABLE AT DECEMBER 31. 1995.................... 72,113
======
AVERAGE PRICE....................................... $6.65
=====
</TABLE>
At December 31, 1995, there were 547,367 shares reserved for option grants
under this plan.
11. INCOME TAXES:
The components of (loss) income before provision for income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Domestic....................................................... $(21,174) $ 4,328 $(16,448)
Foreign........................................................ (288) 410 (871)
-------- ------- --------
(Loss) income from continuing operations....................... (21,462) 4,738 (17,319)
Loss from discontinued operations.............................. (3,752) (13,228) (15,944)
Extraordinary loss............................................. (1,372) -- --
-------- ------- --------
Total................................................ $(26,586) $(8,490) $(33,263)
======== ======= ========
</TABLE>
F-37
<PAGE> 159
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
The components of the (benefit) provision for income taxes were as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
STATE INCOME TAXES:
Current............................................ $ (63) $ (372) $ (479)
Deferred........................................... (166) 182 (136)
FEDERAL INCOME TAXES:
Current............................................ (1,021) (1,922) (5,735)
Deferred........................................... (4,716) 2,925 (927)
FOREIGN INCOME TAXES:
Current............................................ 109 -- (46)
Deferred........................................... (12,788) 705 66
-------- ------- -------
(BENEFIT) PROVISION FOR INCOME TAXES.................... $(18,645) $ 1,518 $(7,257)
======== ======= =======
</TABLE>
The income tax (benefit) provision is included in the financial statements
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
-------- ------ -------
<S> <C> <C> <C>
Continuing operations.................................... $(16,134) $1,873 $(3,446)
Discontinued operations.................................. (2,036) (355) (3,811)
Extraordinary loss....................................... (475) -- --
-------- ------ -------
Total.......................................... $(18,645) $1,518 $(7,257)
======== ====== =======
</TABLE>
In 1995, a foreign deferred income tax benefit was recorded to reflect the
reversal of previously recorded foreign deferred income tax expense associated
with the United Kingdom toxicology operations which were sold during 1995. The
1994 and 1993 foreign deferred income tax expense resulted primarily from
temporary differences related to the excess of United Kingdom capital allowances
for tax purposes over financial reporting depreciation. In 1995, federal and
state deferred income tax benefits were recorded which relate to the federal and
state income tax losses and credits available for carry forward, and
discontinued operations reserves and restructuring reserves established for
financial reporting purposes which are not currently deductible for income tax
purposes. In 1994, federal and state deferred income tax expense resulted
primarily from utilization of restructuring reserves and discontinued operations
reserves established in years prior to 1994 for financial reporting purposes
which resulted in 1994 deductions for income tax purposes. In 1993, federal and
state deferred income tax benefits were recorded which related primarily to the
discontinued operations reserves and restructuring reserves established for
financial reporting purposes which were not deductible at that time for income
tax purposes.
F-38
<PAGE> 160
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the (benefit) provision for income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Effective tax rate............................... 70.1% (17.9)% 21.8%
======== ======= ========
United States federal statutory rate............. $ (9,039) $(2,887) $(11,309)
Differential on rates applied to foreign
earnings....................................... 30 (96) (52)
State taxes (net of federal benefit)............. (166) (125) (406)
Write-down of investment in PACE Incorporated and
EnSys.......................................... (40) 3,774 --
Write-off of goodwill not deductible for income
tax purposes................................... -- -- 983
Sale of toxicology operations.................... (10,370) -- --
Allowance for limitation of domestic tax
losses......................................... -- -- 2,497
Allowance for limitation of foreign tax losses... 841 674 511
Other............................................ 99 178 519
-------- ------- --------
(Benefit) provision for income taxes............. $(18,645) $ 1,518 $ (7,257)
======== ======= ========
</TABLE>
As a result of the 1995 sale of the Company's toxicology operations, the
Company will not be liable for the payment of certain tax liabilities recorded
in prior years. These previously recorded liabilities were reversed in 1995. In
1994, a write-down was recorded of the Company's investment in PACE
Incorporated. No tax benefit was recorded in connection with this write-down as
it was characterized as a write-down giving rise to a capital loss for income
tax purposes. Capital losses can only be deducted for income tax purposes to the
extent of capital gains incurred during the three prior years and five
subsequent years. As the Company's ability to generate capital gains is
uncertain, no benefit was recorded. At December 31, 1994 and 1993, a deferred
tax asset was recorded for the future benefit of U.S. loss carryforwards.
However, a valuation allowance was established as a reserve against these
assets, as the Company only recognized benefits of U.S. losses which could be
realized through a net operating loss carryback. Based on projected future
profits, at December 31, 1995, the Company is recognizing a deferred tax asset
for the future benefit of U.S. loss carryforwards, and the valuation allowance
has been reduced to zero. Based on the uncertainty of realizing a benefit on its
European subsidiaries' loss carryforwards, the Company has not recorded any
benefits associated with such losses.
Components of the net current deferred tax (asset) liability were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -----
<S> <C> <C>
Future benefit of foreign net operating loss....................... $ -- $(250)
Provision for business restructuring............................... (1,060) (133)
Allowance for doubtful accounts.................................... (314) (64)
Accruals........................................................... (524) (152)
Future benefit of U.S. and state net operating losses.............. (2,680) --
Other.............................................................. (178) 44
------- -----
(4,756) (555)
Valuation allowance................................................ -- 677
------- -----
Net current deferred tax (asset) liability......................... $(4,756) $ 122
======= =====
</TABLE>
F-39
<PAGE> 161
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
Components of the net long-term deferred tax (asset) liability were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
<S> <C> <C>
Depreciation and amortization..................................... $ 1,068 $14,637
Provision for discontinued operations............................. (242) (1,712)
Deferred rent..................................................... (1,414) (697)
Future benefit of foreign net operating loss...................... -- (232)
Future benefit of U.S. tax credits................................ (613) (480)
Other............................................................. (290) (168)
------- -------
Net long-term deferred tax (asset) liability...................... $(1,491) $11,348
======= =======
</TABLE>
The cumulative amount of undistributed earnings of the foreign subsidiaries
for which the Company has not provided U.S. income taxes at December 31, 1995
was $318,000. No provision has been made for the additional taxes that would
result from the distribution of earnings of foreign subsidiaries since such
earnings have been permanently reinvested in the foreign operations. The Company
also holds foreign tax credits which may reduce the tax impact of repatriated
funds.
As of December 31, 1995, the Company had approximately $7,000,000 of net
operating losses available for carryforward to future years which will expire in
2009 and 2010. The Company also had approximately $613,000 of alternative
minimum tax credits available for carryforward which never expire.
12. EMPLOYEE SAVINGS AND PENSION PLANS:
SAVINGS PLANS
The Company maintains "The Applied Bioscience International Inc. 401(k)
Retirement Savings Plan" (the "APBI 401(k) Plan"), under which all U.S.
employees are eligible to participate from their date of employment. The Company
matches 50% of an employee's savings up to 6% of pay. All participants are 100%
vested in Company contributions.
Company contributions for all employees for the three years ended December
31,1995, 1994, and 1993 were $1,386,000, $1,180,000 and $798,000, respectively.
PENSION PLANS
Pension costs and related disclosures are determined under the provisions
of Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions" and Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."
Effective December 31, 1992, the Company froze plan benefits for its
separate non-contributory defined benefit plan (the "U.S. Plan") so that
employees did not earn additional defined benefits for future services. The
Company terminated the U.S. Plan on March 1, 1994. All amounts due to
participants of the plan were distributed to the participants in 1995 and 1994,
in accordance with plan provisions. No significant gain or loss resulted in
connection with the plan curtailment or termination.
The Company has a separate contributory defined benefit plan (the "U.K.
Plan") for its qualifying United Kingdom employees and directors employed by the
Company's U.K. subsidiaries. The benefits for this plan are based primarily on
years of service and average pay at retirement. Plan assets consist principally
of investments managed in a mixed fund. The sale of the toxicology business
discussed in Note 3 resulted in the
F-40
<PAGE> 162
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE SAVINGS AND PENSION PLANS -- (CONTINUED)
termination of employment for the majority of United Kingdom employees who
participated in the U.K. Plan. The projected settlement gain of $780,000 is
reflected as a reduction of the loss on the sale of business in the accompanying
consolidated statement of operations for the year ended December 31, 1995.
Pension costs include the following components (in thousands):
<TABLE>
<CAPTION>
U.S. PLAN
------------- U.K. PLAN
YEAR ENDED -----------------------------
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------- -----------------------------
1994 1993 1995 1994 1993
---- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Service cost-benefits earned during the
year................................... $-- $-- $ 1,311 $ 1,461 $ 1,241
Interest cost on projected benefit
obligation............................. 102 97 1,361 1,349 1,164
Actual return on plan assets............. (65) (225) (1,566) 706 (4,184)
Net amortization and deferral............ (26) 151 (38) (2,315) 2,897
---- ----- ------- ------- -------
Net pension cost......................... $ 11 $ 23 $ 1,068 $ 1,201 $ 1,118
==== ===== ======= ======= =======
</TABLE>
The funded status of the defined benefit plans was as follows (in
thousands):
<TABLE>
<CAPTION>
U.S. PLAN U.K. PLAN
------------ ----------------------------
DECEMBER 31, DECEMBER 31,
------------ ----------------------------
1994 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................... $ (133) $ (4,361) $ (17,816)
========== ======= ========
Accumulated benefit obligation............... $ (133) $ (4,403) $ (17,988)
========== ======= ========
Projected benefit obligation...................... $ (133) $ (4,765) $ (19,467)
Plan assets at fair value......................... 94 6,133 19,373
------------ ------------ ------------
Plan assets (less than) in excess of projected
benefit obligation.............................. (39) 1,368 (94)
Remaining unrecognized net asset arising from
initial application of SFAS 87.................. -- (59) 1,074
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions.......................... -- 183 (401)
------------ ------------ ------------
(Pension liability) prepaid pension cost.......... $ (39) $ 1,492 $ 579
========== ======= ========
</TABLE>
Assumptions used to determine pension costs and projected benefit
obligations were as follows:
<TABLE>
<CAPTION>
U.S. PLAN U.K. PLAN
------------ --------------------
1994 1993 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Discount rate................................... 6.0% 6.0% 8.5% 8.0% 8.5%
Rate of compensation increase................... N/A N/A 5.5 6.0 6.5
Long-term rate of return on plan assets......... 6.5 6.5 8.5 8.0 8.5
</TABLE>
The Company maintains the APBI Environmental Sciences Group, Inc. Pension
Plan (the "Pension Plan"), a tax-qualified, defined-contribution money-purchase
pension plan, for the benefit of its eligible ENVIRON employees. ENVIRON is
required to make annual contributions to the Pension Plan in an amount equal to
the sum of 3.75% of each eligible employee's total compensation, plus 3.75% of
the portion of
F-41
<PAGE> 163
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE SAVINGS AND PENSION PLANS -- (CONTINUED)
such employee's compensation in excess of the Social Security wage base.
Participants vest in 20% of their account balances after two years of service
and 20% per year until employees are fully vested.
The annual pension expense of the Pension Plan for the three years ended
December 31, 1995, 1994 and 1993 was $645,000, $633,000 and $648,000,
respectively. Effective January 1, 1994, APBI Environmental Sciences Group, Inc.
established the ENVIRON Supplemental Executive Retirement Plan. This plan is
nonqualified and provides certain key employees defined contribution benefits
that supplement those provided by the Pension Plan. Company contributions to
this plan in 1995 and 1994 were $44,000 and $32,000, respectively.
13. COMMITMENTS AND CONTINGENCIES:
In 1989 and 1990, the Board of Directors approved supplemental retirement
arrangements for two officers that supplement the benefits provided to them
under the Company's former non-contributory defined-benefit pension plan
covering U.S. employees. Under the supplemental retirement arrangements, the
officers were credited with RSUs, which are a form of unfunded deferred
compensation that, subject to the satisfaction of vesting requirements, will be
settled by the delivery of one share of the Company's common stock for each
vested RSU. These deferred benefits are accrued in the accompanying financial
statements. The Company has reserved a total of 65,624 shares of common stock
for issuance under these supplemental retirement arrangements. In connection
with the sale of the toxicology operations, 20,328 RSUs belonging to one of the
two officers became fully vested.
The Company has employment contracts with 11 of its officers and key
employees for periods of one to five years with annual remuneration ranging from
$61,000 to $250,000 plus additional discretionary incentive compensation.
The Company currently maintains liability insurance on a "claims made"
basis for professional acts, errors and omissions. As of December 31, 1995, this
insurance policy includes a $1,000,000 self-insurance retention.
14. LITIGATION:
In the normal course of business, the Company is a party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management of the Company, after consultation with
legal counsel, does not believe that the resolution of these matters will have a
material effect upon the Company's financial condition or results of operations.
15. RELATED PARTY TRANSACTIONS:
The Company paid legal fees of approximately $19,640, $79,300 and $86,500
in the years ended December 31, 1995, 1994 and 1993, respectively, to a firm
having a partner who is also a director of the Company.
In connection with the sale of the toxicology operations, the Company
incurred a one time investment banking fee of $500,000 which is payable to a
firm having a vice-chairman who is also a director of the Company. The full
amount of this expense is included in accrued liabilities as of December 31,
1995.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
F-42
<PAGE> 164
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
CURRENT ASSETS AND CURRENT LIABILITIES
The carrying amount approximates fair value because of the short maturity
of those instruments.
INVESTMENT IN ENSYS
The Company's investment in EnSys is recorded at $1,008,000 which
represents the market price of $1,186,000 as quoted on the National Market
System of the National Association of Securities Dealers Automated Quotation
System at December 31, 1995, less a discount of $178,000 representing the
relatively illiquid nature of the investment. As of February 22, 1996, the fair
value of the investment was $1,368,000. The Company also owns warrants to
purchase up to an additional 866,667 shares of EnSys common stock. The warrants,
which have an exercise price of $7.50 per common share, are not publicly traded.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Fair value
approximates the carrying amount as most debt instruments bear interest based on
the prime rate.
LETTERS OF CREDIT
The Company utilizes letters of credit to back certain guarantees and
insurance policies. The letters of credit reflect fair value as a condition of
their underlying purpose and are subject to fees competitively determined in the
market place.
17. BUSINESS SEGMENT DATA:
As a result of the recent divestiture and acquisition activity and the
Company's decision to evaluate the long-term strategic fit of its operating
groups, the Company has determined that the nature of its operations has changed
such that it no longer operates in one industry segment. For the year ended
December 31, 1995, the Company is reporting operating results in two business
segments: life sciences and environmental sciences.
F-43
<PAGE> 165
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. BUSINESS SEGMENT DATA -- (CONTINUED)
Revenues by principal business segment are included in the consolidated
financial statements. Income from operations, depreciation and amortization,
identifiable assets and capital expenditures by principal business segment were
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
(LOSS) INCOME FROM OPERATIONS
Life sciences................................................. $ (20,185)
Environmental sciences........................................ 7,774
Corporate and other........................................... (6,235)
--------
Operating loss........................................... $ (18,646)
========
DEPRECIATION AND AMORTIZATION
Life sciences................................................. $ 10,078
Environmental sciences........................................ 1,640
Corporate..................................................... 36
--------
Total.................................................... $ 11,754
========
IDENTIFIABLE ASSETS
Life sciences................................................. $ 72,640
Environmental sciences........................................ 23,719
Corporate and other........................................... 18,798
--------
Total.................................................... $ 115,157
========
CAPITAL EXPENDITURES
Life sciences................................................. $ 6,331
Environmental sciences........................................ 1,256
Corporate..................................................... 30
--------
Total.................................................... $ 7,617
========
</TABLE>
F-44
<PAGE> 166
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. OPERATIONS BY GEOGRAPHIC AREA:
The following table presents information about the Company's operations by
geographic area (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues:
United States -- Domestic................................... $128,134 $119,604 $103,994
-- Export..................................... 14,455 15,262 13,444
-------- -------- --------
142,589 134,866 117,438
-------- -------- --------
Europe -- Domestic................................... 33,612 26,154 22,885
-- Export..................................... 7,052 13,842 15,021
40,664 39,996 37,906
-------- -------- --------
$183,253 $174,862 $155,344
======== ======== ========
Operating income:
United States................................................ $(19,032) $ 5,182 $(14,036)
Europe....................................................... 386 2,251 (2,110)
-------- -------- --------
$(18,646) $ 7,433 $(16,146)
======== ======== ========
Identifiable
assets:
United States................................................ $ 91,235 $112,413 $119,170
Europe....................................................... 23,922 69,267 62,070
-------- -------- --------
$115,157 $181,680 $181,240
======== ======== ========
</TABLE>
F-45
<PAGE> 167
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
1995 FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues................................. $45,773 $47,892 $46,241 $ 43,347 $183,253
Operating income (loss)...................... 1,467 1,906 2,218 (24,237) (18,646)
Income (loss) from continuing operations..... 436 775 801 (7,340) (5,328)
Loss from discontinued operations............ -- -- -- (1,716) (1,716)
Extraordinary loss........................... -- -- -- (897) (897)
Net income (loss)............................ 436 775 801 (9,953) (7,941)
Earnings (loss) per common share:
Continuing operations................... $ 0.02 $ 0.03 $ 0.03 $ (0.25) $ (0.19)
Discontinued operations................. -- -- -- (0.06) (0.06)
Extraordinary loss...................... -- -- -- (0.03) (0.03)
------- ------- ------- -------- --------
Total.............................. $ 0.02 $ 0.03 $ 0.03 $ (0.34) $ (0.28)
======= ======= ======= ======== ========
1994
Net revenues................................. $40,195 $44,939 $44,227 $ 45,501 $174,862
Operating income............................. 1,150 2,385 2,846 1,052 7,433
Income (loss) from continuing operations..... 556 1,198 1,359 (248) 2,865
Loss from discontinued operations............ (104) (686) (2,533) (9,550) (12,873)
Net income (loss)............................ 452 512 (1,174) (9,798) (10,008)
Earnings (loss) per common share:
Continuing operations................... $ 0.02 $ 0.04 $ 0.05 $ (0.01) $ 0.10
Discontinued operations................. -- (0.02) (0.09) (0.34) (0.46)
------- ------- ------- -------- --------
Total.............................. $ 0.02 $ 0.02 $ (0.04) $ (0.35) $ (0.36)
======= ======= ======= ======== ========
</TABLE>
F-46
<PAGE> 168
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED OTHER
BALANCE AT TO CHANGES BALANCE
BEGINNING COSTS AND ADD AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (DEDUCT) PERIOD
- ------------------------------------------- ---------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995
Reserve for doubtful accounts......... $3,773 $1,689 $(2,113) $(30) $3,319
====== ====== ====== ==== ======
FOR THE YEAR ENDED DECEMBER 31, 1994
Reserve for doubtful accounts......... $5,421 $2,594 $(4,305) $ 63 $3,773
====== ====== ====== ==== ======
FOR THE YEAR ENDED DECEMBER 31, 1993
Reserve for doubtful accounts......... $2,046 $7,862 $(4,685) $198 $5,421
====== ====== ====== ==== ======
</TABLE>
F-47
<PAGE> 169
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Life sciences revenues, net of subcontractor costs of $4,756 and $6,860,
respectively........................................................... $25,555 $33,354
Environmental sciences revenues, net of subcontractor costs of $882 and
$1,358, respectively................................................... 11,834 12,419
------- -------
37,389 45,773
------- -------
Direct costs -- Life sciences............................................ 16,295 24,049
Direct costs -- Environmental sciences................................... 8,793 8,689
Selling, general and administrative expenses............................. 10,365 11,568
------- -------
35,453 44,306
------- -------
Operating income......................................................... 1,936 1,467
Interest income (expense), net........................................... 128 (758)
Other (expense) income................................................... (85) 44
------- -------
Income before provision for income taxes................................. 1,979 753
Provision for income taxes............................................... 752 317
------- -------
Net income............................................................... $ 1,227 $ 436
======= =======
Weighted average number of common shares outstanding..................... 29,685 28,430
======= =======
Earnings per share....................................................... $ 0.04 $ 0.02
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-48
<PAGE> 170
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 8,683 $ 11,304
Accounts receivable, net............................................ 56,426 54,426
Prepaid expenses and other current assets........................... 6,843 6,601
Deferred tax asset.................................................. 4,067 4,756
----------- ------------
Total current assets........................................ 76,019 77,087
PROPERTY AND EQUIPMENT, at cost less accumulated depreciation and
amortization........................................................ 21,086 21,515
GOODWILL, less accumulated amortization............................... 10,048 10,041
OTHER ASSETS.......................................................... 6,439 6,514
----------- ------------
$ 113,592 $115,157
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................ $ 277 $ 322
Accounts payable.................................................... 3,294 7,089
Accrued liabilities................................................. 21,659 26,749
Advance billings.................................................... 12,971 9,536
----------- ------------
Total current liabilities................................... 38,201 43,696
LONG-TERM DEBT........................................................ 552 572
DEFERRED RENT......................................................... 2,912 3,010
----------- ------------
Total liabilities........................................... 41,665 47,278
----------- ------------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 40,000,000 shares authorized,
30,235,000 and 29,724,000 shares issued and outstanding,
respectively..................................................... 302 297
Paid-in capital..................................................... 72,244 69,598
Retained earnings................................................... 4,371 3,144
Treasury stock, at cost, 713,000 shares............................. (4,335) (4,335)
Unrealized loss on investments...................................... (78) --
Cumulative translation adjustment................................... (183) (425)
Deferred compensation............................................... (394) (400)
----------- ------------
Total stockholders' equity.................................. 71,927 67,879
----------- ------------
$ 113,592 $115,157
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-49
<PAGE> 171
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,227 $ 436
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization....................................... 1,982 2,950
Other............................................................... 732 178
Change in operating assets and liabilities.......................... (7,692) 6,455
------- -------
Net cash (used in) provided by operating activities............ (3,751) 10,019
------- -------
Cash flows from investing activities:
Purchases of property and equipment, net............................... (1,530) (2,636)
Other.................................................................. (213) --
------- -------
Net cash used in investing activities.......................... (1,743) (2,636)
------- -------
Cash flows from financing activities:
Repayment of long-term debt, net....................................... (64) (9,916)
Proceeds from issuance of stock........................................ 2,516 --
------- -------
Net cash provided by (used in) financing activities............ 2,452 (9,916)
------- -------
Effect of exchange rate changes on cash.................................. 421 (944)
------- -------
Net decrease in cash and cash equivalents................................ (2,621) (3,477)
Cash and cash equivalents, beginning of the period....................... 11,304 7,944
------- -------
Cash and cash equivalents, end of the period............................. $ 8,683 $ 4,467
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
F-50
<PAGE> 172
APPLIED BIOSCIENCE INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited consolidated
condensed financial statements reflect all the normal recurring adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods presented. The results for the three month
period ended March 31, 1996, may not necessarily be indicative of the results
for the entire fiscal year.
These financial statements should be read in conjunction with the Company's
annual audited financial statements, as filed with the Securities and Exchange
Commission on Form 10-K, for the year ended December 31, 1995.
2. NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-based Compensation." SFAS No. 123 provides companies the
option to account for employee stock compensation awards based on their
estimated fair value at the date of grant, resulting in a charge to income in
the period the awards are granted, or to present pro forma footnote disclosure
describing the effect to the company's net income and net income per share data.
The Company has elected to adopt the disclosure provisions of SFAS No. 123. The
adoption of this standard had no effect on the Company's results of operations.
3. EARNINGS PER COMMON SHARE
Earnings per common share were computed using the weighted average number
of common stock and common stock equivalents outstanding during the year. Common
equivalent shares are calculated using the treasury stock method and consist
primarily of shares issuable upon exercise of stock options.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated condensed
financial statements of prior periods to conform to the current period
presentation.
F-51
<PAGE> 173
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of June 20, 1996 by and among PHARMACEUTICAL PRODUCT
DEVELOPMENT, INC., a North Carolina corporation ("PPD"), WILMINGTON MERGER
CORP., a North Carolina corporation and wholly owned subsidiary of PPD ("MERGER
SUB"), and APPLIED BIOSCIENCE INTERNATIONAL INC., a Delaware corporation
("APBI").
R E C I T A L S :
A. The Boards of Directors of APBI, PPD and MERGER SUB believe it is in the
best interests of their respective corporations and the stockholders of their
respective corporations that APBI and MERGER SUB combine into a single company
through the statutory merger of MERGER SUB with and into APBI (the "Merger")
and, in furtherance thereof, have approved the Merger.
B. In the Merger, among other things, the outstanding shares of APBI Common
Stock, $0.01 par value ("APBI Common Stock"), shall be converted into shares of
PPD Common Stock, $0.10 par value ("PPD Common Stock"), at the rate set forth
herein.
C. APBI, PPD and MERGER SUB desire to make certain representations and
warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of
the Code.
E. The parties intend for the Merger to be accounted for as a pooling of
interests pursuant to APB Opinion No. 16, Staff Accounting Series Releases 130,
135 and 146 and Staff Accounting Bulletin Topic Two.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Delaware General Corporation Law ("Delaware Law")
and the North Carolina Business Corporation Act ("North Carolina Law"), MERGER
SUB shall be merged with and into APBI, the separate corporate existence of
MERGER SUB shall cease and APBI shall continue as the surviving corporation.
APBI as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable (and in any event
within two business days) after the satisfaction or waiver of each of the
conditions set forth in Article 6 hereof or at such other time as the parties
hereto agree (the date on which the Closing shall occur, the "Closing Date" or
the "Effective Date"). The Closing shall take place at the offices of Murchison,
Taylor, Kendrick, Gibson & Davenport, LLP, 16 N. Fifth Avenue, Wilmington, North
Carolina or at such other location as the parties hereto agree. In connection
with the Closing, the parties hereto shall cause the Merger to be consummated by
filing a Certificate of Merger and Articles of Merger, in form reasonably
satisfactory to PPD and APBI (collectively the "Articles of Merger"), with the
Secretaries of State of the States of Delaware and North Carolina, in accordance
with the relevant provisions of Delaware and North Carolina Law (the time of the
acceptance of such filing being the "Effective Time").
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<PAGE> 174
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Articles of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of APBI and MERGER SUB shall vest in the
Surviving Corporation, and all debts, liabilities and duties of APBI and MERGER
SUB shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws. At the Effective Time, the
Certificate of Incorporation of APBI, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation; and the Bylaws of APBI, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation.
1.5 Directors and Officers.
(a) Directors. At the Effective Time, the directors of the Merger Sub
shall be the initial directors of the Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
(b) Officers. At the Effective Time, the officers of the APBI shall
be the initial officers of the Surviving Corporation, with the exception of
the position of president and chief executive officer, until their
respective successors are duly elected or appointed and qualified. The
president and chief executive officer shall be Fred N. Eshelman or such
other designee appointed by PPD.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of MERGER SUB, PPD, APBI or the holders of any of the
following securities:
(a) Conversion of APBI Common Stock. At the Effective Time, each
share of APBI Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of APBI Common Stock to be canceled
pursuant to Section 1.6(b) hereof) will be canceled and extinguished and be
converted automatically into the right to receive a fractional number of
shares of PPD Common Stock based upon a ratio (the "Exchange Ratio")
computed as follows: (i) if the Average PPD Stock Price (as defined below)
is equal to or less than $48.00 per share, then the Exchange Ratio shall be
equal to the quotient of (x) divided by (y), where (x) is $15.00 per share
and where (y) is the Average PPD Stock Price (as defined below); provided,
however, that in such event the Exchange Ratio shall not be less than
0.3125 nor greater than 0.4054, (ii) if the Average PPD Stock Price (as
defined below) is greater than $48.00 per share, then the Exchange Ratio
shall be equal to the quotient of (x) divided by (y), where (x) is $15.00
per share and where (y) is the Average PPD Stock Price less the product of
0.5 and the difference between the Average PPD Stock Price and $48.00. The
"Average PPD Stock Price" shall mean the average of the last sale price of
a share of PPD Common Stock for the ten (10) most recent days that PPD
Common Stock has traded ending on the day which is five (5) days
immediately prior to the Effective Time, as reported on the Nasdaq National
Market, rounded to the nearest cent.
(b) Cancellation of APBI Common Stock Owned by PPD or APBI. At the
Effective Time, all shares of APBI Common Stock that are owned by APBI as
treasury stock and each share of APBI Common Stock owned by PPD or any
direct or indirect wholly owned subsidiary of PPD or of APBI immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Capital Stock of MERGER SUB. At the Effective Time, each share of
Common Stock, $0.10 par value, of MERGER SUB ("MERGER SUB Common Stock"),
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of Common Stock $0.01 par value, of the Surviving
Corporation. Each stock certificate of MERGER SUB evidencing ownership of
any such shares shall continue to evidence ownership of such shares of
capital stock of the Surviving Corporation.
(d) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into PPD Common Stock or APBI Common Stock), reorganization,
recapitalization or other
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<PAGE> 175
like change with respect to PPD Common Stock or APBI Common Stock occurring
after the date hereof and prior to the Effective Time.
(e) Fractional Shares. No fraction of a share of PPD Common Stock
will be issued, but in lieu thereof each holder of shares of APBI Common
Stock who would otherwise be entitled to a fraction of a share of PPD
Common Stock (after aggregating all fractional shares of PPD Common Stock
to be received by such holder) shall receive from PPD an amount of cash
(rounded to the nearest whole cent) equal to the product of (i) such
fraction, multiplied by (ii) the Average PPD Stock Price.
1.7 APBI Stock Incentive Program. At the Effective Time, the APBI Stock
Incentive Program (1990), as amended (the "APBI Stock Program") and APBI's
obligation with respect to each outstanding option to purchase shares of APBI
Common Stock ("Options") and any restricted stock grants shall be assumed by
PPD.
(a) Options. In the case of each unexpired Option granted under the
APBI Stock Program prior to January 1, 1996, as described in the APBI Stock
Program, the holder, without respect to vesting dates, shall be entitled to
receive from PPD an amount equal to the excess of the highest market price
for APBI's Common Stock on the day, or the earliest prior date, on which a
price has been established for trading purposes preceding the Effective
Time (the "Measurement Date") over the purchase price of each share of APBI
Common Stock covered by such option (the "Option Spread"); provided,
however, that with respect to any such Option for which the highest market
price for APBI's Common Stock on the Measurement Date does not exceed the
purchase price of each share of APBI Common Stock covered by such Option
(an "Out-of-the-Money Option"), the holder shall be entitled to receive a
substitute stock option as provided below. The Option Spread shall be
payable in shares of PPD Common Stock valued on the basis of PPD's closing
trading price on the day immediately preceding the Effective Date. In the
case of each unexpired Option granted under the APBI Stock Program on or
after January 1, 1996 and each Out-of-the-Money Option, the holder shall
receive substituted options (each individual optionee to enter into an
agreement with PPD reflecting such substitute options in the form of
Exhibit 1.7 hereto ("Substitute Option Agreement")) to purchase PPD Common
Stock under the PPD Equity Compensation Plan, such that optionees holding
such unexercised options under the APBI Stock Program shall have the right,
with respect to each such option representing the right to purchase one
share of APBI Common Stock, to receive upon exercise of the substitute
option a fractional number of shares of PPD Common Stock equal to the
Exchange Ratio. Each substitute option shall be subject to the following
terms and conditions:
(i) the exercise price per share of each substitute option (with
any fractional cent being rounded to the next higher full cent) shall be
equal to (x) the exercise price per share at which APBI Common Stock was
theretofore purchasable under the prior Option divided by (y) the
Exchange Ratio;
(ii) the substitute options shall have substantially the same
restrictions, terms and conditions as the options for which they were
substituted, including their characterization as "incentive stock
options" within the meaning of Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code") or nonqualified stock options, as
the case may be; and
(iii) it is intended that, to the extent possible, the substitute
options shall comply with the provisions of Section 424(a) of the Code
and the regulations and rulings promulgated thereunder.
All shares of PPD Common Stock and substitute option agreements to be
delivered hereunder shall be distributed to the former APBI optionholders
as soon as practicable following the Effective Time (and in any event
within 45 days thereafter).
(b) Restricted Stock Grants. Any restricted stock grants or awards
with respect to APBI Common Stock not otherwise vested prior to the
Effective Time shall fully vest as of the Effective Time with any recipient
of a restricted stock grant being entitled to receive the number of shares
of PPD Common Stock that the recipient would have otherwise been entitled
to receive had such recipient been the holder of the shares of APBI Common
Stock under such grant immediately prior to the Effective Time.
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<PAGE> 176
1.8 Non-APBI Plan Options. Certain options to purchase shares of APBI
Common Stock have been previously granted outside of the APBI Stock Program, as
set forth on Schedule 5.12. In the case of each such unexpired option, the
holder, without respect to vesting dates, shall be entitled to receive from PPD
an amount equal to the Option Spread on the Measurement Date for each share of
APBI Common Stock covered by such option; provided, however, that with respect
to each Out-of-the-Money Option, the holder shall be entitled to receive a
substitute option as provided below. The Option Spread shall be payable in
shares of PPD Common Stock valued on the basis of PPD's closing trading price on
the day immediately preceding the Effective Date. In the case of each
Out-of-the-Money Option, the holder shall receive substituted options (each
individual optionee to enter into a Substitute Option Agreement with PPD
reflecting such substitute options in the form of Exhibit 1.7 hereto) to
purchase PPD Common Stock under the PPD Equity Compensation Plan, such that the
holder of such unexercised Out-of-the-Money Options shall have the right, with
respect to each such option representing the right to purchase one share of APBI
Common Stock, to receive upon exercise of the substitute option a fractional
number of shares of PPD Common Stock equal to the Exchange Ratio. Each
substitute option shall be subject to the following terms and conditions:
(i) the exercise price per share of each substitute option (with any
fractional cent being rounded to the next higher full cent) shall be equal
to (x) the exercise price per share at which APBI Common Stock was
theretofore purchasable under the prior option divided by (y) the Exchange
Ratio;
(ii) the substitute options shall have substantially the same
restrictions, terms and conditions as the options for which they were
substituted, including their characterization as non-qualified stock
options; and
(iii) it is intended that, to the extent possible, the substitute
options shall comply with the provisions of Section 424(a) of the Code and
the regulations and rulings promulgated thereunder.
All shares of PPD Common Stock to be delivered hereunder shall be distributed to
the former APBI optionholders as soon as practicable following the Effective
Time (and in any event within 45 days thereafter).
1.9 APBI Stock Option Plan for Outside Directors. At the Effective Time,
the APBI Stock Option Plan for Outside Directors (the "Director Plan") and all
options then outstanding to purchase APBI Common Stock then outstanding under
the APBI Director Plan shall be assumed by PPD in accordance with Section 5.12.
Any option outstanding under the APBI Director Plan may, to the extent vested,
be exercised at any time prior to the Effective Time. The APBI Stock Program and
the APBI Director Plan are sometimes collectively referred to herein as the
"APBI Stock Plans".
1.10 APBI Employee Stock Purchase Plan. At the Effective Time, the APBI
Employee Stock Purchase Plan (the "APBI ESPP") and all of the existing rights
and obligations of APBI pursuant to the outstanding subscription rights
thereunder shall be assumed by PPD in accordance with Section 5.12.
1.11 Surrender of Certificates.
(a) Exchange Agent. Wachovia Bank of North Carolina, N.A. shall act
as exchange agent (the "Exchange Agent") in the Merger.
(b) PPD to Provide Common Stock and Cash. As of the Effective Time,
PPD shall make available to the Exchange Agent for exchange in accordance
with this Article 1, (i) the shares of PPD Common Stock issuable pursuant
to Section 1.6(a) in exchange for shares of APBI Common Stock outstanding
immediately prior to the Effective Time and (ii) cash in an amount
sufficient to permit payment of cash in lieu of fractional shares pursuant
to Section 1.6(e).
(c) Procedures. Promptly after the Effective Time, the Exchange Agent
shall cause to be mailed to each holder of record of a certificate or
certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of APBI Common Stock, whose shares were
converted into the right to receive shares of PPD Common Stock (and cash in
lieu of fractional shares) pursuant to Section 1.6, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon receipt of the
Certificates by the Exchange Agent, and shall be in such form and have such
other provisions as may have been previously agreed to by PPD and
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<PAGE> 177
APBI) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of PPD Common
Stock (and cash in lieu of fractional shares). Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, the holder of record of such Certificate
shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of PPD Common Stock and a check
representing the cash consideration in lieu of fractional shares which such
holder of record has the right to receive pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding Certificate that, prior to the Effective
Time, represented shares of APBI Common Stock will be deemed from and after
the Effective Time, for all corporate purposes, other than as provided in
subsection (d) below, to evidence the ownership of the number of full
shares of PPD Common Stock into which such shares of APBI Common Stock
shall have been so converted and the right to receive an amount in cash in
lieu of the issuance of any fractional shares in accordance with Section
1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to PPD Common Stock with a record date
after the Effective Time will be paid to the holder of record of any
unsurrendered Certificate with respect to the shares of PPD Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of PPD Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the
amount of any such dividends or other distributions with a record date
after the Effective Time theretofore payable (but for the provisions of
this Section 1.11(d)) with respect to such shares of PPD Common Stock.
(e) Transfers of Ownership. If any certificate for shares of PPD
Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to PPD or any agent
designated by it any transfer or other taxes required by reason of the
issuance of a certificate for shares of PPD Common Stock in any name other
than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of PPD or any agent designated by it that
such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.11, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to any person for any amount properly paid to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
1.12 No Further Ownership Rights in APBI Common Stock. All shares of PPD
Common Stock issued upon the surrender for exchange of shares of APBI Common
Stock in accordance with the terms hereof (including any cash paid in lieu of
fractional shares) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of APBI Common Stock, and following the
Effective Time there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of APBI Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article 1.
1.13 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of PPD Common Stock
(and cash in lieu of fractional shares) as may be required pursuant to Section
1.6; provided, however, that PPD may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against PPD, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
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<PAGE> 178
1.14 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a pooling
of interests.
1.15 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of APBI and MERGER SUB, the officers and directors of APBI and
MERGER SUB are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action, so long
as such action is not inconsistent with this Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF APBI
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change or effect related to the business, results of operations
or financial condition of such entity or group of entities. In this Agreement,
any reference to a "Material Adverse Effect" with respect to any entity or group
of entities means any event, change or effect that is materially adverse to the
business, results of operations or financial condition of such entity and its
subsidiaries, taken as a whole; provided, however, in no event shall the
termination or resignation of any executive or employee or any group of
executives and/or employees be characterized as giving rise to a "Material
Adverse Effect." Such termination or resignation is hereinafter referred to as
"Retention Issues".
In this Agreement, any reference to APBI's "knowledge" means (i) the actual
knowledge of APBI's chief executive officer, chief financial officer and
controller, (ii) Pharmaco's chief executive officer or director of finance or
(iii) Environ's chief executive officer.
APBI represents and warrants to PPD and MERGER SUB as follows:
2.1 Organization, Standing and Power. (a) Each of APBI and its Principal
Subsidiaries (as hereinafter defined) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of APBI and its Principal Subsidiaries has the corporate
power to own its properties and to carry on its business as now being conducted
and as proposed to be conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified and
in good standing would have a Material Adverse Effect on APBI. APBI has
delivered to PPD a true and correct copy of the Certificate of Incorporation
(referred to herein as APBI's "Certificate of Incorporation") and Bylaws or
other charter documents, as applicable, of APBI and each of its Principal
Subsidiaries, each as amended to date. Neither APBI nor any of its Principal
Subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent organizational documents. Attached hereto
as Schedule 2.1 is a list of APBI's subsidiaries in which APBI, directly or
indirectly, owns or controls twenty percent (20%) or more of the outstanding
voting interests, showing for each of such subsidiaries the percentage interests
owned by APBI or any of its subsidiaries, the jurisdiction under which laws such
subsidiaries were formed and the date of formation. APBI is the owner, directly
or indirectly, of all outstanding shares of capital stock of each of its
subsidiaries and all such shares are duly authorized, validly issued, fully paid
and nonassessable. Except as reflected on Schedule 2.1, all of the outstanding
shares of capital stock of each such subsidiary are owned by APBI or one of its
wholly owned subsidiaries free and clear of all liens, charges, claims or
encumbrances or rights of others. Except as reflected on Schedule 2.1, there are
no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other securities
of any such subsidiary, or otherwise obligating APBI or any such subsidiary to
issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Except as disclosed in Schedule 2.1 and the APBI SEC Documents (as
defined in Section 2.4), APBI does not directly or indirectly own any equity or
similar interest in, or any interest convertible or exchangeable or exercisable
for, any equity or similar interest in, any corporation, partnership, joint
venture or other business association or entity.
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<PAGE> 179
(b) Each of Pharmaco International Inc., Pharmaco International Holdings,
Inc., APBI Environmental Sciences Group, Inc. and Clinix International, Inc. are
referred to individually as a "Principal Subsidiary" and collectively as the
"Principal Subsidiaries".
2.2 Capital Structure. The authorized capital stock of APBI consists of
40,000,000 shares of Common Stock, $0.01 par value, of which there were issued
and outstanding as of the close of business on May 1, 1996 29,504,048 shares of
APBI Common Stock. Except as set forth on Schedule 2.2, there are no other
outstanding shares of capital stock or voting securities of APBI and no
outstanding commitments to issue any shares of capital stock or voting
securities of APBI after May 1, 1996 other than pursuant to (i) the exercise of
options or restricted stock grants outstanding as of such date under the APBI
Stock Plans, (ii) the exercise of certain options outstanding as of such date
awarded outside of the APBI Stock Plans or (iii) the exercise of subscription
rights outstanding as of such date under the APBI ESPP. All outstanding shares
of APBI Common Stock are duly authorized, validly issued, fully paid and
nonassessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not subject
to preemptive rights or rights of first refusal created by statute, the
Certificate of Incorporation or Bylaws of APBI or any agreement to which APBI is
a party or by which it is bound. As of the close of business on May 1, 1996 APBI
had reserved (i) 6,500,000 shares of APBI Common Stock for issuance to employees
pursuant to the APBI Stock Program of which 1,398,516 shares have been issued
pursuant to option exercises and 2,840,030 shares are subject to outstanding,
unexercised options, (ii) 800,000 shares of APBI Common Stock for issuance to
employees pursuant to the APBI ESPP, of which 215,103 shares have been issued
and 386,538 shares remain purchasable under outstanding, unexercised
subscription rights and approximately 42,209 shares are subject to outstanding
subscriptions, (iii) 147,428 shares of APBI Common Stock for issuance to former
officers or employees pursuant to stock options granted outside of the APBI
Stock Plans, all of which shares are subject to outstanding, unexercised
options, and (iv) 150,000 shares of APBI Common Stock for issuance to directors
pursuant to the APBI Director Plan for Outside Directors, of which no shares
have been issued pursuant to option exercises and 36,000 shares are subject to
outstanding unexercised options. Except as set forth on Schedule 2.2, since May
1, 1996 APBI has not (i) issued or granted additional options under any of APBI
Stock Plans or (ii) accepted any additional Common Stock subscriptions or
otherwise granted any additional purchase rights under the APBI ESPP. Except for
the rights created pursuant to this Agreement and as disclosed in this Section
2.2, there are no other options, warrants, calls, rights, commitments or
agreements of any character to which APBI is a party or by which it is bound
obligating APBI to issue, deliver, sell, repurchase or redeem or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of capital stock of
APBI or obligating APBI to grant, extend, accelerate the vesting of, change the
price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. There are no contracts, commitments or
agreements relating to voting, registration, purchase or sale of APBI's capital
stock (i) between or among APBI and any of its stockholders or (ii) to APBI's
knowledge, between or among any of APBI's stockholders. Except with respect to
options granted subsequent to January 1, 1996, the terms of the APBI Stock
Program do not permit the assumption or substitution of options to purchase PPD
Common Stock, without the consent or approval of the holders of such options.
True and complete copies of all agreements and instruments relating to or issued
under the APBI Stock Plans and the APBI ESPP are available to PPD upon request
and such agreements and instruments have not been amended, modified or
supplemented, and there are no agreements to amend, modify or supplement such
agreements or instruments.
2.3 Authority. APBI has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of APBI, subject only to the approval of the Merger
by APBI's stockholders as contemplated by Section 6.1(a). This Agreement has
been duly executed and delivered by APBI and constitutes the valid and binding
obligation of APBI enforceable against APBI in accordance with its terms. The
Board of Directors of APBI has unanimously approved this Agreement and the
transactions contemplated hereby. Except as set forth on Schedule 2.3, the
execution and delivery of this Agreement by APBI does not, and the consummation
of the transactions contemplated hereby will not, conflict with, or result in
any violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of
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termination, cancellation or acceleration of any obligation or loss of any
material benefit under (i) any provision of the Certificate of Incorporation or
Bylaws of APBI or any of its Principal Subsidiaries, or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to APBI or any of its Principal
Subsidiaries (subject to receipt of HSR Clearance prior to Closing) or any of
their properties or assets, except where such conflict, violation, default,
termination, cancellation or acceleration with respect to the foregoing
provisions of item (ii) would not have had and would not reasonably be expected
to have a Material Adverse Effect on APBI. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
State, local or foreign court, administrative agency or commission or other
governmental authority or instrumentality ("Governmental Entity") is required by
or with respect to APBI or any of its Principal Subsidiaries in connection with
the execution and delivery of this Agreement, or the consummation of the
transactions contemplated hereby and thereby, except for (i) the filing of the
Articles of Merger as provided in Section 1.2; (ii) the filing with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. (the "NASD") of the Proxy Statement (as defined in
Section 2.19) relating to the APBI Stockholders Meeting (as defined in Section
2.19); (iii) such consents, approvals, orders, authorizations, registrations
declarations and filings as may be required under applicable state securities
laws and the securities laws of any foreign country; (iv) the receipt of the HSR
Clearance; and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on APBI and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement. For purposes of this Agreement, the
"HSR Clearance" shall mean the expiration of any applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, without
any suit to enjoin the transactions contemplated herein having been filed by the
United States Department of Justice or Federal Trade Commission under Title 15
of the United States Code or any notice of an intent to file such suit being
received by any party to this Agreement.
2.4 SEC Documents; Financial Statements. APBI has furnished or will
furnish upon request to PPD a true and complete copy of each statement, report,
registration statement (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities Act of 1933, as amended (the "Securities Act")),
definitive proxy statement and other filings filed with the SEC by APBI since
January 1, 1994, and, prior to the Effective Time, APBI will have furnished PPD
with true and complete copies of any additional documents filed with the SEC by
APBI prior to the Effective Time (collectively, the "APBI SEC Documents"). In
addition, APBI has made available to PPD all exhibits to the APBI SEC Documents
subsequently filed prior to the date hereof, and will promptly make available to
PPD all exhibits to any additional APBI SEC Documents filed prior to the
Effective Time. All documents required to be filed as exhibits to the APBI SEC
Documents have been so filed, and all material contracts so filed as exhibits
are in full force and effect, except those which have expired or have been
terminated in accordance with their terms, and neither APBI nor any of its
subsidiaries is in material default under such contracts except where such
default would not have a Material Adverse Effect on APBI. As of their respective
filing dates, the APBI SEC Documents complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the Securities Act, and none of the APBI SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances in which they were made, not misleading, except to the
extent corrected by a subsequently filed APBI SEC Document. The consolidated
financial statements of APBI for the years ended December 31, 1993, December 31,
1994 and December 31, 1995, including the notes thereto, included in the APBI
SEC Documents (the "APBI Financial Statements") were complete and correct in all
material respects as of their respective dates, 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 as of their respective
dates, and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements included in Quarterly Reports on Form 10-Qs,
as permitted by Form 10-Q of the SEC). The APBI Financial Statements fairly
present the consolidated financial condition and operating results of APBI and
its subsidiaries at the dates and during the periods indicated therein (subject,
in the case of unaudited statements, to normal, recurring year-end
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adjustments). There has been no change in APBI accounting policies except as
described in the notes to the APBI Financial Statements.
2.5 Absence of Certain Changes. Since March 31, 1996 (the "APBI Balance
Sheet Date") through the date hereof, except as disclosed on Schedule 2.5 or as
disclosed in any APBI SEC Document filed since March 31, 1996 and prior to the
date of this Agreement, each of APBI and its Principal Subsidiaries has
conducted its business in the ordinary course consistent with past practice and
there has not occurred: (i) any change, event or condition (whether or not
covered by insurance) that has resulted in, or might reasonably be expected to
result in, a Material Adverse Effect on APBI; (ii) any acquisition, sale or
transfer of any material asset of APBI or any of its subsidiaries other than in
the ordinary course of business and consistent with past practice; (iii) any
change in accounting methods or practices (including any change in revenue
recognition, depreciation or amortization policies or rates) by APBI or any
revaluation by APBI of any of its or any of its Principal Subsidiaries' assets;
(iv) any declaration, setting aside, or payment of a dividend or other
distribution with respect to the shares of APBI, or any direct or indirect
redemption, purchase or other acquisition by APBI of any of its shares of
capital stock; (v) any material contract entered into by APBI or any of its
Principal Subsidiaries, other than in the ordinary course of business, or any
material amendment or termination of, or default under, any material contract to
which APBI or any of its Principal Subsidiaries is a party or by which it is
bound except where such termination or default would not have a Material Adverse
Effect on APBI; (vi) to APBI's knowledge, any action by APBI or any affiliate of
APBI which might, based on the advice of APBI's outside accountants, reasonably
be expected to preclude the ability of PPD to account for the business
combination to be effected by the Merger as a "pooling of interests" under
generally accepted accounting principles (except for actions which to APBI's
knowledge may be cured, rescinded or otherwise remedied so as to account for the
Merger as a "pooling of interests"); (vii) any (A) grant of any severance or
termination pay to any director, officer or employee of APBI or any of its
Principal Subsidiaries, (B) 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 APBI or any of its
Principal Subsidiaries, (C) any increase in benefits payable under any existing
severance or termination pay policies or employment agreements, or (D) any
increase in compensation, bonus or other benefits payable to directors, officers
or employees of APBI or any of its subsidiaries, in each case other than in the
ordinary course of business consistent with past practice; or (ix) any agreement
by APBI or any of its Principal Subsidiaries to do any of the things described
in the preceding clauses (i) through (viii) (other than negotiations with PPD
and its representatives regarding the transactions contemplated by this
Agreement).
2.6 Absence of Undisclosed Liabilities. Except as disclosed elsewhere in
this Agreement, Schedules 2.6, 2.8(b), 2.9, 2.11 or any other Schedules attached
hereto, as of the date hereof, each of APBI and its Principal Subsidiaries has
no material obligations or liabilities of any nature (matured or unmatured,
fixed or contingent) other than (i) those set forth or adequately provided for
in the Balance Sheet included in APBI's Quarterly Report on Form 10-Q for the
period ended March 31, 1996 (the "APBI Balance Sheet"); (ii) those incurred in
the ordinary course of business and not required to be set forth in the APBI
Balance Sheet under generally accepted accounting principles; (iii) those
incurred in the ordinary course of business since the APBI Balance Sheet Date
and consistent with past practice; (iv) those which would not have a Material
Adverse Effect on APBI; and (v) those incurred in connection with the execution
of this Agreement and the transactions contemplated hereby.
2.7 Permits and Licenses. Each of APBI and its Principal Subsidiaries is
now the holder of all material licenses, franchises, ordinances, authorizations,
permits, and certificates, domestic or foreign (collectively, the "APBI
Licenses"), necessary to enable it to continue to conduct its business in all
material respects as presently conducted, except where the failure to have such
APBI Licenses, individually or in the aggregate, would not have a Material
Adverse Effect on APBI. All of APBI Licenses are in full force and effect. APBI
has no reason to believe that any Governmental Entity having jurisdiction will
revoke, cancel, rescind, refuse to renew in the ordinary course, or modify any
of APBI Licenses. There is not now pending, or, to the knowledge of APBI,
threatened any investigation before any such Governmental Entity which, either
individually or in the aggregate, would have a Material Adverse Effect on APBI.
Except as set forth on Schedule 2.7, each of APBI and its Principal Subsidiaries
has conducted its business so as to comply with all
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applicable laws, regulations, ordinances, and codes, domestic and foreign,
including, without limitation, laws, regulations, ordinances, and codes relating
to the protection of the environment, the failure to comply with which could
reasonably be expected to have a Material Adverse Effect on APBI.
2.8 Properties and Contracts. (a) Each of APBI and its Principal
Subsidiaries owns, or is licensed to use, or leases, all material property and
assets, real and personal, tangible and intangible, used in or necessary for the
conduct of its business as currently conducted, except in those cases where the
failure to own, license or lease would not have a Material Adverse Effect on
APBI and except as this subsection (a) may relate to APBI Intellectual Property
which is addressed exclusively by Section 2.10 below.
(b) To the knowledge of APBI, except as set forth on Schedule 2.8(b), all
of the material clinical and/or environmental consulting contracts of APBI and
its Principal Subsidiaries are presently valid and existing and in full force
and effect, and there is no material violation or default or claim of violation
or default by any party thereto and no condition or event has occurred which
with notice or lapse of time or both would constitute a violation or default
thereunder, except for any such failure to be valid and existing and in full
force and effect, or any such violation, default, or claim, which would not have
a Material Adverse Effect on APBI. APBI has performed and continues to perform
substantial work on clinical development studies upon execution of a letter of
intent with a study sponsor and, on very limited occasions and with the consent
of Pharmaco's Chief Executive Officer, APBI performs work on clinical
development studies without a written contract or letter of intent; provided
that, to the knowledge of APBI, the failure to perform services pursuant to
written contracts or letters of intent has not and will not have a Material
Adverse Effect on APBI.
2.9 Litigation. Set forth on Schedule 2.9 attached hereto is a listing as
of the date hereof of all actions, suits, proceedings, claims or investigations
pending or, to the knowledge of APBI, threatened against APBI or any of its
Principal Subsidiaries which involve amounts in dispute in excess of $50,000.
Except as set forth on Schedule 2.9, as of the date hereof there is no private
or governmental action, suit, proceeding, claim, arbitration or investigation
pending before any agency, court or tribunal, foreign or domestic, or, to the
knowledge of APBI, threatened against APBI or any of its Principal Subsidiaries
or any of their respective properties or any of their respective officers or
directors (in their capacities as such) that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on APBI or that
arise out of or in any way relate to this Agreement, the Merger or any of the
transactions contemplated hereby. From the date of this Agreement until the
Effective Time, APBI shall promptly advise PPD of any such action, suit,
proceeding, claim, arbitration or investigation that is commenced, or, to the
knowledge of APBI, threatened against APBI or any of its Principal Subsidiaries.
As of the date hereof, there is no judgment, decree or order against APBI or any
of its subsidiaries, or, to the knowledge of APBI, any of their respective
directors or officers (in their capacities as such), that could prevent, enjoin,
alter or materially delay any of the transactions contemplated by this Agreement
or that could reasonably be expected to have a Material Adverse Effect on APBI.
2.10 Trademarks and Copyrights. APBI and its Principal Subsidiaries own or
possess adequate licenses or other valid rights to use all material trademarks,
trademark rights, trade names, trade name rights, copyrights, service marks,
trade secrets, applications for trademarks and for service marks, know-how and
other proprietary rights and information used or held for use in connection with
the business of APBI and its Principal Subsidiaries as currently conducted and
to the knowledge of APBI there is no assertion or claim challenging the validity
of any of the foregoing which, individually or in the aggregate, would have a
Material Adverse Effect on APBI. The conduct of the business of APBI and its
Principal Subsidiaries as currently conducted does not conflict in any way with
any license, trademark, trademark right, trade name, trade name right, service
mark or copyright of any third party that, individually or in the aggregate,
would have a Material Adverse Effect on APBI.
2.11 Environmental Matters. Except as set forth on Schedule 2.11, to the
knowledge of APBI, each of APBI and its subsidiaries is and at all times has
been in compliance with all foreign, federal, state and local laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or waste, except to the extent
noncompliance with such laws would not have a Material Adverse Effect on APBI.
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2.12 Taxes. APBI and each of its Principal Subsidiaries, and any
consolidated, combined or unitary group for Tax purposes of which APBI or any of
its Principal Subsidiaries is or has been a member have timely filed all Tax
Returns required to be filed by them and have paid all Taxes shown thereon to be
due except for such Tax Returns the failure of which to file timely would not
have a Material Adverse effect on APBI. The APBI Financial Statements (i) fully
accrue all actual and contingent liabilities for Taxes with respect to all
periods through December 31, 1995 and, to the knowledge of APBI, APBI and each
of its Principal Subsidiaries have not and will not incur any Tax liability in
excess of the amount reflected on the APBI Financial Statements with respect to
such periods, and (ii) properly accrue in accordance with generally accepted
accounting principles all liabilities for Taxes payable after December 31, 1995
with respect to all transactions and events occurring on or prior to such date
except where the failure to so accrue would not have a Material Adverse Effect
on APBI. No material Tax liability since December 31, 1995 has been incurred by
APBI or its Principal Subsidiaries other than in the ordinary course of business
and adequate provision has been made in the APBI Financial Statements for all
Taxes since that date in accordance with generally accepted accounting
principles on at least a quarterly basis. APBI and each of its Principal
Subsidiaries have withheld and paid or will timely pay to the applicable Tax
Authority all amounts required to be withheld. No notice of deficiency or
similar document of any Tax Authority has been received by either APBI or any of
its Principal Subsidiaries, and there are no liabilities for Taxes with respect
to the issues that have been raised (and are currently pending) by any Tax
Authority that could, if determined adversely, have a Material Adverse Effect on
APBI. Except as set forth on Schedule 2.12, there is (i) no material claim for
Taxes that is a lien against the property of APBI or any of its subsidiaries
other than liens for Taxes not yet due and payable, (ii) no notification
received by APBI of any audit of any Tax Return of APBI or any of its
subsidiaries being conducted, pending or threatened by a Tax Authority, (iii) no
extension or waiver of the statute of limitations on the assessment of any Taxes
granted by APBI or any of its subsidiaries and currently in effect, and (iv) no
agreement, contract or arrangement to which APBI or any of its subsidiaries is a
party that may result in the payment of any material amount that would not be
deductible by reason of Sections 280G or 404 of the Code. Except as set forth on
Schedule 2.12, APBI will not be required to include any material adjustment in
Taxable income for any Tax period (or portion thereof) pursuant to Sections 481
or 263A of the Code or any comparable provision under state or foreign Tax laws
as a result of transactions, events or accounting methods employed prior to the
Merger. Except as set forth on Schedule 2.12, neither APBI nor any of its
subsidiaries is a party to any tax sharing or tax allocation agreement nor does
APBI or any of its subsidiaries owe any amount under any such agreement. For
purposes of this Agreement, the following terms have the following meanings:
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax Authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in item (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in
items (i) or (ii) as a result of any express or implied obligation to indemnify
any other person. As used herein, "Tax Return" shall mean any return, statement,
report or form including, without limitation, estimated Tax returns and reports,
withholding Tax returns and reports and information reports and returns required
to be filed with respect to Taxes. APBI and each of its subsidiaries are in full
compliance with all terms and conditions of any Tax exemptions or other
Tax-sharing agreement or order of a foreign government applicable to them and
the consummation of the Merger shall not have any adverse effect on the
continued validity and effectiveness of any such Tax exemptions or other
Tax-sharing agreement or order.
2.13 Employee Benefit Plans.
(a) Schedule 2.13 lists, with respect to APBI, any subsidiary of APBI
and any trade or business (whether or not incorporated) which is treated as
a single employer with APBI (an "ERISA Affiliate") within the meaning of
Section 414(b), (c), (m) or (o) of the Code, (i) all material employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended
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("ERISA"), (ii) each loan to a non-officer employee in excess of $10,000,
loans to officers and directors and any stock option, stock purchase,
phantom stock, stock appreciation right, supplemental retirement,
severance, sabbatical, medical, dental, vision care, disability, employee
relocation, cafeteria benefit (Code Section 125) or dependent care (Code
Section 129), life insurance or accident insurance plans, programs or
arrangements, (iii) all bonus, pension, profit sharing, savings, deferred
compensation or incentive plans, schemes programs or arrangements, (iv)
other fringe or employee benefit plans, programs or arrangements that apply
to senior management of APBI or any of its subsidiaries and that do not
generally apply to all employees, and (v) any current or former employment
or executive compensation or severance agreements, written or otherwise, as
to which unsatisfied obligations of APBI or any of its subsidiaries of
greater than $50,000 remain for the benefit of, or relating to, any present
or former employee, consultant or director of APBI (together, the "APBI
Employee Plans"). Schedule 2.13 lists all of such APBI Employee Plans,
domestic and foreign.
(b) Except as set forth in Schedule 2.13 and except as would not,
individually or in the aggregate, have a Material Adverse Effect on APBI:
(i) each APBI Employee Plan intended to be qualified under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service (the "IRS") that it is so qualified and nothing has
occurred since the date of the letter that could reasonably be expected to
affect the qualified status of such APBI Employee Plan; and (ii) each APBI
Employee Plan has been operated in all material respects in accordance with
its terms and the requirements of applicable (foreign and domestic) law. No
APBI Employee Plan currently is covered by Title IV of ERISA and neither
APBI nor any APBI subsidiary is a party to or has made any contribution to
or otherwise incurred any obligation under any "multi employer" plan as
defined in Section 3(37) of ERISA.
(c) With respect to each APBI Employee Plan, APBI and each of its
United States subsidiaries have complied with (i) the applicable health
care continuation and notice provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") and the proposed regulations
thereunder and (ii) the applicable requirements of the Family Leave Act of
1993 and the regulations thereunder, except to the extent that such failure
to comply would not, in the aggregate, have a Material Adverse Effect on
APBI. With respect to any of the APBI Employee Plans formed under and/or
governed by the substantive laws of any foreign jurisdiction, each of such
plans has been at all times, is and will be at the Effective Time in
compliance in all material respects with (i) all applicable foreign laws,
rules, regulations, orders and mandates of any Governmental Entity having
power to regulate such plans, and (ii) all of the terms, restrictions and
conditions of the plan documents except to the extent that such failure to
comply would not have a Material Adverse Effect on APBI.
(d) There has been no amendment to, written interpretation or
announcement (whether or not written) by APBI, any APBI subsidiary or other
ERISA Affiliate relating to, or change in participation or coverage under,
any APBI Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to
that Plan for the most recent fiscal year included in APBI's Financial
Statements.
2.14 Representations Complete. To the knowledge of APBI as of the date
hereof, none of the representations or warranties made by APBI herein or in any
Schedule or Exhibit hereto, or certificate furnished by APBI pursuant to this
Agreement, or the APBI SEC Documents or any written statement furnished to PPD
by APBI pursuant hereto or in connection with the transactions contemplated
hereby, when all such documents are read together in their entirety, contains
any untrue statement of a material fact, or omits to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading except to the extent
that such untrue statement or omission would not have a Material Adverse Effect
on APBI; provided, however, that it is understood that the financial projections
delivered by APBI represent only APBI's best estimate under the circumstances of
what it reasonably believes (although APBI has no knowledge and is not aware of
any fact or information that would lead it to believe that such projections are
misleading in any material respect) and are based upon assumptions that APBI
believes were reasonable as of the time such projections were made. APBI does
not
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make any other representation or warranty regarding such projections or APBI's
possible or anticipated operating performance other than as set forth in this
Section 2.14.
2.15 Certain Agreements Affected by the Merger. Except as set forth in
Schedule 2.15, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute, bonus or otherwise) becoming due to any director or employee
of APBI or any of its subsidiaries, (ii) materially increase any benefits
otherwise payable by APBI or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
2.16 Brokers' and Finders' Fees. Except for the fees of Lehman Brothers
(the "APBI Financial Advisor") described in the engagement letter previously
delivered to PPD, APBI has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents' commissions
or investment bankers' fees or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
2.17 Opinion of APBI Financial Advisor. APBI has received the opinion of
the APBI Financial Advisor to the effect that, as of the date hereof, the
consideration to be received by APBI's stockholders in the Merger is fair, from
a financial point of view, to stockholders of APBI.
2.18 Action Under the Certificate of Incorporation. The Board of Directors
of APBI has unanimously approved the Merger and the execution of this Agreement,
and accordingly has taken all action necessary to exempt the Merger from being
subject to the higher stockholder approval requirement provided for in ARTICLE
SEVENTH of the APBI Certificate of Incorporation.
2.19 Registration Statement; Proxy Statement/Prospectus. The written
information supplied by APBI expressly for the purpose of inclusion in the
registration statement on Form S-4 (or such other or successor form as shall be
appropriate) pursuant to which the shares of PPD Common Stock to be issued in
the Merger will be registered with the SEC (the "Registration Statement") shall
not at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC 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 therein, in light of
the circumstances under which they were made, not misleading. The written
information supplied by APBI expressly for the purpose of inclusion in the
combined proxy statement/prospectus to be sent to the stockholders of APBI in
connection with the meetings of APBI's stockholders (the "APBI Stockholders
Meeting") and PPD's stockholders (the "PPD Stockholders Meeting") to be held in
connection with the Merger (such proxy statement/prospectus as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to APBI's stockholders, at the time of
the APBI Stockholders Meeting and at the Effective Time, contain any statement
which, at such time, is false or misleading with respect to any 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 are made, not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the APBI Stockholders Meeting which has become false or misleading.
If at any time prior to the Effective Time any event or information should be
discovered by APBI which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, APBI shall promptly inform PPD
and MERGER SUB. Notwithstanding the foregoing, APBI makes no representation,
warranty or covenant with respect to any information supplied by PPD or MERGER
SUB which is contained in any of the foregoing documents.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PPD AND MERGER SUB
PPD and MERGER SUB, jointly and severally, represent and warrant to APBI as
follows:
In this Agreement, any reference to PPD's "knowledge" means the actual
knowledge of PPD's chief executive officer, president and chief operating
officer, and chief financial officer.
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3.1 Organization, Standing and Power. Each of PPD and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of PPD and its subsidiaries has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on PPD.
PPD has delivered to APBI a true and correct copy of the Articles of
Incorporation and Bylaws or other charter documents, as applicable, of PPD and
each of its subsidiaries, each as amended to date. Neither PPD nor any of its
subsidiaries is in violation of any of the provisions of its Articles of
Incorporation or Bylaws or equivalent organizational documents. Attached hereto
as Schedule 3.1 is a list of PPD's subsidiaries in which PPD, directly or
indirectly, owns or controls twenty percent (20%) or more of the outstanding
voting interests, showing for each of such subsidiaries the percentage interest
owned by PPD or any of its subsidiaries, the jurisdiction under which law such
subsidiaries were formed and the date of formation. PPD is the owner, directly
or indirectly, of all outstanding shares of capital stock of each of its
subsidiaries and all such shares are duly authorized, validly issued, fully paid
and nonassessable. All of the outstanding shares of capital stock of MERGER SUB
are owned by PPD free and clear of all liens, charges, claims or encumbrances or
rights of others. Except as disclosed in Schedule 3.1 and the PPD SEC Documents
(as defined in Section 3.4), PPD does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
3.2 Capital Structure. The authorized capital stock of PPD consists of
30,000,000 shares of Common Stock, $0.10 par value, and 5,000,000 shares of
Preferred Stock, $0.10 par value, of which there were issued and outstanding as
of the close of business on May 1, 1996, 9,242,295 shares of PPD Common Stock
and no shares of Preferred Stock. Except as disclosed on Schedule 3.5, there are
no other outstanding shares of capital stock or voting securities of PPD and no
outstanding commitments to issue any shares of capital stock or voting
securities of PPD after May 1, 1996 other than shares of PPD Common Stock issued
after May 1, 1996 upon the exercise of options outstanding as of such date under
the PPD Equity Compensation Plan and the PPD Stock Option Plan for Non-Employee
Directors (the "PPD Stock Plans"). The authorized capital stock of MERGER SUB
consists of 100,000 shares of Common Stock, $0.10 par value, of which 1,000
shares are issued and outstanding and are held by PPD. All outstanding shares of
PPD and MERGER SUB have been duly authorized, validly issued, fully paid and are
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof. As of the close of
business on May 1, 1996, PPD had reserved 800,000 shares of PPD Common Stock for
issuance to employees, directors and independent contractors pursuant to the PPD
Stock Plans, of which 500 shares have been issued pursuant to option exercises,
and approximately 321,450 shares are subject to outstanding, unexercised
options. Other than this Agreement and except as disclosed on Schedule 3.5
attached hereto, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which PPD or MERGER SUB is a party
or by which either of them is bound obligating PPD or MERGER SUB to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of PPD or MERGER SUB or
obligating PPD or MERGER SUB to grant, extend, accelerate the vesting of, change
the price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. The shares of PPD Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid, and
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof. Except for the
Underwriting Agreement and the Registration Rights Agreement entered into
between PPD and the underwriters in connection with its initial public offering
and the Award Agreements with employees and directors of PPD pursuant to the PPD
Stock Plans, there are no contracts, commitments or agreements relating to
voting, registration, purchase or sale of PPD's capital stock (i) between or
among PPD and any of its stockholders or (ii) to the best of PPD's knowledge,
between or among any of PPD's stockholders. True and complete copies of all
agreements and instruments relating to or issued under the PPD Stock Plans are
available to APBI upon request and such agreements and instruments have not been
amended, modified or supplemented, and there are no agreements to amend, modify
or supplement such agreements or instruments.
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3.3 Authority. Each of PPD and MERGER SUB has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of each of PPD and
MERGER SUB, subject only to the approval of the issuance of shares of PPD Common
Stock in the Merger by the stockholders of PPD. This Agreement has been duly
executed and delivered by each of PPD and MERGER SUB and constitutes the valid
and binding obligations of each of PPD and MERGER SUB, enforceable against each
in accordance with its terms. Each of the commitments contemplated by Section
5.19 hereof has been duly executed and delivered by each of the Principal
Shareholders and constitutes the valid and binding obligation of each Principal
Shareholder, enforceable against each in accordance with its terms. The Board of
Directors of PPD has unanimously approved this Agreement and the transactions
contemplated hereby. Except as set forth on Schedule 3.3, the execution and
delivery of this Agreement by PPD and MERGER SUB does not, and the consummation
of the transactions contemplated hereby will not, conflict with, or result in
any violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a material benefit under (i) any provision of the
Articles of Incorporation or Bylaws of PPD or any of its subsidiaries, or (ii)
any material mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to PPD or any of its
subsidiaries (subject to receipt of the HSR Clearance prior to Closing) or their
properties or assets, except where such conflict, violation, default,
termination, cancellation or acceleration with respect to the foregoing
provisions of item (ii) would not have had and would not reasonably be expected
to have a Material Adverse Effect on PPD. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by or with respect to PPD or any of its subsidiaries in
connection with the execution and delivery of this Agreement by PPD and MERGER
SUB or the consummation by each of PPD and MERGER SUB of the transactions
contemplated hereby, except for (i) the filing of the Articles of Merger as
provided in Section 1.2, (ii) the filing with the SEC and NASD of the
Registration Statement, (iii) the filing of a Form 8-K with the SEC and NASD
within 15 days after the Closing Date, (iv) any filings as may be required under
applicable state securities laws and the securities laws of any foreign country,
(v) the filing with the Nasdaq National Market of a Notification Form for
Listing of Additional Shares and the filing of a Form 10-C with the SEC, in each
case with respect to the shares of PPD Common Stock issuable upon conversion of
the APBI Common Stock in the Merger and upon exercise of the options,
subscriptions or other awards, as the case may be, under the APBI Stock Plans
and the APBI ESPP to be assumed by PPD, (vi) the receipt of the HSR Clearance,
and (vii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on PPD and would not prevent or materially alter or delay any of the
transactions contemplated by this Agreement.
3.4 SEC Documents; Financial Statements. PPD has furnished or will furnish
upon request to APBI a true and complete copy of each statement, report,
registration statement (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities Act), definitive proxy statement, and other filings
filed with the SEC by PPD and, prior to the Effective Time, PPD will have
furnished APBI with true and complete copies of any additional documents filed
with the SEC by PPD prior to the Effective Time (collectively, the "PPD SEC
Documents"). In addition, PPD has made available to APBI all exhibits to the PPD
SEC Documents filed prior to the date hereof, and will promptly make available
to APBI all exhibits to any additional PPD SEC Documents filed prior to the
Effective Time. All documents required to be filed as exhibits to the PPD SEC
Documents have been so filed, and all material contracts so filed as exhibits
are in full force and effect, except those which have expired or have been
terminated in accordance with their terms, and neither PPD nor any of its
subsidiaries is in material default under such contracts except where such
default would not have a Material Adverse Effect on PPD. As of their respective
filing dates, the PPD SEC Documents complied in all material respects with the
requirements of the Exchange Act and the Securities Act, and none of the PPD SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed PPD SEC
Document. The consolidated financial statements of PPD for the years ended
December 31, 1993, December 31, 1994,
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and December 31, 1995, including the notes thereto and the financial statements,
included in the PPD SEC Documents (the "PPD Financial Statements") were complete
and correct in all material respects as of their respective dates, 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 as of
their respective dates, and have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent throughout the
periods indicated and consistent with each other (except as may be indicated in
the notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs, as permitted by Form 10-Q of the SEC). The PPD Financial
Statements fairly present the consolidated financial condition and operating
results of PPD and its subsidiaries at the dates and during the periods
indicated therein (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments). There has been no change in PPD accounting
policies except as described in the notes to the PPD Financial Statements.
3.5 Absence of Certain Changes. Since March 31, 1996 (the "PPD Balance
Sheet Date") through the date hereof, except as disclosed on Schedule 3.5 or as
disclosed in any PPD SEC Document filed since March 31, 1996 and prior to the
date of this Agreement, each of PPD and its subsidiaries has conducted its
business in the ordinary course consistent with past practice and there has not
occurred: (i) any change, event or condition (whether or not covered by
insurance) that has resulted in a Material Adverse Effect on PPD; (ii) any
acquisition, sale or transfer of any material asset of PPD or any of its
subsidiaries other than in the ordinary course of business and consistent with
past practice; (iii) any change in accounting methods or practices (including
any change in revenue recognition, depreciation or amortization policies or
rates) by PPD or any of its subsidiaries or any revaluation by PPD or any of its
subsidiaries of any of its assets; (iv) any declaration, setting aside, or
payment of a dividend or other distribution with respect to the shares of PPD,
or any direct or indirect redemption, purchase or other acquisition by PPD of
any of its shares of capital stock; (v) any material contract entered into by
PPD or any of its subsidiaries, other than in the ordinary course of business
and as provided to APBI, or any material amendment or termination of, or default
under, any material contract to which PPD or any of its subsidiaries is a party
or by which it is bound except where such termination or default would not have
a Material Adverse Effect on PPD; (vi) to PPD's knowledge, any action by PPD or
any affiliate of PPD which might, based on the advice of PPD's outside
accountants, reasonably be expected to preclude the ability of PPD to account
for the business combination to be effected by the Merger as a "pooling of
interests" under generally accepted accounting principles (except for actions
which to PPD's knowledge may be cured, rescinded or otherwise remedied so as to
account for the Merger as a "pooling of interests"); (vii) any (A) grant of any
severance or termination pay to any director, officer or employee of PPD or any
of its subsidiaries, (B) 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 PPD or any such subsidiary, (C) any
increase in benefits payable under any existing severance or termination pay
policies or employment agreements, or (D) any increase in compensation, bonus or
other benefits payable to directors, officers or employees of PPD or any such
subsidiary, in each case other than in the ordinary course of business
consistent with past practice; or (ix) any negotiation or agreement by PPD or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (viii) (other than negotiations with APBI and its
representatives regarding the transactions contemplated by this Agreement).
3.6 Absence of Undisclosed Liabilities. Except as disclosed elsewhere in
this Agreement or the Schedules attached hereto, as of the date hereof PPD has
no material obligations or liabilities of any nature (matured or unmatured,
fixed or contingent) other than (i) those set forth or adequately provided for
in the Balance Sheet included in PPD's Quarterly Report on Form 10-Q for the
period ended March 31, 1996 (the "PPD Balance Sheet"); (ii) those incurred in
the ordinary course of business and not required to be set forth in the PPD
Balance Sheet under generally accepted accounting principles; (iii) those
incurred in the ordinary course of business since the PPD Balance Sheet Date and
consistent with past practice; (iv) those which would not have a Material Effect
on PPD; and (v) those incurred in connection with the execution of this
Agreement and the transactions contemplated hereby.
3.7 Permits and Licenses. Each of PPD and its subsidiaries is now the
holder of all material licenses, franchises, ordinances, authorizations,
permits, and certificates, domestic or foreign (collectively, the "PPD
Licenses"), necessary to enable it to continue to conduct its business in all
material respects as presently
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conducted, except where the failure to have such PPD Licenses, individually or
in the aggregate, would not have a Material Adverse Effect on PPD. All of PPD
Licenses are in full force and effect. PPD has no reason to believe that any
Governmental Entity having jurisdiction will revoke, cancel, rescind, refuse to
renew in the ordinary course, or modify any of PPD Licenses. There is not now
pending, or, to the knowledge of PPD, threatened any investigation before any
Governmental Entity which, either individually or in the aggregate, would have a
Material Adverse Effect on PPD. Except as set forth on Schedule 3.7, each of PPD
and its subsidiaries has conducted its business so as to comply with all
applicable laws, regulations, ordinances, and codes, domestic and foreign,
including, without limitation, laws, regulations, ordinances, and codes relating
to the protection of the environment, the failure to comply with which could
reasonably be expected to have a Material Adverse Effect on PPD.
3.8 Properties and Contracts. (a) PPD owns, or is licensed to use, or
leases, all material property and assets, real and personal, tangible and
intangible, used in or necessary for the conduct of its business as currently
conducted, except in those cases where the failure so to own, license or lease
would not have a Material Adverse Effect on PPD and except as this subsection
(a) may relate to PPD Intellectual Property which is addressed exclusively by
Section 3.10 below.
(b) To the knowledge of PPD, except as set forth on Schedule 3.8(b), all of
the material clinical contracts of PPD are presently valid and existing and in
full force and effect, and there is no material violation or default or claim of
violation or default by any party thereto and no condition or event has occurred
which with notice or lapse of time or both would constitute a violation or
default thereunder, except for any such failure to be valid and existing and in
full force and effect, or any such violation, default, or claim, which would not
have a Material Adverse Effect on PPD. PPD has performed and continues to
perform substantial work on clinical development studies upon execution of a
letter of intent with a study sponsor and, on very limited occasions and with
the consent of PPD's Chief Executive Officer, PPD performs work on clinical
development studies without a written contract or a letter of intent, provided
that, to the knowledge of PPD, the failure to perform services pursuant to
written contracts or letters of intent has not and will not have a Material
Adverse Effect on PPD.
3.9 Litigation. Included in Schedule 3.9 is a listing of all actions,
suits, proceedings, claims or investigations pending or, to the knowledge of
PPD, threatened against PPD or any of its subsidiaries which involve amounts in
dispute in excess of $50,000. Except as set forth on Schedule 3.9, as of the
date hereof there is no private or governmental action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal,
foreign or domestic, or, to the knowledge of PPD, threatened against PPD or any
of its subsidiaries or any of their respective properties or any of their
respective officers or directors (in their capacities as such) that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on PPD or that arise out of or in any way relate to this
Agreement, the Merger or any of the transactions contemplated hereby. From the
date of this Agreement until the Effective Time, PPD shall promptly advise APBI
of any such action, suit, proceeding, claim, arbitration or investigation that
is commenced, or, to the knowledge of PPD, threatened against PPD or any of its
subsidiaries. There is no judgment, decree or order against PPD or any of its
subsidiaries or, to the knowledge of PPD, any of their respective directors or
officers (in their capacities as such) that could prevent, enjoin, alter or
materially delay any of the transactions contemplated by this Agreement or that
could reasonably be expected to have a Material Adverse Effect on PPD.
3.10 Trademarks and Copyrights. PPD and its subsidiaries own or possess
adequate licenses or other valid rights to use all material trademarks,
trademark rights, trade names, trade name rights, copyrights, service marks,
trade secrets, applications for trademarks and for service marks, know-how and
other proprietary rights and information used or held for use in connection with
the business of PPD and its subsidiaries as currently conducted and to the
knowledge of PPD there is no assertion or claim challenging the validity of any
of the foregoing which, individually or in the aggregate, would have a Material
Adverse Effect on PPD. The conduct of the business of PPD and its subsidiaries
as currently conducted does not conflict in any way with any license, trademark,
trademark right, trade name, trade name right, service mark or copyright of any
third party that, individually or in the aggregate, would have a Material
Adverse Effect on PPD.
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3.11 Environmental Matters. Except as set forth on Schedule 3.11, to the
knowledge of PPD, each of PPD and its subsidiaries is and at all times has been
in compliance with all foreign, federal, state and local laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or waste, except to the extent
noncompliance with such laws has not had and could not reasonably be expected to
have a Material Adverse Effect on PPD.
3.12 Taxes. PPD and each of its subsidiaries, and any consolidated,
combined or unitary group for Tax purposes of which PPD or any of its
subsidiaries is or has been a member have timely filed all Tax Returns required
to be filed by them and have paid all Taxes shown thereon to be due except for
such Tax Returns the failure of which to file timely would not have a Material
Adverse Effect on PPD. The PPD Financial Statements (i) fully accrue all actual
and contingent liabilities for Taxes with respect to all periods through
December 31, 1995 and, to the knowledge of PPD, PPD and each of its subsidiaries
have not and will not incur any Tax liability in excess of the amount reflected
on the PPD Financial Statements with respect to such periods, and (ii) properly
accrue in accordance with generally accepted accounting principles all
liabilities for Taxes payable after December 31, 1995 with respect to all
transactions and events occurring on or prior to such date except where the
failure to so accrue would not have a Material Adverse Effect on PPD. No
material Tax liability since December 31, 1995 has been incurred by PPD or its
subsidiaries other than in the ordinary course of business and adequate
provision has been made in the PPD Financial Statements for all Taxes since that
date in accordance with generally accepted accounting principles on at least a
quarterly basis. PPD and each of its subsidiaries have withheld and paid or will
timely pay to the applicable Tax Authority all amounts required to be withheld.
No notice of deficiency or similar document of any Tax Authority has been
received by either PPD or any of its subsidiaries, and there are no liabilities
for Taxes with respect to the issues that have been raised (and are currently
pending) by any Tax Authority that could, if determined adversely to PPD, have a
Material Adverse Effect on PPD. Except as set forth on Schedule 3.12, there is
(i) no material claim for Taxes that is a lien against the property of PPD or
any of its subsidiaries other than liens for Taxes not yet due and payable, (ii)
no notification received by PPD of any audit of any Tax Return of PPD or any of
its subsidiaries being conducted pending or threatened by a Tax Authority, (iii)
no extension or waiver of the statute of limitations on the assessment of any
Taxes granted by PPD or any of its subsidiaries and currently in effect, and
(iv) no agreement, contract or arrangement to which PPD or any of its
subsidiaries is a party that may result in the payment of any material amount
that would not be deductible by reason of Sections 280G or 404 of the Code. PPD
will not be required to include any material adjustment in Taxable income for
any Tax period (or portion thereof) pursuant to Sections 481 or 263A of the Code
or any comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Merger. Except
as set forth on Schedule 3.12, neither PPD nor any of its subsidiaries is a
party to any tax sharing or tax allocation agreement nor does PPD or any of its
subsidiaries owe any amount under any such agreement. PPD and each of its
subsidiaries are in fiat compliance with all terms and conditions of any Tax
exemptions or other Tax-sparing agreement or order of a foreign government
applicable to them and the consummation of the Merger shall not have any adverse
effect on the continued validity and effectiveness of any such Tax exemptions or
other Tax-sparing agreement or order.
3.13 Employee Benefit Plans.
(a) Schedule 3.13 lists, with respect to PPD, any subsidiary of PPD
and any ERISA Affiliate, (i) all material employee benefit plans (as
defined in Section 3(3) of ERISA), (ii) each loan to a non-officer employee
in excess of $10,000, loans to officers and directors and any stock option,
stock purchase, phantom stock, stock appreciation right, supplemental
retirement, severance, sabbatical, medical, dental, vision care,
disability, employee relocation, cafeteria benefit (Code section 125) or
dependent care (Code Section 129), life insurance or accident insurance
plans, programs or arrangements, (iii) all bonus, pension, profit sharing,
savings, deferred compensation or incentive plans, schemes, programs or
arrangements, (iv) other fringe or employee benefit plans, programs or
arrangements that apply to senior management of PPD or any of its
subsidiaries and that do not generally apply to all employees, and (v) any
current or former employment or executive compensation or severance
agreements, written or otherwise, as to which unsatisfied obligations of
PPD or any of its subsidiaries of greater than $50,000 remain for the
benefit of, or relating to, any present or former employee, consultant or
director of PPD
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(together, the "PPD Employee Plans"). Schedule 3.13 lists all of such PPD
Employee Plans, domestic and foreign.
(b) Except as set forth in Schedule 3.13 and except as would not,
individually or in the aggregate, have a Material Adverse Effect on PPD:
(i) each PPD Employee Plan intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the Internal
Revenue Service (the "IRS") that it is so qualified and nothing has
occurred since the date of the letter that could reasonably be expected to
affect the qualified status of such PPD Employee Plan; and (ii) each PPD
Employee Plan has been operated in all material respects in accordance with
its terms and the requirements of applicable (foreign and domestic) law. No
PPD Employee Plan currently is covered by Title IV of ERISA and neither PPD
nor any PPD subsidiary is a party to or has made any contribution to or
otherwise incurred any obligation under any "multi employer" plan as
defined in Section 3(37) of ERISA.
(c) With respect to each PPD Employee Plan, PPD and its United States
subsidiaries have complied with (i) the applicable health care continuation
and notice provisions of the Consolidated Omnibus Budget Reconciliation Act
of 1985 ("COBRA") and the proposed regulations thereunder and (ii) the
applicable requirements of the Family Leave Act of 1993 and the regulations
thereunder, except to the extent that such failure to comply would not, in
the aggregate, have a Material Adverse Effect on PPD. With respect to any
of the PPD Employee Plans formed under and/or governed by the substantive
laws of any foreign jurisdiction, each of such plans has been at all times,
is and will be at the Effective Time in compliance in all material respects
with (i) all applicable foreign laws, rules, regulations, orders and
mandates of any Governmental Entity having power to regulate such plans,
and (ii) all of the terms, restrictions and conditions of the plan
documents except to the extent that such failure to comply would not have a
Material Adverse Effect on PPD.
(d) There has been no amendment to, written interpretation or
announcement (whether or not written) by PPD, any PPD subsidiary or other
ERISA Affiliate relating to, or change in participation or coverage under,
any PPD Employee Plan which would materially increase the expense of
maintaining such Plan above the level of expense incurred with respect to
that Plan for the most recent fiscal year included in PPD's Financial
Statements.
3.14 Representations Complete. To the knowledge of PPD as of the date
hereof, none of the representations or warranties made by PPD herein or in any
Schedule or Exhibit hereto, or certificate furnished by PPD pursuant to this
Agreement, or the PPD SEC Documents or any written statement furnished to PPD by
APBI pursuant hereto or in connection with the transactions contemplated hereby,
when all such documents are read together in their entirety, contains any untrue
statement of a material fact, or omits to state any material act necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading except to the extent that such
untrue statement or omission wold not have a Material Adverse Effect on PPD;
provided, however, that it is understood that the financial projections
delivered by PPD represent only PPD's best estimate under the circumstances of
what it reasonably believes (although PPD has no knowledge and it is not aware
of any fact or information that would lead it to believe that such projections
are misleading in any material respect) and are based upon assumptions that PPD
believes were reasonable as of the time such projections were made. PPD does not
make any other representation or warranty regarding such projections or PPD's
possible or anticipated operating performance other than as set forth in this
Section 3.14.
3.15 Certain Agreements Affected by the Merger. Except as set forth on
Schedule 3.15, neither the execution and delivery of this Agreement nor the
consummation of the transaction contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute, bonus or otherwise) becoming due to any director or employee
of PPD or any of its subsidiaries, (ii) materially increase any benefits
otherwise payable by PPD, or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
3.16 Brokers' and Finders' Fees. Except for the fees of Furman Selz, (the
"PPD Financial Advisor") described in the engagement letter previously delivered
to APBI, PPD has not incurred, nor will it incur,
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directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
3.17 Opinion of PPD Financial Advisor. PPD has received the opinion of the
PPD Financial Advisor to the effect that, as of the date hereof, the
consideration to be paid to the security holders of APBI pursuant to this
Agreement is fair, from a financial point of view, to PPD.
3.18 Action by Board of Directors. The Board of Directors of PPD has
unanimously approved the merger and the execution of this Agreement.
3.19 Related Party Contracts. Except as set forth in the PPD SEC Documents
or described elsewhere in this Agreement, PPD has no contracts, commitments,
arrangements or understandings with any of the following (collectively, "Related
Persons"): (i) the Principal Shareholders (hereinafter defined); (ii) the
spouses, children and other lineal descendants of any of the Principal
Shareholders; or (iii) any corporation, partnership, joint venture or other
entity owned or controlled by any of the Principal Shareholders.
3.20 Registration Statement; Proxy Statement/Prospectus. The written
information supplied by PPD and MERGER SUB expressly for the purpose of
inclusion in the Registration Statement shall not, at the time the Registration
Statement (including any amendments or supplements thereto) is declared
effective by the SEC, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
written information supplied by PPD expressly for the purpose of inclusion in
the Proxy Statement shall not, on the date the Proxy Statement is first mailed
to PPD's stockholders, at the time of the PPD Stockholders Meeting and at the
Effective Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which it is made, not false or misleading; or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the PPD Stockholders Meeting which
has become false or misleading. If at any time prior to the Effective Time any
event or information should be discovered by PPD or MERGER SUB which should be
set forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement, PPD or MERGER SUB will promptly inform APBI. Notwithstanding
the foregoing, PPD and MERGER SUB make no representation, warranty or covenant
with respect to any information supplied by APBI which is contained in any of
the foregoing documents.
ARTICLE 4
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of APBI and PPD. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of APBI and PPD agrees (except to the
extent expressly contemplated by or disclosed elsewhere in this Agreement or in
any Schedule hereto or as consented to in writing by the other) to carry on its
and its subsidiaries' business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted; to pay and to cause its
subsidiaries to pay debts and taxes when due subject to good faith disputes over
such debts or taxes; to use all reasonable efforts consistent with past practice
and policies to preserve intact its and its subsidiaries' present business
organizations; to use its reasonable efforts consistent with past practice to
keep available the services of its and its subsidiaries' present officers and
key employees; and to use its reasonable efforts consistent with past practice
to preserve its and its subsidiaries' relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it
or its subsidiaries, to the end that its and its subsidiaries' goodwill and
ongoing businesses shall be unimpaired at the Effective Time. Each of APBI and
PPD agrees to promptly notify the other of any event or occurrence not in the
ordinary course of its or its subsidiaries' business, and of any event which
could have a Material Adverse Effect on APBI or PPD, as the case may be. Without
limiting the foregoing, and except as expressly contemplated by or disclosed
elsewhere in this Agreement, Schedule 4.1 or any other Schedule attached hereto
or as otherwise set forth below, from the date of this Agreement and continuing
until the earlier of the termination of this Agreement
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or the Effective Time neither APBI nor PPD shall do, cause or permit any of the
following, or allow, cause or permit any of its subsidiaries to do, cause or
permit any of the following, without the prior written consent of the other
(which consent shall not be unreasonably withheld):
(a) Charter Documents. Cause or permit any amendments to its Articles
of Incorporation or Bylaws or other similar organizational document;
(b) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions (including subscription rights under the APBI ESPP),
rights, warrants or options to acquire, or other agreements or commitments
of any character obligating it to issue any such shares or other
convertible securities, other than the issuance of shares of its Common
Stock pursuant to the exercise of stock options, warrants or other rights
therefor outstanding as of the date of this Agreement; provided, however,
that PPD may, in the ordinary course of business consistent with past
practice, grant options for the purchase of PPD Common Stock under the PPD
Stock Plans not to exceed 250,000 shares and APBI may, in the ordinary
course of business consistent with past practice, grant options for the
purchase of APBI Common Stock under the APBI Stock Plans with the consent
of PPD, which consent will not be unreasonably withheld and grant options
for the purchase of APBI Common Stock in connection with the Environ
Special Deferred Compensation Plan not to exceed 250,000 shares;
(c) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock; provided, however, that the foregoing
restriction shall apply only to APBI and PPD but not their subsidiaries;
(d) Stock Option Plans, Etc. Accelerate, amend or change the period
of exercisability or vesting of options or other rights granted under its
stock option agreements or stock plans or authorize cash payments in
exchange for any options or other rights granted under any of such
agreements or plans, except as may be required by the terms of such
agreements or plans or any related agreements then in effect, except as may
be required in connection with the treatment of this transaction as a
pooling of interests and except as disclosed in any of the APBI Schedules;
(e) Pooling. Take any actions which, to the knowledge of APBI or PPD,
would interfere with PPD's ability to account for the Merger as a pooling
of interests;
(f) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(g) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with the other
party prior to the filing of such a suit, or (iii) for a breach of this
Agreement;
(h) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its subsidiaries' business,
taken as a whole;
(i) Taxes. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, except where such change
or election would not have a Material Adverse Effect on such party, adopt
or change any accounting method in respect of Taxes, file any material Tax
Return or any amendment to a material Tax Return, enter into any closing
agreement, settle any claim or assessment in
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respect of Taxes, or consent to any extension or waiver of the limitation
period applicable to any claim or assessment in respect of Taxes;
(j) Revaluation. Revalue in any material respect any of its assets,
including without limitation writing down the value of inventory or writing
off notes or accounts receivable other than in the ordinary course of
business; or
(k) Material Contracts. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the
material terms of any of its material contracts, other than in the ordinary
course of business consistent with past practice;
(l) Intellectual Property. Transfer to any person or entity any
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(m) Exclusive Rights. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products, services
or technology;
(n) Indebtedness. Except as related to acquisitions by PPD of the
type described in Section 4.1(h), incur any indebtedness for borrowed money
or guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others, other than in the ordinary course
of business consistent with past practice;
(o) Leases. Enter into any operating lease other than in the ordinary
course of business consistent with past practice;
(p) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $100,000 in any one case or $250,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the APBI or PPD Financial Statements;
(q) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
consistent with past practice;
(r) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(s) Employee Benefit Plans; New Hires; Pay Increases. (A) Adopt or
amend any employee benefit or stock purchase or option plan, and (B) in the
case of APBI, accept any new or additional subscriptions under the APBI
ESPP, or hire any new director level or officer level employee (except that
it may hire a replacement for any current director level or officer level
employee if it first provides the other party advance notice regarding such
hiring decision), pay any special bonus or special remuneration to any
employee or director not otherwise reserved for in such party's financial
statements, or increase the salaries or wage rates of its employees, except
in the ordinary course of business and consistent with past practices;
(t) Severance Arrangements. Grant any severance or termination pay
(i) to any director or officer or (ii) to any other employee except (A)
payments made pursuant to standard written agreements outstanding on the
date hereof or (B) grants which are made in the ordinary course of business
in accordance with its standard past practice;
(u) Registration Agreement. Enter into or amend any registration or
similar agreements;
(v) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (u) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect so as to cause a Material Adverse Effect on
such party or prevent it from performing or cause it not to perform its
covenants hereunder.
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4.2 Notices. APBI, in consultation with PPD, shall give all notices and
other information, if any, required to be given to the employees of APBI, under
applicable law, both domestic and foreign, in connection with the transactions
provided for in this Agreement.
4.3 No Solicitations. From the date hereof until the Effective Time or
until this Agreement is terminated or abandoned as provided in Article 7, APBI
shall not directly or indirectly solicit or initiate discussions concerning or,
subject to any action taken by or upon the authority of the Board of Directors
of APBI in the exercise of its good faith judgment as to its fiduciary duties to
shareholders of APBI based upon the advice of counsel, enter into negotiations
with, or furnish any information which is not publicly available to, any
corporation, partnership, person or other entity or group concerning, any
proposal for a merger, sale of substantial assets, sale of shares of stock or
securities or other takeover or business combination transaction (an
"Acquisition Proposal") involving APBI or any subsidiary of APBI, and APBI will
instruct its respective officers, directors, advisors, or other financial or
legal representatives or consultants not to take any action contrary to the
foregoing provisions of this sentence. APBI represents and warrants to PPD that
it has terminated all discussions with third parties regarding Acquisition
Proposals.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, APBI and PPD shall prepare
and file with the SEC preliminary proxy materials relating to the approval of
the Merger and the transactions contemplated hereby by the stockholders of APBI
and PPD and, as promptly as practicable following receipt of SEC comments
thereon, PPD shall file with the SEC a Registration Statement on Form S-4 (or
such other or successor form as shall be appropriate), which complies in form
with applicable SEC requirements and shall use all reasonable efforts to cause
the Registration Statement to become effective as soon thereafter as
practicable; provided, however, that PPD shall have no obligation to agree (and
shall not so agree without APBI's written consent) to account for the Merger as
a "purchase" in order to cause the Registration Statement to become effective.
The Proxy Statement shall include the recommendation of the Board of Directors
of each of APBI and PPD in favor of the Merger; provided that such
recommendation may not be included or may be withdrawn if previously included if
such action is determined to be necessary by APBI's Board of Directors
consistent with the Board of Directors' fiduciary duties under applicable law.
Furthermore, (i) the Board of Directors of PPD shall put forward an additional
proposal in the Proxy Statement to increase the number of shares reserved for
issuance under the PPD Equity Compensation Plan so as to provide for a minimum
of 1,500,000 shares and to increase the number of shares reserved for issuance
under the PPD Stock Option Plan for Non-Employee Directors so as to provide for
a minimum of 100,000 shares, and may increase such amounts if they shall
determine it to be appropriate with APBI's consent (which shall not be
unreasonably withheld); (ii) the Board of Directors of PPD shall include a
proposal in the Proxy Statement to be submitted to a vote of the PPD
Shareholders to amend its Articles of Incorporation to increase the number of
authorized shares to One Hundred Million (100,000,000), consisting of
Ninety-Five Million (95,000,000) shares of PPD Common Stock and Five Million
(5,000,000) shares of Preferred Stock; (iii) the Board of Directors of PPD shall
include a proposal in the Proxy Statement, such proposal to be in a form
reasonably acceptable to APBI, to amend PPD's Bylaws to eliminate staggered
terms for PPD's Board of Directors; and (iv) the Board of Directors of PPD shall
include in the Proxy Statement a proposal to increase the number of PPD
directors from eight directors to nine directors consistent with the provisions
of Section 6.1(g) hereof.
5.2 Meeting of Stockholders. (a) APBI shall promptly after the date hereof
take all reasonable action necessary in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to convene the APBI Stockholders Meeting
on or prior to August 31, 1996 or as soon thereafter as is practicable and in
any event on the date within 40 days of the date on which the Registration
Statement shall be declared effective by the SEC, unless otherwise mutually
agreed by the parties hereto. Subject to the fiduciary duties of its Board of
Directors under applicable law as advised by outside counsel, APBI shall use its
reasonable efforts to solicit from stockholders of APBI proxies in favor of the
Merger, shall take all other action necessary or advisable to
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secure the vote or consent of stockholders required to effect the Merger and
shall not postpone or adjourn (other than for the absence of a quorum) the APBI
Stockholders Meeting without the consent of PPD.
(b) PPD shall promptly after the date hereof take all action necessary in
accordance with North Carolina Law and its Articles of Incorporation and Bylaws
to convene the PPD Stockholders Meeting on or prior to August 31, 1996 or as
soon thereafter as is practicable and in any event on the date within 40 days of
the date on which the Registration Statement shall be declared effective by the
SEC, unless otherwise mutually agreed by the parties hereto. PPD shall consult
with APBI and use all reasonable efforts to hold the PPD Stockholders Meeting on
the same day as the APBI Stockholders Meeting and shall not postpone or adjourn
the PPD Stockholders meeting without the consent of APBI. PPD shall use its best
efforts to solicit from stockholders of PPD proxies in favor of the Merger and
shall take all other action necessary or advisable to secure the vote or consent
of stockholders to effect the Merger.
5.3 Access to Information. (a) APBI shall afford PPD and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of APBI's and its
subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of APBI
and its subsidiaries as PPD may reasonably request. APBI agrees to provide to
PPD and its accountants, counsel and other representatives copies of internal
financial statements promptly upon request. PPD shall afford APBI and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i) all of PPD's
and its subsidiaries' properties, books, contracts, commitments and records, and
(ii) all other information concerning the business, properties and personnel of
PPD and its subsidiaries as APBI may reasonably request. PPD agrees to provide
to APBI and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of PPD and APBI shall confer on a regular and frequent
basis with one or more representatives of the other party to report material
operational matters and the general status of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 5.3 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.4 Confidentiality. The parties acknowledge that PPD and APBI have
previously executed a non-disclosure agreement dated March 11, 1996 (the
"Confidentiality Agreement"), which Confidentiality Agreement shall continue in
full force and effect in accordance with its terms.
5.5 Public Disclosure. Unless otherwise permitted by this Agreement, PPD
and APBI shall consult with each other before issuing any press release or
otherwise making any public statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange or with
the NASD.
5.6 Consents; Cooperation. (a) Each of PPD and APBI shall promptly apply
for or otherwise seek, and use its reasonable efforts to obtain, all consents
and approvals required to be obtained by it for the consummation of the Merger,
and shall use its reasonable efforts to obtain all necessary consents, waivers
and approvals under any of its material contracts in connection with the Merger
for the assignment thereof, if required. The parties hereto will consult and
cooperate with one another, and consider in good faith the views of one another,
in connection with any analyses, appearances, presentations, memoranda, briefs,
arguments, opinions and proposals made or submitted by or on behalf of any party
hereto in connection with proceedings under or relating to any federal or state
antitrust or fair trade law.
(b) Each of PPD and APBI shall use all reasonable efforts to obtain the HSR
Clearance and to resolve such objections, if any, as may be asserted by any
Governmental Entity with respect to the transactions contemplated by this
Agreement under the Sherman Act, as amended, the Clayton Act, as amended, the
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Federal Trade Commission Act, as amended, and any other Federal, state or
foreign statutes, rules, regulations, orders or decrees that are designed to
prohibit, restrict or regulate actions having the purpose or effect of
monopolization or restraint of trade (collectively, "Antitrust Laws"). In
connection therewith, if any administrative or judicial action or proceeding is
instituted (or threatened to be instituted) challenging any transaction
contemplated by this Agreement as violative of any Antitrust Law, each of PPD
and APBI shall cooperate and use all reasonable efforts vigorously to contest
and resist any such action or proceeding and to have vacated, lifted, reversed,
or overturned any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent (each an "Order"), that is in effect and
that prohibits, prevents, or restricts consummation of the Merger or any such
other transactions, unless by mutual agreement PPD and APBI decide that
litigation is not in their respective best interests. Notwithstanding the
provisions of the immediately preceding sentence, it is expressly understood and
agreed that neither PPD nor APBI shall have any obligation to litigate or
contest any administrative or judicial action or proceeding or any Order beyond
January 1, 1997.
(c) Notwithstanding anything to the contrary in subsection (a) or (b)
above, (i) neither PPD nor any of it subsidiaries shall be required to divest
any of their respective businesses, product lines or assets, or to take or agree
to take any other action or agree to any limitation that could reasonably be
expected to have a Material Adverse Effect on PPD or of PPD combined with the
Surviving Corporation after the Effective Time or (ii) neither APBI nor its
subsidiaries shall be required to divest any of their respective businesses,
product lines or assets, or to take or agree to take any other action or agree
to any limitation that could reasonably be expected to have a Material Adverse
Effect on APBI.
5.7 Pooling Accounting. PPD and APBI shall each use its reasonable efforts
to cause the business combination to be effected by the Merger to be accounted
for as a pooling of interests and to take such action as may be reasonably
necessary to permit such treatment. Each of PPD and APBI shall use its
reasonable efforts to cause its "Affiliates" (as defined in Section 5.8) not to
take any action that would adversely affect the ability of PPD to account for
the business combination to be effected by the Merger as a pooling of interests.
5.8 Affiliate Agreements.
(a) Schedule 5.8(a) sets forth those persons who may be deemed
"Affiliates" of APBI within the meaning of the SEC's rules relating to
pooling of interests accounting. APBI shall provide PPD such information
and documents as PPD shall reasonably request for purposes of reviewing
such list. APBI shall, at least 30 days prior to the Effective Date, cause
to be delivered to each person APBI believes to be an "Affiliate" of APBI a
notice informing such persons of the restrictions on the transfer of APBI
Common Stock resulting from the Merger being accounted for as a pooling of
interests in accordance with generally accepted accounting principles and
all published rules, regulations and policies of the SEC and shall take
reasonable steps to prevent the disposition of the shares of APBI Common
Stock owned by APBI Affiliates in violation of such restrictions. APBI
shall use its reasonable efforts to deliver or cause to be delivered to
PPD, as soon as practicable following the execution of this Agreement (and
in each case prior to the Effective Time) from each of the Affiliates of
APBI, an executed Affiliates Agreement in the form attached as Exhibit
5.8(a). PPD and MERGER SUB shall be entitled to place appropriate legends
on the certificates evidencing any PPD Common Stock to be received by such
Affiliates of APBI pursuant to the terms of this Agreement that have signed
Affiliates Agreements, and to issue appropriate stop transfer instructions
to the transfer agent for PPD Common Stock, consistent with the terms of
such Affiliates Agreements.
(b) Schedule 5.8(b) sets forth the persons who may be deemed
"Affiliates" of PPD within the meaning of the SEC's rules relating to
pooling of interests accounting. PPD has caused to be delivered to each
person PPD believes to be an "Affiliate" of PPD a notice informing such
persons of the restrictions on the transfer of PPD Common Stock resulting
from the Merger being accounted for as a pooling of interests in accordance
with generally accepted accounting principles and all published rules,
regulations and policies of the SEC. Contemporaneous with the execution of
this Agreement, each of the Affiliates has delivered to PPD and APBI an
executed Affiliates Agreement in the form attached as Ex-
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hibit 5.8(b) hereto. PPD shall provide APBI such information and documents
as APBI shall reasonably request for purposes of reviewing such list. PPD
shall take reasonable steps to prevent the disposition of the shares of PPD
Common Stock owned by PPD Affiliates in violation of such restrictions. PPD
shall place appropriate legends on the certificates evidencing PPD Stock
held by PPD Affiliates and shall issue stop transfer instructions to the
transfer agent for PPD Stock consistent with the terms of such Affiliates
Agreement.
5.9 FIRPTA. APBI shall, prior to the Closing Date, provide PPD with a
properly executed Foreign Investment and Real Property Tax Act of 1980
("FIRPTA") Notification Letter, in form and substance reasonably satisfactory to
PPD, which states that shares of capital stock of APBI do not constitute "United
States real property interests" under Section 897(a) of the Code, for purposes
of satisfying PPD's obligations under Treasury Regulation Section
1.1445-2(a)(3). In addition, simultaneously with delivery of such Notification
Letter, APBI shall provide to PPD, as agent for APBI, a form of notice to the
Internal Revenue Service in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2), which shall be in form and substance
reasonably satisfactory to PPD, along with written authorization for PPD to
deliver such notice form to the Internal Revenue Service on behalf of APBI upon
the Closing of the Merger.
5.10 Legal Requirements. Each of PPD, MERGER SUB and APBI will, and will
cause their respective subsidiaries to, take all reasonable actions necessary to
comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon such other party
in connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.11 PPD Sky Laws. PPD shall promptly take such steps as may be necessary
to comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the PPD Common Stock in connection with the
Merger. APBI shall use its reasonable efforts to assist PPD as may be necessary
to comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of PPD Common Stock in connection
with the Merger.
5.12 Employee Benefit Plans. At the Effective Time, the APBI Stock Program
and each outstanding option to purchase shares of APBI Common Stock granted
under the APBI Stock Program will be assumed by PPD. Schedule 5.12(a) hereto
sets forth a true and complete list as of the date hereof of all holders of
outstanding options under the APBI Stock Plans, including the number of shares
of APBI Common Stock subject to each such option, the exercise or vesting
schedule of each option granted on or after January 1, 1996, the exercise price
per share, and the term of each option granted on or after January 1, 1996. On
the Closing Date, APBI shall deliver to PPD an updated Schedule 5.12(a) hereto
current as of such date.
(a) Options. In the case of each unexpired Option granted under or
outside of the APBI Stock Program prior to January 1, 1996, the holder,
without respect to vesting dates, shall be entitled to receive from PPD an
amount equal to the Option Spread on the Measurement Date for each share of
APBI Common Stock covered by such option; provided, however, that with
respect to each Out-of-the-Money Option, the holder shall be entitled to
receive a substitute stock option as provided below. The Option Spread
shall be payable in shares of PPD Common Stock valued on the basis of PPD's
closing trading price on the day immediately preceding the Effective Date.
In the case of each unexpired Option granted under or outside of the APBI
Stock Program on or after January 1, 1996 and each Out-of-the-Money Option,
the holder shall receive substituted options (each individual optionee to
enter into a Substitute Option Agreement with PPD reflecting such
substitute options in the form of Exhibit 1.7 hereto) to purchase PPD
Common Stock under the PPD Equity Compensation Plan, such that optionees
holding such options shall have the right, with respect to each such option
representing the right to purchase one share of APBI Common Stock, to
receive upon exercise of the substitute option a fractional number of
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shares of PPD Common Stock equal to the Exchange Ratio. Each substitute
option shall be subject to the following terms and conditions:
(i) the exercise price per share of each substitute option (with
any fractional cent being rounded to the next higher full cent) shall be
equal to (x) the exercise price per share at which APBI Common Stock was
theretofore purchasable under the prior Option divided by (y) the
Exchange Ratio;
(ii) the substitute options shall have substantially the same
restrictions, terms and conditions as the options for which they were
substituted, including their characterization as "incentive stock
options" within the meaning of Section 422(b) of the Code or
non-qualified stock options, as the case may be; and
(iii) it is intended that, to the extent possible, the substitute
options shall comply with the provisions of Section 424(a) of the Code
and the regulations and ruling promulgated thereunder.
All shares of PPD Common Stock and the Substitute Option Agreements to
be delivered under this Section 5.12 shall be distributed to the holders of
the APBI Options as soon as practicable following the Effective Time (and
in any event no later than 45 days after the Effective Time). PPD will take
all corporate and other action necessary to reserve a sufficient number of
shares of PPD Common Stock for issuance to the holder of APBI Options
pursuant to this Section 5.12(a).
(b) Restricted Stock Grants. At the Effective Time, each outstanding
restricted stock grant or award with respect to APBI Common Stock not
otherwise vested prior to the Effective Time shall vest and each holder of
a restricted stock grant or award shall be entitled to receive the number
of shares of PPD Common Stock equal to the number of shares of APBI Common
Stock held by the recipient pursuant to the restricted stock grant or award
multiplied by the Exchange Ratio. Schedule 5.12(b) hereto sets forth a true
and complete list as of the date hereof of all holders of outstanding
restricted stock grants or award under the APBI Stock Program, including
the number of shares of APBI Common Stock subject to each such restricted
stock grant or award. On the Closing Date, APBI shall deliver to PPD an
updated Schedule 5.12(b) hereto current as of such date. All shares of PPD
Common Stock to be delivered pursuant to this Section 5.12(b) shall be
delivered to the holders of outstanding APBI restricted stock grants or
awards as soon as practicable after the Effective Time (and in any event no
later than 45 days after the Effective Time). PPD will take all corporate
and other action necessary to reserve a sufficient number of shares of PPD
Common Stock for issuance to the holders of such restricted stock grants or
awards.
(c) APBI Employee Stock Purchase Plan. The APBI ESPP and each
outstanding subscription to purchase shares of APBI Common Stock thereunder
(an "APBI Purchase Right") shall be assumed by PPD at the Effective Time of
the Merger. Schedule 5.12(c) hereto sets forth a true and complete list as
of the date hereof of all holders of outstanding APBI Purchase Rights,
including the remaining number of shares of APBI Common Stock purchasable
under each such right, the outstanding balance in each APBI ESPP
participant's subscription account thereunder, the fair market value of
APBI Common Stock on the date the APBI Purchase Right was granted, and the
expiration date of such right. On the Closing Date, APBI shall deliver to
PPD an updated Schedule 5.12(c) hereto current as of such date. The APBI
Purchase Rights so assumed by PPD shall continue to be exercisable upon the
same terms and conditions applicable to those rights immediately prior to
the Effective Time in accordance with the terms of the APBI ESPP, except
that each such assumed APBI Purchase Right will be exercisable for that
number of whole shares of PPD Common Stock equal to the product of the
number of shares of APBI Common Stock purchasable under the APBI Purchase
Right immediately prior to the Effective Time multiplied by the Exchange
Ratio and rounded down to the nearest whole number of shares of PPD Common
Stock, and the purchase price payable per share of PPD Common Stock under
the assumed right will be equal to eighty-five percent (85%) of the lower
of (i) the fair market value per share of the APBI Common Stock on the date
the APBI Purchase Right was granted, divided by the Exchange Ratio and
rounded up to the nearest whole cent, or (ii) the fair market value per
share of PPD Common Stock on the date such right is exercised. Within 45
days after the Effective Time, PPD will issue to each person
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who, immediately prior to the Effective Time, was a holder of an
outstanding APBI Purchase Right, a document in form and substance
reasonably satisfactory to APBI evidencing the foregoing assumption of such
APBI Purchase Right by PPD.
(d) APBI Director Plan Options. As of the Effective Time, the APBI
Director Plan and each outstanding option to purchase shares of APBI Common
Stock under the APBI Director Plan, whether vested or unvested, will be
assumed by PPD. Schedule 5.12(d) hereto sets forth a true and complete list
as of the date hereof of all holders of outstanding options under the APBI
Director Plan, including the number of shares of APBI Common Stock subject
to each such option, the exercise or vesting schedule, the exercise price
per share and the term of each such Option. On the Closing Date, APBI shall
deliver to PPD an updated Schedule 5.12(d) hereto current as of such date.
Each such option so assumed by PPD under this Agreement shall continue to
have, and be subject to the same terms and conditions set forth in the APBI
Director Plan immediately prior to the Effective Time, except that (i) such
option will be exercisable for that number of whole shares of PPD Common
Stock equal to the product of the number of shares of APBI Common Stock
that were issuable upon exercise of such option immediately prior to the
Effective Time multiplied by the Exchange Ratio and rounded down to the
nearest whole number of shares of PPD Common Stock, and (ii) the per share
exercise price for the shares of PPD Common Stock issuable upon exercise of
such assumed option will be equal to the quotient determined by dividing
the exercise price per share of APBI Common Stock at which such option was
exercisable immediately prior to the Effective time by the Exchange Ratio,
rounded up to the nearest whole cent. Within 45 business days after the
Effective Time, PPD will issue to each person who, immediately prior to the
Effective Time was a holder of an outstanding option under the APBI
Director Plan, a document in form and substance reasonably satisfactory to
APBI evidencing the foregoing assumption of such option by PPD. PPD will
take all corporate and other action necessary to reserve a sufficient
number of shares of PPD Common Stock for issuance upon the exercise of the
options assumed by PPD pursuant to this Section 5.12(d).
(e) Compliance with Rule 16b-3. From and after the assumption by PPD
of the APBI Stock Plans and the APBI ESPP, and the outstanding options and
subscriptions thereunder, and, with regard to each such plan, until such
time as none of the participants thereunder are subject to Section 16(b) of
the Exchange Act, PPD shall take all steps necessary to ensure that any
transaction under the APBI Stock Plans or the APBI ESPP by any such
participant shall comply with Rule 16b-3 under the Exchange Act (to the
extent such plans shall have complied with Rule 16b-3 prior to the
Effective Time).
(f) APBI Retirement Plan. At the Effective Time, the APBI U.S.
Retirement Savings Plan will be assumed by PPD. Schedule 5.12(f) hereto
sets forth a true and complete list as of March 31, 1996 of each
participant in the APBI U.S. Retirement Savings Plan who has invested in
APBI Common Stock under such plan and the number of shares of APBI Common
Stock credited to such participant under the plan. On the Closing Date,
APBI shall deliver to PPD an updated Schedule 5.12(f) hereto current as of
the end of the last quarter. At the Effective Time, the shares of APBI
Common Stock held under the terms of the APBI U.S. Retirement Savings Plan
shall be exchanged for that number of whole shares of PPD Common Stock
equal to the product of the number of shares of APBI Common Stock held by
the APBI U.S. Retirement Savings Plan and the Exchange Ratio. All shares of
PPD Common Stock issuable pursuant to this Section 5.12(f) shall be
delivered to the trustee of the APBI U.S. Retirement Savings Plan as soon
as practicable following the Effective Time (and in no event no later than
45 days after the Effective Time).
(g) APBI EVA Plan. At the Effective Time, the APBI Economic Value
Added Compensation Plan ("EVA Plan") shall be assumed by PPD and PPD has
agreed to continue with such EVA Plan in effect through 1996. With respect
to all APBI corporate officers and employees that are participants in the
EVA Plan, as identified in Schedule 5.12(g) hereto, their bonuses shall be
calculated on the basis of APBI's performance through the Effective Time.
APBI may pay up to 90% of their bonuses on or prior to the Effective Time
with the balance of their bonuses to be calculated and payable within 30
days of the Effective Time.
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(h) APBI Retention Plan. As soon as practicable following the date
hereof, APBI shall adopt a retention plan for certain corporate officers
and employees of APBI (the "APBI Retention Plan"). The APBI Retention Plan
shall be limited to those individuals identified on Schedule 5.12(h) and
shall be based on the terms specified in Schedule 5.12(h). At the Effective
Time, the APBI Retention Plan shall be assumed by PPD and PPD has agreed to
continue such plan in accordance with its terms through June 30, 1997.
During this period, PPD shall not amend or reduce the severance or bonus
benefits otherwise available to any participant under the Retention Plan.
(i) Welfare Benefits. Except as otherwise provided in Section 5.12(g)
or (h) above, following the Effective Time, PPD shall provide or cause to
be provided health, life, disability and severance pay benefits and
participation in bonus, savings, incentive and retirement plans of PPD to
the employees of APBI and its subsidiaries which, in the aggregate, are no
less favorable to the employees of APBI and its subsidiaries than those
provided to PPD's employees as in effect on May 1, 1996. Nothing in this
Agreement shall prevent or prohibit PPD from terminating or modifying any
of the APBI Employee Benefit Plans pursuant to the terms of such plans. PPD
shall grant to such employees after the Effective Time credit for all
service with APBI and its subsidiaries (or their predecessors to the extent
credit has been provided by APBI) with respect to all benefit arrangements
maintained by such entities. PPD shall continue to honor the terms of all
agreements (including, but not limited to, employment, consulting, and
severance agreements) between APBI and any of its subsidiaries and any
employee or employees which relate to employment, compensation or benefits;
provided, however, that nothing contained herein shall be construed to
require the continued employment of any specific employee.
(j) Integration Planning. PPD and APBI agree to appoint
representatives who, in the period following the execution of this
Agreement, will meet and in good faith negotiate to reach agreement prior
to the Effective Date with respect to the manner in which the APBI employee
benefit plans will be integrated with the PPD employee benefit plans.
(k) Withholding Related to Options. APBI and PPD shall use reasonable
efforts to arrange with one or more brokers for holders of outstanding
options to issue irrevocable instructions to the Exchange Agent to deliver
directly to the designated broker the shares of PPD Common Stock to which
the holder is entitled to receive as a result of the Merger and irrevocable
instructions to such broker to sell a sufficient number of shares of PPD
Common Stock to satisfy the withholding obligations of the holder and to
deliver the proceeds directly to PPD.
5.13 Letter of PPD's and APBI's Accountants. (a) PPD shall use all
reasonable efforts to cause to be delivered to APBI a letter of Coopers &
Lybrand, LLP, PPD's independent auditors, dated a date within two business days
before the date on which the Registration Statement shall become effective and
addressed to APBI, in form reasonably satisfactory to APBI and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
(b) APBI shall use all reasonable efforts to cause to be delivered to PPD a
letter of Arthur Andersen, LLP, APBI's independent auditors, dated a date within
two business days before the date on which the Registration Statement shall
become effective and addressed to PPD, in form reasonably satisfactory to PPD
and customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
5.14 Form S-8. PPD agrees to file with the SEC, no later than five days
after the Closing, a registration statement on Form S-8 covering the shares of
PPD Common Stock issuable pursuant to (i) outstanding options under the APBI
Stock Plans assumed by PPD, (ii) outstanding APBI Purchase Rights under the APBI
ESPP assumed by PPD; and (iii) outstanding options under the APBI Stock Plans or
outside the APBI Stock Plans which are exchanged for shares of PPD Common Stock
pursuant to Section 5.12 hereof (to the extent not otherwise registered under
the Registration Statement). PPD shall keep such registration statement
effective for so long as it may be required so that holders of options that have
or will receive shares of PPD Common Stock may resell such shares without
further registration under the Securities Act. PPD shall use its
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best efforts to have such registration statement comply with state securities or
Blue Sky laws. APBI shall cooperate with and assist PPD in the preparation of
such registration statement.
5.15 Listing of Additional Shares; Form 10-C. Prior to the Effective Time,
PPD shall file with the Nasdaq National Market a Notification Form for Listing
of Additional Shares with respect to the shares referred to in Section 6.1(f).
PPD shall file with the SEC a Form 10-C, in the time and manner specified in
such form, reporting the increase in the number of outstanding shares of PPD
Common Stock as a result of the Merger.
5.16 Pooling Letters. (a) APBI shall use all reasonable efforts to cause
to be delivered to APBI and Coopers & Lybrand, LLP a preliminary letter of
Arthur Andersen, LLP as soon as practicable following the execution of this
Agreement to the effect that APBI is a corporation eligible to be a party to a
transaction seeking pooling of interests accounting treatment. Such letter shall
be in a form reasonably satisfactory to PPD and APBI and shall be customary in
scope and substance for letters delivered by independent public accountants in
connection with transactions of this type. APBI shall also use all reasonable
efforts to cause Arthur Andersen, LLP to deliver to APBI and Coopers & Lybrand,
LLP a final copy of such letter dated the Effective Date.
(b) PPD shall use all reasonable efforts to cause to be delivered to PPD
and Arthur Andersen, LLP a preliminary letter of Coopers & Lybrand, LLP as soon
as practicable following the execution of this Agreement to the effect that,
assuming APBI is a corporation eligible to be a party to a transaction seeking
pooling of interests accounting treatment, the Merger will qualify for pooling
of interests accounting treatment if consummated in accordance with this
Agreement. Such letter shall be in a form reasonably satisfactory to APBI and
PPD and shall be customary in scope and substance for letters delivered by
independent public accountants in connection with transactions of this type. PPD
shall also use all reasonable efforts to cause Coopers & Lybrand, LLP to deliver
to PPD and Arthur Andersen, LLP a final copy of such letter dated the Effective
Date.
5.17 Reasonable Efforts and Further Assurances. Each of the parties to
this Agreement shall use its reasonable efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.18 Notification of Certain Matters. APBI shall give prompt notice to
PPD, and PPD shall give prompt notice to APBI, of (i) the occurrence, or
non-occurrence, of any event, the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of such party contained in this
Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii)
any failure of APBI, PPD or MERGER SUB, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.18 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
5.19 Principal Shareholders. Each of the Principal Share-holders (as
hereinafter defined) of PPD contemporaneous with the execution of this Agreement
has executed and delivered to APBI a binding commitment in favor of APBI to vote
their respective shares of PPD Common Stock at the PPD Stockholder Meeting in
favor of the Merger and the issuance of shares of PPD Common Stock in connection
therewith and all other matters contemplated herein; provided, however, that
nothing in this Agreement shall prevent PPD from exercising its right to
terminate this Agreement at any time prior to the Effective Time to the extent
it otherwise has a right to do so under Article 7 hereof. For purposes hereof,
the "Principal Shareholders" of PPD are defined as Fredric N. Eshelman, John A.
McNeill, Jr., Ronald B. McNeill and Ernest Mario.
5.20 Tax Treatment. Each of PPD and APBI will use its reasonable efforts
to cause the Merger to qualify as a tax-free reorganization under the provisions
of Section 368(a) of the Code.
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5.21 Indemnification. The Surviving Corporation and PPD for a period of
six years after the Effective Time, shall indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the date of this
Agreement or who becomes prior to the Effective Time, an officer, director or
employee of APBI or any of its subsidiaries (the "Indemnified Parties") in
respect of acts or omissions occurring on or prior to the Effective Time to the
fullest extent provided under APBI's Certificate of Incorporation and Bylaws in
effect on the date hereof; provided that such indemnification shall be subject
to any limitation imposed from time to time under applicable law. For a period
of three years after the Effective Time, the Surviving Corporation shall pay for
and maintain in effect $10,000,000 of directors' and officers' "tail" liability
insurance coverage with respect to claims arising from facts or events which
occurred on or before the Effective Time, such insurance policy to provide
substantially the same coverage as APBI's current policy, in a form reasonably
acceptable to APBI. Without limitation of the foregoing, in the event any such
Indemnified Party is or becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter relating to this
Agreement or the transactions contemplated hereby occurring on or prior to the
Effective Time, the Surviving Corporation or PPD shall pay as incurred such
Indemnified Party's reasonable legal and other expenses (including the cost of
any investigation and preparation) incurred in connection therewith. The
provisions of this Section 5.21 are intended to be for the benefit of, and shall
be enforceable by, each Indemnified Party, his or her heirs and representatives.
5.22 PPD Vote. PPD, as the sole stockholder of Merger Sub, hereby agrees
to vote for the Merger and all other actions contemplated herein.
5.23 Filing of Form 8-K. As soon as practicable following the first
complete month of combined operations of PPD and APBI (and in any event within
30 days of such month end) PPD shall file a Form 8-K with the SEC with the
combined results of operations in such form as to satisfy all requirements of
Accounting Series Release No. 130.
5.24 Board and Committee Representation. PPD covenants and agrees to take
all necessary actions so as to comply with the provisions of Section 6.1(g)
hereof to the extent consistent with the fiduciary duties of PPD's Board of
Directors. Any PPD covenants contained herein which by their terms are to be
performed subsequent to the Effective Time, including but not limited to this
Section 5.24, are intended for the benefit of APBI and its shareholders and
without in any way limiting the foregoing are enforceable by any of the APBI
Board Representatives (as herein defined).
ARTICLE 6
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by (i) the holders of APBI Common Stock
representing a majority of the outstanding stock entitled to vote on such
matters at the APBI Stockholders Meeting at which a quorum is present in
person or by proxy, (ii) the holders of shares of PPD Common Stock
representing a majority of the total votes cast on such matters at the PPD
Stockholders Meeting at which a quorum is present in person or by proxy,
and (iii) PPD as the sole stockholder of MERGER SUB.
(b) Registration Statement Effective; Blue Sky Laws. The SEC shall
have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
initiated or to the knowledge of PPD or APBI threatened by the SEC. All
necessary state securities and Blue Sky permits, approvals and exemption
orders required in connection with the transactions contemplated by this
Agreement shall have been obtained.
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(c) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger shall be
in effect; nor shall there be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal; and no
temporary restraining order, preliminary or permanent injunction or other
order issued by any court of competent jurisdiction or other legal or
regulatory restraint provision limiting or restricting PPD's conduct or
operation of the business of APBI and its subsidiaries, following the
Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending. In the event an injunction or
other order shall have been issued, each party agrees to use its reasonable
diligent efforts to have such injunction or other order lifted.
(d) Governmental Approval. PPD and APBI shall have obtained the HSR
Clearance, and PPD, APBI and MERGER SUB and their respective subsidiaries
shall have timely obtained from each Governmental Entity all other
approvals, waivers, authorizations and consents, necessary for consummation
of or in connection with the Merger and the several transactions
contemplated hereby, except where the failure to obtain such approvals,
waivers, authorizations and consents would not have a Material Adverse
Effect on the combined operations of PPD and APBI.
(e) Pooling of Interests. PPD shall be able to account for the Merger
and the transactions contemplated hereby as a pooling of interests.
(f) Listing of Additional Shares. The filing with the Nasdaq National
Market of a Notification Form for Listing of Additional Shares with respect
to the shares of PPD Common Stock issuable upon conversion of the APBI
Common Stock in the Merger and upon exercise of or exchange for the options
under the APBI Stock Plans or outside of the APBI Stock Plans, and upon the
exercise of APBI Purchase Rights under the APBI ESPP, assumed by PPD shall
have been made.
(g) PPD Management. At and after the Effective Time, the Board of
Directors of PPD shall consist of Ernest Mario, Fred N. Eshelman, John A.
McNeill, Jr., and Stuart Bondurant (the "PPD Board Representatives") and
four individuals to be appointed by APBI (the "APBI Board
Representatives"). Subsequent to the Effective time, if not previously
agreed to by APBI and PPD, one additional outside director who has
significant knowledge and experience regarding PPD's and APBI's existing
and/or prospective businesses shall be appointed by PPD's then existing
Board. Subsequent to the Effective Time there shall be at least one APBI
Board Representative on each committee of the Board of Directors of PPD
until the 1998 Annual Meeting of Shareholders of PPD. There also shall be a
Nominating Committee formed consisting of the Chief Executive Officer of
PPD, as chairman, one PPD Board Representative, if available, and one APBI
Board Representative, if available. The Nominating Committee, as so
described, shall serve until their successors are duly elected and
qualified, but in any event at least until completion of the nominations
for the 1997 Annual Meeting of Shareholders at which the Board of Directors
of PPD will be elected. The Nominating Committee shall use their reasonable
best efforts consistent with their fiduciary duties to cause the PPD Board
Representatives and the APBI Board Representatives to be nominated for
election at the 1997 Annual Meeting of Shareholders of PPD. At and after
the Effective Time, the officers of PPD shall consist of the following
persons who shall serve until the earlier of their death, resignation or
removal or until their successors are duly elected and qualified: Ernest
Mario, Chairman, Fred N. Eshelman, Chief Executive Officer, and Rudy C.
Howard, Chief Financial Officer. PPD's Board of Directors shall not form an
executive committee at any time prior to the 1998 annual meeting of
shareholders of PPD.
(h) Compensation to Outgoing Directors. For the last calendar quarter
of 1996, APBI shall pay the sum of Six Thousand Dollars ($6,000) to each
member of the APBI Board of Directors serving as of the date hereof who is
not appointed as one of the APBI Board Representatives. For the last
calendar quarter of 1996, PPD shall pay the sum of Six Thousand Dollars
($6,000) to each member of the PPD Board of Directors serving as of the
date hereof who is not appointed as one of the PPD Board
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Representatives, but only if such director has received compensation in the
past for service on the PPD Board of Directors. The amounts to be paid
pursuant to this Section 6.1(h) shall be considered reasonable estimates of
the quarterly stipends paid by each of PPD and APBI to members of their
respective Boards of Directors.
6.2 Additional Conditions to Obligations of APBI. The obligations of APBI
to consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, by APBI:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of PPD and MERGER SUB in this Agreement
shall be true and correct in all material respects (except for such
representations and warranties that are qualified by their terms by a
reference to materiality which representations and warranties as so
qualified shall be true in all respects) on and as of the Effective Time as
though such representations and warranties were made on and as of such time
(other than those representations and warranties which address matters only
as of a particular date) except where the failure to be true and correct
would not have a Material Adverse Effect on PPD, and (ii) PPD and MERGER
SUB shall have performed and complied in all material respects with all
material covenants, obligations and conditions of this Agreement required
to be performed and complied with by them as of the Effective Time.
(b) Certificate of PPD. APBI shall have been provided with a
certificate dated, the Effective Date, executed on behalf of PPD by its
Chief Executive Officer or President and its Chief Financial Officer to the
effect that, as of the Effective Time, to the knowledge of such individuals
the condition provided for in subsection (a) above has been satisfied.
(c) No Material Adverse Changes. Since the date of this Agreement,
there shall not have occurred any material adverse change in the business,
results of operations or financial condition of PPD and its subsidiaries,
taken as a whole; provided, however, that in no event shall "Retention
Issues" as defined in Article II be characterized as giving rise to a
Material Adverse Change.
(d) Letters from Accountants. APBI shall have received the
preliminary and final letters referred to in Section 5.16(a) from Arthur
Andersen, LLP and the preliminary and final letters referred to in Section
5.16(b) from Coopers & Lybrand, LLP.
(e) Third Party Consents. APBI shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons, as
set forth on Schedule 6.2(e) whose consent or approval shall be required in
connection with the Merger under any material contract of PPD or any of its
subsidiaries or otherwise.
(f) Tax Opinion. Shaw, Pittman, Potts and Trowbridge shall have
rendered its opinion to APBI dated the Closing Date to the effect that the
Merger will constitute a reorganization for Federal income tax purposes
within the meaning of Section 368(a)(2)(E) of the Code.
(g) Affiliates Agreements. Each of the Affiliates Agreements provided
to APBI pursuant to Section 5.8(b) shall remain in full force and effect
and shall have been complied with in accordance with its terms.
(h) Amendment to Registration Rights Agreement. On or before the
Effective Date, an amendment to the PPD Registration Rights Agreement in
the form of Exhibit 6.2(h) shall be executed by PPD and the required number
of PPD Shareholders who are parties thereto.
6.3 Additional Conditions to the Obligations of PPD and MERGER SUB. The
obligations of PPD and MERGER SUB to consummate and effect this Agreement and
the transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by PPD:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of APBI in this Agreement shall be true and
correct in all material respects (except for such representations and
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warranties that are qualified by their terms by a reference to materiality,
which representations and warranties as so qualified shall be true in all
respects) on and as of the Effective Time as though such representations
and warranties were made on and as of such time (other than those
representations which address matters only as of a particular date) except
where the failure to be true and correct would not have a Material Adverse
Effect on APBI, and (ii) APBI shall have performed and complied in all
material respects with all material covenants, obligations and conditions
of this Agreement required to be performed and complied with by it as of
the Effective Time.
(b) Certificate of APBI. PPD shall have been provided with a
certificate, dated the Effective Date, executed on behalf of APBI by its
President and its Chief Financial Officer to the effect that, as of the
Effective Time, to the knowledge of such individuals the condition provided
for in subsection (a) above has been satisfied.
(c) No Material Adverse Changes. Since the date of this Agreement,
there shall not have occurred any material adverse change in the business,
results of operations or financial condition of APBI and its subsidiaries,
taken as a whole; provided, however, that in no event shall "Retention
Issues" as defined in Article II be characterized as giving rise to a
Material Adverse Change.
(d) Letters from Accountants. PPD shall have received the preliminary
and final letters referred to in Section 5.16(b) from Coopers & Lybrand,
LLP and the preliminary and final letters referred to in Section 5.16(a)
from Arthur Andersen, LLP.
(e) Third Party Consents. PPD shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons, as set
forth on Schedule 6.3(e), whose consent or approval shall be required in
connection with the Merger under any material contract of APBI or any of
its subsidiaries or otherwise.
(f) Tax Opinion. Shaw, Pittman, Potts and Trowbridge shall have
rendered its opinion to APBI dated the Closing Date to the effect that the
Merger will constitute a reorganization for Federal income tax purposes
within the meaning of Section 368(a)(2)(E) of the Code.
(g) Affiliate Agreements. PPD shall have received from each of the
Affiliates of APBI identified on Schedule 5.8(a) an executed Affiliate
Agreement in substantially the form attached hereto as Exhibit 5.8(a).
(h) FIRPTA Certificate. APBI shall have provided to PPD the
documentation referred to in Section 5.9.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of APBI or PPD, this Agreement may be terminated:
(a) by mutual consent of PPD and APBI;
(b) by either PPD or APBI, if the Effective Date shall not have
occurred on or before December 31, 1996; provided that the right to
terminate this Agreement pursuant to this paragraph (b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been a significant cause of, or resulted in, the failure of
the Effective Date to occur on or before such date;
(c) by PPD, if (i) APBI shall breach any of its representations,
warranties or obligations hereunder (and such breach shall not have been
cured within ten business days of receipt by APBI of written notice of such
breach), or if any representation or warranty of APBI set forth in this
Agreement shall have become untrue, in either case such that the conditions
set forth in Section 6.3(a) would be incapable of being satisfied by
December 31, 1996, or (ii) the Board of Directors of APBI shall have
withdrawn or
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modified its recommendation of this Agreement or the Merger in a manner
adverse to PPD or shall have resolved to do any of the foregoing, it being
understood that any withdrawal or modification by the Board of Directors of
APBI for any reason other than as permitted in this Section 7.1 hereof
shall be a breach of this Agreement;
(d) by APBI, if (i) PPD shall breach any of its representations,
warranties or obligations hereunder (and such breach shall not have been
cured within ten business days following receipt by PPD of written notice
of such breach), or if any representations or warranty of PPD set forth in
this Agreement shall have become untrue, in either case such that the
conditions set forth in Section 6.2(a) would be incapable of being
satisfied by December 31, 1996; or (ii) the Board of Directors of PPD shall
have withdrawn or modified its recommendation of this Agreement or the
Merger in a manner adverse to APBI or shall have resolved to do any of the
foregoing, it being understood that any withdrawal or modification by the
Board of Directors of PPD for any reason other than as permitted in this
Section 7.1 hereof shall be a breach of this Agreement;
(e) by either PPD or APBI, if the Board of Directors of APBI following
receipt of an Acquisition Proposal in the exercise of its good faith
judgment, after consultation with its legal counsel, withdraws its approval
and recommendation of this Agreement and the transactions contemplated
hereby after determining that to cause APBI to proceed with the
transactions contemplated hereby would not be consistent with the Board of
Directors' fiduciary duty to the stockholders of APBI;
(f) by either PPD or APBI, if any permanent injunction or other order
of a court or other competent authority preventing the consummation of the
Merger shall have become final and nonappealable;
(g) by either PPD or APBI, if at the APBI Stockholders Meeting
(including any adjournment or postponement thereof) the requisite vote of
stockholders of APBI shall not have been obtained;
(h) by APBI, if at the PPD Stockholders Meeting (including any
adjournment or postponement thereof) the requisite vote of stockholders of
PPD shall not have been obtained;
(i) by either PPD or APBI, if the Average PPD Stock Price is less than
$30.00 per share; or
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of PPD, MERGER SUB or APBI or
their respective officers, directors, stockholders or affiliates, except as
follows: (i) a party shall be liable to the other party for any expenses to the
extent provided in Section 7.3(a) hereof; (ii) the respective parties, as
applicable, shall be liable for any termination fee to the extent provided in
Section 7.3(b) and Section 7.3(c) hereof, and such termination fee, if due,
shall be in the absence of a willful breach the exclusive and nonelective remedy
against the applicable party and in lieu of any other damages or remedies which
might otherwise be available; (iii) if termination results from the willful
breach by a party hereto of any of its representations, warranties or covenants
set forth in this Agreement such that the conditions set forth in Sections
6.2(a) or 6.3(a) were not satisfied then the breaching party shall be liable to
the nonbreaching party for actual and compensatory damages (but not for
consequential or punitive type damages); and (iv) the provisions of Section 5.4
(Confidentiality), Section 7.3 (Expenses and Termination Fees) and this Section
7.2 and the Confidentiality Agreement shall remain in full force and effect and
survive any termination of this Agreement.
7.3 Expenses and Termination Fees. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby (including, without limitation, the
fees and expenses of its advisers, accountants and legal counsel) shall be paid
by the party incurring such expense, except that, in the event the Merger shall
not be consummated for any reason or if this Agreement shall be terminated for
any reason other than pursuant to Section 7.1(d) or 7.1(h), expenses incurred in
connection with printing the Proxy Materials and the Registration Statement,
registration and filing fees incurred in connection with the Registration
Statement, the Proxy Materials and the listing of additional shares pursuant to
Section 6.1(f), fees in connection with any pooling letters, and fees, costs and
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expenses associated with compliance with applicable state securities laws in
connection with the Merger shall be shared equally by APBI and PPD.
(b) In the event that this Agreement is terminated pursuant to Section
7.1(e) based upon a determination of APBI's Board of Directors to entertain or
accept an Acquisition Proposal and APBI's Board of Directors accepts a written
binding agreement with respect to such Acquisition Proposal either prior to or
within two (2) years after the termination of this Agreement, then APBI shall be
liable to PPD for a termination fee in the amount of $10,000,000 to be paid
within ninety (90) days after acceptance of such Acquisition Proposal.
(c) In the event PPD terminates this Agreement or causes the termination of
this Agreement other than as expressly permitted in Section 7.1, and such
termination does not constitute a willful breach, then PPD shall be liable to
APBI for a termination fee in the amount of $10,000,000 to be paid within ninety
(90) days after such termination by PPD.
7.4 Amendment. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of this Agreement by the stockholders of
APBI, PPD or MERGER SUB shall not (i) alter or change the amount or kind of
consideration to be received on conversion of the APBI Common Stock, (ii) alter
or change any term of the Articles of Incorporation of the Surviving Corporation
to be effected by the Merger, or (iii) alter or change any of the terms and
conditions of this Agreement if such alteration or change would adversely affect
the holders of APBI Common Stock or PPD Common Stock.
7.5 Extension: Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 8
GENERAL PROVISIONS
8.1 Survival. The representations, warranties and agreements set forth in
this Agreement shall terminate at the Effective Time, except that the agreements
set forth in Article 1, Section 5.4 (Confidentiality), 5.7 (Pooling Accounting),
5.8 (Affiliate Agreements), 5.12 (Employee Benefit Plans), 5.14 (Form S-8), 5.15
(Listing of Additional Shares; Form 10-C), 5.17 (Reasonable Efforts and Further
Assurances), 5.2 (Indemnification), 5.23 (Filing of Form 8-K), 5.24 (Board and
Committee Representation), 7.3 (Expenses and Termination Fees), 7.4 (Amendment),
and this Article 8 shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to PPD or MERGER SUB, to:
Pharmaceutical Product Development, Inc.
115 N. Third Street
Wilmington, North Carolina 28401
Attention: Fred N. Eshelman, Chief Executive Officer
Facsimile No.: (910) 343-5920
Telephone No.: (910) 251-0081
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with a copy to:
Murchison, Taylor, Kendrick, Gibson & Davenport, LLP
16 N. Fifth Avenue
Wilmington, North Carolina 28401
Attention: Fred B. Davenport, Jr.
Facsimile No.: (910) 763-6561
Telephone No.: (910) 763-2426
(b) if to APBI, to:
Applied Bioscience International Inc.
4350 North Fairfax Drive
Arlington, Virginia 22203
Attention: Kenneth H. Harper, Chief
Executive Officer
with a copy to:
Shaw, Pittman, Potts & Trowbridge
2300 N. Street, N. W.
Washington, D.C. 20037
Attention: Craig E. Chason
Facsimile No.: (202) 663-8007
Telephone No.: (202) 663-8758
8.3 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available if requested by the party to
whom such information is to be made available. The phrases "the date of this
Agreement", "the date hereof", and terms of similar import, unless the context
otherwise requires, shall be deemed to refer to June 20, 1996. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits and the
Schedules hereto, constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, except for the Confidentiality Agreement, which shall
continue in full force and effect, and shall survive any termination of this
Agreement or the Closing, in accordance with its terms; (b) are not intended to
confer upon any other person any rights or remedies hereunder, except as set
forth in Sections 1.6(a)-(e), 1.7-1.10, 5.12, 5.15 and 5.24; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided.
8.6 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
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8.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (without regard to its
principles of conflicts of law).
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
IN WITNESS WHEREOF, APBI, PPD and MERGER SUB have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized, all as of the date first written above.
<TABLE>
<S> <C>
[CORPORATE SEAL] PHARMACEUTICAL PRODUCT
DEVELOPMENT, INC.
ATTEST:
/s/ RUDY C. HOWARD By: /s/ FRED N. ESHELMAN
- ------------------------------------- -----------------------------------------------
Secretary Name: Fred N. Eshelman
Title: Chief Executive Officer
[CORPORATE SEAL]
WILMINGTON MERGER CORP.
ATTEST:
/s/ FRED B. DAVENPORT, JR. By: /s/ FRED N. ESHELMAN
- ------------------------------------- -----------------------------------------------
(Asst.) Secretary Name: Fred N. Eshelman
Title: President
[CORPORATE SEAL]
APPLIED BIOSCIENCE
INTERNATIONAL INC.
ATTEST:
/s/ CRAIG E. CHASON By: /s/ KENNETH H. HARPER
- ------------------------------------- -----------------------------------------------
(Asst.) Secretary Name: Kenneth H. Harper
Title: Chief Executive Officer
</TABLE>
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<PAGE> 211
ANNEX B
[FURMAN SELZ LLC LETTERHEAD]
June 20, 1996
Board of Directors
Pharmaceutical Product Development, Inc.
115 North Third Street
Wilmington, North Carolina 28401
Ladies and Gentlemen:
We understand that Pharmaceutical Product Development, Inc. (the
"Company"), Applied Bioscience International Inc. ("APBI") and Wilmington Merger
Corp., a wholly owned subsidiary of the Company (the "Merger Sub"), propose to
enter into an Agreement and Plan of Reorganization substantially in the form of
the draft dated June 10, 1996 which has been furnished to us (the "Agreement"),
whereby, among other things, Merger Sub will be merged with and into APBI in a
transaction (the "Merger") in which each share of APBI's common stock, par value
$0.01, will be converted into the right to receive a fractional number of shares
(the "Merger Consideration") of the common stock, par value $0.10, of the
Company based upon a ratio (the "Exchange Ratio"), the numerator of which is
$15.00 and the denominator of which is the average of the last sale prices for
the Company for the last ten consecutive trading days ending on the date which
is five days prior to the closing of the Merger (the "Average PPD Stock Price").
If the Average PPD Stock Price is greater than $48.00, then the Exchange Ratio
shall be equal to $15.00 divided by the Average PPD Stock Price less the product
of 0.5 and the difference between the Average PPD Stock Price and $48.00. If the
Average PPD Stock Price is less than $37.00, then the Exchange Ratio shall
remain fixed at 0.4054 until the Average PPD Stock Price equals $30.00. If the
Average PPD Stock Price is less than $30.00, both the Company and APBI have the
right to terminate the Agreement. The terms and conditions of the Merger are
more fully set forth in the Agreement.
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, to the Company of the Merger Consideration to be
paid to APBI's stockholders.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed and analyzed, among other things, the following:
a. a draft of the Agreement dated June 10, 1996;
b. the Company's and APBI's respective Annual Reports on Form 10-K for the
fiscal years ended December 31, 1993, December 31, 1994 and December 31,
1995;
c. the Company's and APBI's respective Quarterly Reports on Forms 10-Q for
the quarterly period ended March 31, 1996;
d. certain other publicly available information concerning the Company and
APBI and the trading market for their common stock;
e. certain internal information relating to the Company and APBI, including
financial forecasts and projections provided by the respective
managements of the Company and APBI;
f. the results of operations of the Company and APBI and compared such
results of operations with those of certain companies which we deemed to
be reasonably similar to the Company and APBI;
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g. certain publicly available information concerning certain other
companies engaged in businesses which we believe to be comparable to the
Company and APBI and the trading markets for certain such companies'
securities; and
h. the financial terms of certain business combinations which we believe to
be relevant.
We have also met with certain officers and employees of the Company and
APBI concerning their businesses and operations, assets, present condition and
future prospects and undertaken such other studies, analyses and investigations
as we deemed appropriate.
In arriving at our opinion, we have not visited or conducted a physical
inspection of the properties and facilities of the Company or APBI (although we
have visited each company's headquarters), nor have we made, obtained or assumed
any responsibility for any independent evaluation or appraisal of any such
properties and facilities or of the assets and liabilities of the Company or
APBI. We have assumed and relied upon the accuracy and completeness of the
financial and other information supplied to or otherwise used by us in arriving
at our opinion and have not attempted independently to verify, or undertaken any
obligation to verify, such information. In addition we have assumed that the
Company's and APBI's forecasts and projections supplied to us represent the best
currently available estimates and judgment of the Company's and APBI's
managements as to the expected future financial condition and results of
operations of the Company and APBI, and have assumed that such forecasts and
projections have been reasonably prepared based on such currently available
estimates and judgment. We assume no responsibility for and express no view as
to such forecasts and projections or the assumptions on which they are based. We
further have assumed the Merger will qualify as a tax-free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, as amended, and that
for accounting purposes, the Merger is intended to be accounted for as a
pooling-of-interests.
We have also taken into account our assessment of general economic, market
and financial conditions and our experience in similar transactions, as well as
our experience in securities valuation in general. Our opinion necessarily is
based upon conditions as they exist and can be evaluated on the date hereof.
We do not express any view as to what the value of the Company's stock will
be when issued to APBI stockholders pursuant to the Merger, or the price at
which the Company's stock will trade prior to or subsequent to the closing of
the Merger. This letter is for the benefit and use of the Board of Directors of
the Company in its consideration of the Merger. This letter does not constitute
a recommendation of the Merger over any other alternative transactions which may
be available to the Company and does not address the underlying business
decision of the Board of Directors of the Company to proceed with or effect the
Merger. Furthermore, this letter does not constitute a recommendation by our
firm to any stockholder to vote in favor of the Merger.
As you are aware, we have performed various investment banking services for
the Company in the past, including acting as a managing underwriter for the
Company's initial public offering in January 1996 and have received customary
fees for such services. In the ordinary course of our business, we may actively
trade in the equity securities of the Company and APBI for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be paid to APBI's stockholders is fair,
from a financial point of view, to the Company.
Very truly yours,
FURMAN SELZ LLC
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<PAGE> 213
ANNEX C
[LEHMAN BROTHERS LETTERHEAD]
June 20, 1996
Board of Directors
Applied Bioscience International Inc.
4350 North Fairfax Drive
Arlington, Virginia 22203
Members of the Board:
We understand that Applied Bioscience International Inc. ("APBI" or the
"Company"), Pharmaceutical Product Development, Inc. ("PPD"), and Wilmington
Merger Corp., a wholly owned subsidiary of PPD ("MergerSub") have entered into
an Agreement and Plan of Reorganization dated as of June 20, 1996 (the
"Agreement") regarding the proposed merger of MergerSub with and into the
Company (the "Merger"). The Agreement provides that, upon effectiveness of the
Merger, each issued and outstanding share of common stock of the Company will be
converted into a share of PPD Common Stock based upon a ratio (the "Exchange
Ratio") computed as follows: (i) if the Average PPD Stock Price (as defined
below) is equal to or less than $48.00 per share, then the Exchange Ratio shall
be equal to the quotient of (x) divided by (y), where (x) is $15.00 per share
and where (y) is the Average PPD Stock Price (as defined below); provided,
however, that in such event the Exchange Ratio shall not be less than 0.3125 nor
greater than 0.4054; (ii) if the Average PPD Stock Price (as defined below) is
greater than $48.00 per share, then the Exchange Ratio shall be equal to the
quotient of (x) divided by (y), where (x) is $15.00 per share and where (y) is
the Average PPD Stock Price less the product of 0.5 and the difference between
the Average PPD Stock Price and $48.00. The "Average PPD Stock Price" shall mean
the last sale price of a share of PPD Common Stock for the ten (10) most recent
days that PPD Common Stock has traded ending on the day which is five (5) days
immediately prior to the Effective Time. We further understand that if the
Average PPD Stock Price declines below $30.00 per share, then both APBI and PPD
shall have the right to terminate the Agreement. The terms and conditions of the
Proposed Transaction are set forth in more detail in the Agreement.
We have acted as financial advisor to the Company in connection with the
Merger, and have been requested by the Board of Directors of the Company to
render our opinion with respect to the fairness, from a financial point of view,
to the stockholders of the Company of the consideration to be offered to such
stockholders in the Merger. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Merger.
In arriving at our opinion, we reviewed and analyzed the following: (i) the
Agreement and the specific terms of the Merger; (ii) publicly available
information concerning the Company and PPD which we believe to be relevant to
our inquiry, including without limitation the Company's Form 10-K for the year
ended December 31, 1995 and Form 10-Q for the quarter ended March 31, 1996, and
PPD's Form 10-K for the year ended December 31, 1995 and Form 10-Q for the
quarter ended March 31, 1996; (iii) financial and operating information with
respect to the business, operations and prospects of the Company, including such
information as to Pharmaco International Inc., ENVIRON Corporation and Clinix
International as separate operating businesses, furnished to us by the Company;
(iv) financial and operating information with respect to the business,
operations and prospects of PPD furnished to us by PPD; (v) a trading history of
the Company's common stock since its initial public offering in March 1987, and
of PPD's common stock since its initial public offering on January 24, 1996, and
a comparison of such trading histories with those of other companies that we
deemed relevant; (vi) a comparison of the historical financial results and
present financial condition of the Company and PPD with those of other companies
that we deemed relevant; (vii) third party research analysts' quarterly and
annual earnings estimates for the Company and PPD; (viii) the potential pro
forma financial effects of the Merger; and (ix) a comparison of the financial
terms of the Merger with the terms of certain other recent transactions that we
deemed relevant. In addition, we have had discussions with the
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respective managements of the Company, including the management of Pharmaco
International Inc., ENVIRON Corporation and Clinix International, and PPD
concerning their respective businesses, operations, assets, financial conditions
and prospects and the potential cost savings, operating synergies and other
strategic benefits expected to result from a combination of the businesses of
the Company and PPD, and undertook such other studies, analyses and
investigations as we deemed appropriate for the purposes of the opinion
expressed herein.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial forecasts of the Company, upon advice
of the Company we have assumed that such forecasts have been reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the management of the Company as to the future financial performance of the
Company and we have relied upon such forecasts in arriving at our opinion. With
respect to the financial forecasts of PPD, we have assumed that such forecasts
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of PPD as to the future financial
performance of PPD and that PPD will perform in accordance with such forecasts.
In arriving at our opinion, we have not made nor obtained any evaluations or
appraisals of the assets or liabilities of the Company or PPD. Upon the advice
of the Company and its legal and accounting advisors, we have assumed the Merger
will qualify (i) for pooling-of-interests accounting treatment and (ii) as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended, and, therefore, as a tax-free transaction to the
stockholders of the Company. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of, the
date of this letter.
Based upon and subject to the foregoing, we are of the opinion of the date
hereof that, from a financial point of view, the consideration to be offered to
the stockholders of the Company in the Merger is fair to such stockholders.
We have acted as financial advisor to the Company in connection with the
merger and will receive a fee for our services which is contingent upon the
consummation of the Merger. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. We
also have performed various investment banking services for the Company in the
past and have received customary fees for such services. Frederick Frank, Vice
Chairman of Lehman Brothers, is a director of the Company. In addition, we acted
as lead manager of the initial public offering of common stock by PPD, which was
completed on January 24, 1996. In the ordinary course of our business, we may
actively trade in the securities of the Company and PPD for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Merger. This opinion is not intended to be and does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger.
Very truly yours,
LEHMAN BROTHERS
------------------------------------
Managing Director
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APPENDIX A
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
THIS PROXY IS SOLICITED BY MANAGEMENT
PROXY
The undersigned, a shareholder of Pharmaceutical Product Development, Inc., a
North Carolina corporation ("PPD"), hereby constitutes and appoints Fredric N.
Eshelman and Rudy C. Howard, or either of them, attorneys and proxies with full
power of substitution to act and vote all shares of the undersigned at the
special meeting of shareholders of PPD to be held at ,
on September , 1996, commencing at : .m., Eastern Time, and any
adjournment(s) thereof (the "Meeting"). The undersigned hereby directs this
proxy to be voted as follows:
1. The approval of the Merger Agreement, as described in the accompanying Proxy
Statement:
Vote for / / Vote against / / Withhold vote / /
2. The approval of the amendment to the Articles of Incorporation to increase
the number of authorized shares of PPD Common Stock from 30,000,000 to
95,000,000, as described in the accompanying Proxy Statement:
Vote for / / Vote against / / Withhold vote / /
3. The approval of the increase in the number of authorized directors from eight
to nine, as described in the accompanying Proxy Statement:
Vote for / / Vote against / / Withhold vote / /mmmmmmmm
4. The approval of the amendment to PPD's Bylaws to provide for the annual
election of directors, as described in the accompanying Proxy Statement:
Vote for / / Vote against / / Withhold vote / /tttttttt
5. The approval of the amendment to PPD's Equity Compensation Plan to increase
the number of shares of PPD Common Stock reserved for issuance thereunder
from 750,000 shares to 1,500,000 shares, as described in the accompanying
Proxy Statement:
Vote for / / Vote against / / Withhold vote / /iiiiiiii
6. The approval of the amendment to PPD's Stock Option Plan for Non-Employee
Directors to increase the number of shares of PPD Common Stock reserved for
issuance thereunder from 50,000 to 100,000, as described in the accompanying
Proxy Statement:
Vote for / / Vote against / / Withhold vote / /aaaaaaaa
This Proxy will be voted as directed above. In the absence of any direction,
this Proxy will be voted for Proposals 1-6, with discretion to vote upon such
other matters as may be brought before the Meeting. Any proxy heretofore given
by the undersigned for the Meeting is hereby revoked and declared null and void
and without any effect whatsoever.
DATED: , 1996
(SEAL)
-----------------------------
[Please sign exactly as name
appears on certificate(s)]
-----------------------------------
Print name and title, if
appropriate
(SEAL)
------------------------------
[Please sign exactly as name
appears on certificate(s)]
-----------------------------------
Print name and title, if
appropriate
<PAGE> 216
APPENDIX B
APPLIED BIOSCIENCE INTERNATIONAL INC.
THIS PROXY IS SOLICITED BY MANAGEMENT
PROXY
The undersigned, a stockholder of Applied Bioscience International Inc., a
Delaware corporation ("APBI"), hereby constitutes and appoints Kenneth H. Harper
and Stephen L. Waechter, or either of them, attorneys and proxies with full
power of substitution to act and vote all shares of the undersigned at the
special meeting of stockholders of APBI to be held at
, , on September , 1996,
commencing at : .m., Eastern Time, and any adjournment(s) thereof (the
"Meeting"). The undersigned hereby directs this proxy to be voted as follows:
1. The approval of the Merger Agreement, as described in the accompanying Proxy
Statement:
Vote for / / Vote against / / Withhold vote / /
This Proxy will be voted as directed above. In the absence of any direction,
this Proxy will be voted for Item 1, with discretion to vote upon such other
matters as may be brought before the Meeting. Any proxy heretofore given by the
undersigned for the Meeting is hereby revoked and declared null and void and
without any effect whatsoever.
DATED: , 1996
(SEAL)
------------------------------
[Please sign exactly as name
appears on certificate(s)]
-------------------------------------
Print name and title, if appropriate
(SEAL)
------------------------------
[Please sign exactly as name
appears on certificate(s)]
-------------------------------------
Print name and title, if appropriate
<PAGE> 217
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws include provisions to
(i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the fullest extent permitted
by Section 55-8-30(e) of the North Carolina Business Corporation Act (the "North
Carolina Law"), and (ii) require the Registrant to indemnify its directors and
officers to the fullest extent permitted by Sections 55-8-50 through 55-8-58 of
the North Carolina Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Sections 55-8-51 and 55-8-57 of the North
Carolina Law, a corporation generally has the power to indemnify its present and
former directors, officers, employee and agents against expenses incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful. The
Registrant believes that these provisions are necessary to attract and retain
qualified persons as directors and officers. These provisions do not eliminate
the directors' duty of care, and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under North Carolina Law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for acts or omissions that the director
believes to be contrary to the best interests of the Registrant or its
shareholders, for any transaction from which the director derived an improper
personal benefit, for acts or omissions involving a reckless disregard for the
director's duty to the Registrant or its shareholders when the director was
aware or should have been aware of a risk of serious injury to the Registrant or
its shareholders, for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, for improper transactions between the director
and the Registrant and for improper distributions to shareholders and loans to
directors and officers. These provisions do not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant's Bylaws require the Registrant to indemnify its directors
and officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful. The Registrant's Bylaws also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <C> <S>
2.1** -- Plan of Merger to Merge PPD Subsidiary, Inc. with and into Pharmaceutical
Product Development Clinical Research Unit, Inc. ("PPD-CRU").
2.2** -- Plan of Merger to Merge PPD-Europe, Inc. ("PPD Europe") with and into the
Registrant.
2.3 -- Agreement and Plan of Reorganization, dated as of June 20, 1996, among the
Registrant, Wilmington Merger Corp. and Applied Bioscience International Inc.
(see page A-1).
3.1 -- Restated Articles of Incorporation, as proposed to be amended.
</TABLE>
II-1
<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <C> <S>
3.2 -- Amended and Restated Bylaws, as proposed to be amended.
5.1* -- Opinion of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1** -- Employment Agreement, dated July 1, 1995, by and between the Registrant and
Fredric N. Eshelman.
10.2** -- Employment Agreement, dated July 1, 1995, by and between the Registrant and
Peter J. Wise.
10.3** -- Employment Agreement, dated October 1, 1995, by and between the Registrant and
Rudy C. Howard.
10.4** -- Plan of Merger to Merge PPD Subsidiary, Inc. with and into PPD-CRU (see Exhibit
2.1).
10.5** -- Plan of Merger to Merge PPD-Europe with and into the Registrant (see Exhibit
2.2).
10.6** -- Agreement for the Sale and Purchase of the Whole of the Issued Share Capital of
Gabbay Group Limited, dated August 1, 1995, by and among Dr. Felicity Jane
Gabbay, Professor John Gabbay, Leslie Grant Marshall, Mrs. Elizabeth MacKenzie
Marshall, the Registrant, PPD-Europe and Gabbay Group Limited.
10.7** -- Stock Purchase Agreement, dated May 16, 1994, by and among the Registrant,
Wisconsin Analytical and Research Services, Ltd. ("WARS"), Richard Johnson and
Richard Charles.
10.8** -- Pharmaceutical Product Development, Inc. Equity Compensation Plan, effective as
of October 30, 1995.
10.9** -- Pharmaceutical Product Development, Inc. Stock Option Plan for Non-Employee
Directors, effective as of October 31, 1995.
10.10** -- Registration Rights Agreement, dated January 24, 1995, by and among the
Registrant and certain of its shareholders.
10.11** -- Term Loan Agreement, dated July 14, 1995, among the Registrant, PPD-CRU,
Pharmaceutical Research Plus, Inc. and Wachovia Bank of North Carolina, N.A.
("Wachovia").
10.12** -- Note and Security Agreement, dated November 15, 1993, made by the Registrant
for the benefit of Wachovia, as amended on July 19, 1995.
10.13** -- Note and Security Agreement, dated May 16, 1994, made by the Registrant for the
benefit of Wachovia, as amended on July 19, 1995.
10.14** -- Note and Security Agreement, dated June 28, 1994, made by PPD-CRU for the
benefit of Wachovia, as amended on July 19, 1995.
10.15** -- General Security Agreement, dated January 29, 1991, made by the Registrant for
the benefit of Wachovia Bank and Trust Company, N.A.
10.16** -- Note and Security Agreement, dated May 12, 1994, made by PPD-CRU for the
benefit of Wachovia.
10.17** -- General Security Agreement, dated June 28, 1994, made by PPD-CRU for the
benefit of Wachovia.
10.18** -- General Security Agreement, dated March 5, 1991, made by PPD-CRU for the
benefit of Wachovia Bank and Trust Company, N.A.
10.19** -- Loan Agreement, dated August 11, 1995, among Dr. Felicity Jane Gabbay,
Professor John Gabbay and Gabbay Limited.
10.20** -- Promissory Note, dated August 1, 1995, made by the Registrant and PPD-Europe
for the benefit of Felicity Jane Gabbay, John Gabbay, Leslie Grant Marshall and
Mrs. E.M. Marshall.
10.21** -- Lease, dated August 18, 1995, by and between LOI Building, Inc. and the
Registrant.
10.22** -- Lease, dated August 18, 1995, by and between LOI Building, Inc. and the
Registrant.
10.23** -- Sublease Agreement, dated July 6, 1993, by and between United Carolina Bank and
the Registrant.
10.24** -- Sublease Agreement, dated April 14, 1993, by and between United Carolina Bank
and the Company.
10.25** -- Lease, dated June 7, 1993, by and between LOI Building, Inc. and the
Registrant, as amended on August 18, 1995.
</TABLE>
II-2
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <C> <S>
10.26** -- Lease, dated May 1, 1994, by and between LOI Building, Inc. and the Registrant,
as amended on August 18, 1995.
10.27** -- Lease, dated November 1, 1990, by and between LOI Building, Inc. and the
Registrant, as previously amended and as amended on August 18, 1995.
10.28** -- Lease, dated February 9, 1993, by and between LOI Building, Inc. and the
Registrant, as amended on January 23, 1995 and on August 18, 1995.
10.29** -- Lease Agreement, dated August 17, 1995, by and between the Registrant and
Pinehurst National Development Corporation, as amended on September 29, 1995.
10.30** -- Lease, dated March 7, 1994, by and among John C. Bullock, Jr. and Jean H.
Bullock and the Registrant, as supplemented by the Letter dated April 20, 1995
between John C. Bullock and the Registrant.
10.31** -- Lease Agreement, dated as of August 1, 1991, by and between Connecticut General
Life Insurance Company and the Registrant, as amended on January 5, 1993 and on
August 18, 1995.
10.32** -- Lease Agreement, dated as of February 22, 1995, by and between Perimeter Park
West Associates Limited Partnership and the Registrant.
10.33** -- Lease, dated October 15, 1995, by and between John T. Talbert, Jr., Gary M.
Garlow and John T. Talbert, III, d/b/a Tagata Properties and the Registrant.
10.34** -- Assignment and Assumption of Lease, dated May 17, 1994, by and between WARS and
PPD-CRU, with respect to a Lease, dated July 1, 1987, by and between The LAB
Associates and WARS.
10.35** -- Lease, dated January 26, 1994, by and between Michael James Lawton, Jeffrey
William Ware, Prudential Nominees Limited and Gabbay Group Limited.
10.36** -- Lease on Offices, dated October 19, 1993, by and between Eucro European
Contract Research GmbH and Gabbay Group Ltd.
10.37** -- Employment Agreement, dated October 18, 1995, by and between the Registrant and
Terrence W. Mischler.
10.38** -- Lease Agreement, dated as of October 25, 1995, by and between the Registrant
and Perimeter Park West Associates Limited Partnership.
10.39** -- Lease Agreement, dated as of October 25, 1995, by and between PPD-CRU and
Perimeter Park West Associates Limited Partnership.
10.40** -- Note and Security Agreement, dated June 1, 1995 made by the Registrant for the
benefit of Wachovia.
10.41** -- Guaranty Agreement, dated June 10, 1994, made by Ronald B. McNeill for the
benefit of Wachovia.
10.42** -- Guaranty Agreement, dated June 10, 1994, made by Ernest Mario for the benefit
of Wachovia.
10.43** -- Guaranty Agreement, dated June 10, 1994, made by John A. McNeill, Jr. for the
benefit of Wachovia.
10.44** -- Guaranty Agreement, dated May 12, 1994, made by Ernest Mario for the benefit of
Wachovia.
10.45** -- Guaranty Agreement, dated May 12, 1994, made by Fred Eshelman for the benefit
of Wachovia.
10.46** -- Guaranty Agreement, dated May 12, 1994, made by Ronald B. McNeill for the
benefit of Wachovia.
10.47** -- Guaranty Agreement, dated May 12, 1994, made by Peter J. Wise for the benefit
of Wachovia.
10.48** -- Guaranty Agreement, dated May 12, 1994, made by John A. McNeill, Jr. for the
benefit of Wachovia.
10.49** -- First Amendment to Lease Agreement, dated October 25, 1995, with respect to
Lease Agreement dated February 22, 1993, by and between the Registrant and
Perimeter Park West Associates Limited Partnership.
10.50** -- First Amendment to Lease, dated as of September 20, 1995, with respect to Lease
dated April 14, 1993, by and between United Carolina Bank and the Registrant.
</TABLE>
II-3
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <C> <S>
10.51** -- First Amendment to Lease, dated as of September 20, 1995, with respect to Lease
dated July 6, 1993, by and between United Carolina Bank and the Registrant.
10.52** -- Assignment of Sublease, dated September 21, 1995 with respect to Sublease dated
July 6, 1993, by and among United Carolina Bank, the Registrant and Clinical
Investigation Review Board.
10.53** -- Guaranty Agreement, dated June 10, 1994, made by Fred Eshelman for the benefit
of Wachovia.
10.54** -- Guaranty Agreement, dated June 10, 1994, made by Peter J. Wise for the benefit
of Wachovia.
10.55** -- Lease made January 23, 1996 between PPD-CRU and Western Center Properties, Inc.
10.56** -- Note dated January 23, 1996, made by the Registrant for the benefit of
Wachovia.
10.57 -- First Amendment to Registration Rights Agreement.
10.58 -- Shareholder Voting Agreement, dated June 7, 1996.
10.59 -- First Amendment to Lease Agreement, dated October 25, 1995, between PPD and
Perimeter Park West Associates Limited Partnership.
10.60 -- First, Second and Third Amendments to Lease Agreement, dated March 25, 1996,
between PPD and BBC Family Limited Partnership.
21.1** -- List of Subsidiaries.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Andersen LLP.
23.3* -- Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (contained in Exhibit 5.1).
24.1 -- Power of Attorney (see page S-1).
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated by reference to the Registrant's Registration Statement on Form
S-1, as amended (File No. 33-98996).
ITEM 22. UNDERTAKINGS
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.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the foregoing paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for directors, officers, and controlling persons of the
Registrant pursuant to provisions described in Item 20 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
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
II-4
<PAGE> 221
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the 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. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a 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-5
<PAGE> 222
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wilmington, State of
North Carolina, on this 12th day of July, 1996.
PHARMACEUTICAL PRODUCT
DEVELOPMENT, INC.
By: /s/ FREDRIC N. ESHELMAN
------------------------------------
Fredric N. Eshelman, Pharm.D.
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Fredric
N. Eshelman, Pharm.D., and Rudy C. Howard, and each of them, his or her true and
lawful attorney-in-fact and agent, with full powers of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- -------------------------------- --------------
<C> <S> <C>
/s/ FREDRIC N. ESHELMAN Director and Chief Executive July 12, 1996
- --------------------------------------------- Officer (Principal Executive
Fredric N. Eshelman, Pharm.D. Officer)
/s/ RUDY C. HOWARD Chief Financial Officer and Vice July 12, 1996
- --------------------------------------------- President, Finance and
Rudy C. Howard Treasurer (Principal Financial
and Accounting Officer)
/s/ ERNEST MARIO Director July 15, 1996
- ---------------------------------------------
Ernest Mario, Ph.D.
/s/ PETER J. WISE Director July 12, 1996
- ---------------------------------------------
Peter J. Wise, M.D.
/s/ JOHN A. MCNEILL, JR. Director July 15, 1996
- ---------------------------------------------
John A. McNeill, Jr.
/s/ RONALD B. MCNEILL Director July 15, 1996
- ---------------------------------------------
Ronald B. McNeill
</TABLE>
S-1
<PAGE> 223
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- -------------------------------- --------------
<C> <S> <C>
Director July , 1996
- ---------------------------------------------
Patti S. Manuel
/s/ STUART BONDURANT, M.D. Director July 11, 1996
- ---------------------------------------------
Stuart Bondurant, M.D.
/s/ W. TRAVIS PORTER, III Director July 12, 1996
- ---------------------------------------------
W. Travis Porter, III
</TABLE>
S-2
<PAGE> 224
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consent to being named in this Registration
Statement as persons to become directors of the Registrant upon consummation of
the Merger.
<TABLE>
<C> <S> <C>
/s/ JOHN D. BRYER July 12 1996
- ---------------------------------------------
John D. Bryer
/s/ KIRBY L. CRAMER July 15, 1996
- ---------------------------------------------
Kirby L. Cramer
/s/ FREDERICK FRANK July 15, 1996
- ---------------------------------------------
Frederick Frank
/s/ FRANK E. LOY July 15, 1996
- ---------------------------------------------
Frank E. Loy
</TABLE>
S-3
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Pursuant to Section 55-10-07 of the General Statutes of North Carolina, the
undersigned corporation does hereby submit the following for the purpose of
restating its Articles of Incorporation:
1. The name of the corporation is Pharmaceutical Product Development,
Inc. (formerly PPD Acquisition Corp.)
2. The text of the Restated Articles of Incorporation is attached.
3. The Restated Articles of Incorporation, which contain an amendment
requiring shareholder approval, were approved by shareholder action,
and shareholder approval was obtained as required by Chapter 55 of the
North Carolina General Statutes.
4. The Restated Articles of Incorporation do not contain an amendment
providing for an exchange, reclassification, or cancellation of issued
shares.
This the _____ day of _________, 1995.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
By: ________________________________________
Fred N. Eshelman, Chief Executive Officer
<PAGE> 2
RESTATED ARTICLES OF INCORPORATION
OF
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
ARTICLE I
The name of the corporation is Pharmaceutical Product Development,
Inc.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under Chapter 55 of the
General Statutes of North Carolina.
ARTICLE III
The corporation shall have authority to issue Thirty-Five Million
(35,000,000) shares, of which Five Million (5,000,000) shares shall be
preferred stock having a par value of $.10 per share, and Thirty Million
(30,000,000) shares shall be of common stock having a par value of $.10 per
share. The preferred stock may be issued from time to time in one or more
series. The Board of Directors of the corporation is authorized from time to
time to designate by resolution one or more classes or series of preferred
stock and the powers, preferences and rights, and relative participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof as shall be permitted by North Carolina law and these
Restated Articles of Incorporation, and, subject to any requirements of these
Restated Articles of Incorporation, to fix or alter the number of shares
comprising any such classes or series and the designation thereof.
ARTICLE IV
The street address and county of the registered office of the
corporation in North Carolina is 115 North Third Street, Wilmington, New
Hanover County, North Carolina 28401.
ARTICLE V
The mailing address of the registered office of the corporation in
North Carolina is 115 North Third Street, Wilmington, North Carolina 28401.
<PAGE> 3
ARTICLE VI
The name of the registered agent at the address of the registered
office is Fredric N. Eshelman.
2
<PAGE> 4
ARTICLE VII
There shall be no preemptive rights with respect to the shares of the
corporation.
ARTICLE VIII
The number, term and qualifications of Directors of the corporation
may be fixed by the bylaws.
ARTICLE IX
No director of the corporation shall have personal liability arising
out of an action whether by or in the right of the corporation or otherwise for
monetary damages for breach of any duty as a director; provided, however, that
the foregoing shall not limit or eliminate the personal liability of a director
with respect to (i) acts or omissions that such director at the time of such
breach knew or believed were clearly in conflict with the best interests of the
corporation, (ii) any liability under Section 55-8-33 of the North Carolina
General Statutes or any successor provision, (iii) any transaction from which
such director derived an improper personal benefit, or (iv) acts or omissions
occurring prior to the date of the effectiveness of this Article. As used in
this Article, the term "improper personal benefit" does not include a
director's reasonable compensation or other reasonable incidental benefit for
or on account of his or her services as a director, officer, employee,
independent contractor, attorney, or consultant of the corporation.
Furthermore, notwithstanding the foregoing provision, in the event
that Section 55-2-02 or any other provision of the North Carolina General
Statutes is amended or enacted to permit further limitation or elimination of
the personal liability of the director, the personal liability of the
corporation's directors shall be limited or eliminated to the fullest extent
permitted by the applicable law.
This Article shall not affect a provision permitted under the North
Carolina General Statutes in the articles of incorporation, bylaws or contract
or resolution of the corporation indemnifying or agreeing to indemnify a
director against personal liability. Any repeal or modification of this
Article shall not adversely affect any limitation hereunder on the personal
liability of the director with respect to acts or omissions occurring prior to
such repeal or modification.
3
<PAGE> 5
ARTICLE X
(a) Except as set forth in paragraph (b) of this Article X, the
affirmative vote or consent of the holders of not less than SEVENTY-FIVE
PERCENT (75%) of the outstanding shares of stock of the corporation entitled to
vote on a particular matter shall be required:
4
<PAGE> 6
(1) to adopt any agreement for, or to approve, the merger
or consolidation of the corporation or any affiliate (as
hereinafter defined) with or into any other person (as
hereinafter defined);
(2) to authorize any sale, transfer, or exchange to any
other person of all or substantially all of the assets of the
corporation or any affiliate; or
(3) to authorize the issuance or transfer by the
corporation or any affiliate of any voting securities of the
corporation or any affiliate in exchange or payment for the
securities or assets of any other person, if such
authorization is otherwise required by law or by agreement
between the corporation and any national securities exchange
or by any other agreement to which the corporation or any
affiliate is a party.
(b) The provisions of paragraph (a) of this Article X shall not
apply, and the provisions of North Carolina law otherwise applicable shall
apply, to (1) any transactions described therein if the Board of Directors by
resolution shall have approved the transaction by two-thirds vote of all
directors then in office; or (2) any transaction described therein if such
other person is a corporation of which a majority of the outstanding shares of
all classes of stock entitled to vote in elections of directors is owned of
record or beneficially by the corporation or its affiliates.
(c) The affirmative vote or consent of the holders of not less
than EIGHTY PERCENT (80%) of the outstanding shares of stock of the corporation
entitled to vote on the dissolution of the corporation shall be required for
the adoption of any plan for the dissolution of the corporation if the Board of
Directors shall not have, by resolution adopted by two-thirds vote of all
directors then in office, recommended to the shareholders the adoption of such
plan for dissolution of the corporation. If the Board of Directors by such
vote shall have so recommended to the shareholders such plan for dissolution of
the corporation, the provisions of North Carolina law otherwise applicable
shall apply.
(d) In evaluating the merits of any transaction described in
paragraph (a) of this Article X, or any offer of a person to make a tender or
exchange offer for any equity security of the corporation, the Board of
Directors shall, in connection with the exercise of its
5
<PAGE> 7
judgment in determining what is in the best interest of the corporation and its
shareholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effects on the employees,
customers, suppliers, and other constituents of the corporation and its
affiliates, and on the communities in which the corporation and its affiliates
operate or are located.
6
<PAGE> 8
(e) For the purposes of this Article X,
(1) an "affiliate" is any person who directly, or indirectly,
through one or more intermediaries, controls, or is controlled
by, or is under common control with, the person specified;
(2) "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of
the management and policies of a person, whether through the
ownership of voting securities, by contract, or otherwise; and
(3) a "person" is any individual, corporation, partnership,
trust, estate or other entity.
ARTICLE XI
A director may be removed from office with cause by the affirmative
vote of SEVENTY-FIVE PERCENT (75%) of all eligible votes present in person or
by proxy at a meeting of shareholders at which a quorum is present. A director
may be removed from office without cause by the affirmative vote of
SEVENTY-FIVE PERCENT (75%) of all eligible votes present in person or by proxy
at a meeting of shareholders at which a quorum is present, provided that
removal without cause is recommended to the shareholders by the Board of
Directors pursuant to a vote of not less than SEVENTY-FIVE PERCENT (75%) of the
directors then in office. If a director is elected by a separate voting group,
only the members of that voting group may participate in the vote to remove
him. The entire Board of Directors may not be removed except pursuant to the
removal of individual directors in accordance with the foregoing provisions.
For purposes of this Section, "cause" is defined as personal
dishonesty, incompetence, mental or physical incapacity, breach of fiduciary
duty involving personal profit, a failure to perform stated duties, or a
violation of any law, rule or regulation (other than a traffic violation or
similar routine offense) based on a conviction for such offense or an opinion
of counsel to the Corporation that such violation has occurred.
ARTICLE XII
These Articles may not be amended except pursuant to the affirmative
vote of SEVENTY-FIVE PERCENT (75%) of all eligible votes present in person or
by proxy at a meeting of shareholders at which a quorum is
7
<PAGE> 9
present, and, if applicable, the affirmative vote of SEVENTY-FIVE PERCENT (75%)
of all eligible votes in any voting group present in person or by proxy at a
meeting of shareholders at which a quorum of such voting group is present with
respect to which voting group the amendment would create dissenters' rights or
under the circumstances set forth in North Carolina General Statutes Section
55-10-04; provided, however, the provisions of this Article shall not apply,
and the provisions of North Carolina law otherwise applicable shall apply, to
an amendment approved by the Board of Directors by resolution adopted by a
two-thirds vote of all disinterested directors then in office.
ARTICLE XIII
A vacancy occurring in the Board of Directors of the Corporation,
including, without limitation, a vacancy created by an increase in the
authorized number of directors or resulting from the shareholders' failure to
elect the full authorized number of directors, may only be filled by the
directors remaining in office, or, if the directors remaining in office
constitute less than a quorum of the directors, by the affirmative vote of a
majority of all remaining directors or by the sole remaining director; provided
that if any director was elected by a particular voting group, a vacancy in
that position may be filled only by any remaining director or directors elected
by that voting group, if any, and if there are none, by members of the related
voting group. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office.
ARTICLE XIV
The shareholders of the corporation shall not be entitled to cumulate
their votes in the election of directors.
8
<PAGE> 10
AMENDMENT NO. 1
TO
RESTATED ARTICLES OF INCORPORATION
The first sentence of Article III of the Restated Articles of
Incorporation is hereby deleted in its entirety and the following substituted
as the first sentence in place thereof:
"The corporation shall have authority to issue One Hundred
Million (100,000,000) shares, of which Five Million
(5,000,000) shares shall be preferred stock having a par value
of $.10 per share, and Ninety-Five Million (95,000,000) shares
shall be of common stock having a par value of $.10 per
share."
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
OFFICES
<S> <C> <C>
1. Principal Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
MEETINGS OF SHAREHOLDERS
1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Substitute Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
6. Shareholders List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
8. Voting of Shares and Voting Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
9. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10. Inspectors of Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11. Informal Action by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
12. Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
DIRECTORS
1. General Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. Number, Term and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3A. Nominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3B. Election of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6. Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Executive and Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
9. Directors Emeritus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE IV
MEETINGS OF DIRECTORS
1. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5. Manner of Acting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6. Informal Action by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7. Attendance by Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V
OFFICERS
1. Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Appointment and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6. Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11. Assistant Secretaries and Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
12. Controller and Assistant Controllers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13. Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
14. Voting Upon Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VI
CONTRACTS, LOANS AND DEPOSITS
1. Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Checks and Drafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE VII
CERTIFICATES FOR SHARES AND OTHER TRANSFER
1. Certificates for Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3. Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6. Holder of Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7. Shares held by Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8. Acquisition by Corporation of its Own Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII
INDEMNIFICATION AND REIMBURSEMENT
OF DIRECTORS AND OFFICERS
1. Indemnification for Expenses and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2. Advance Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
3. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE IX
GENERAL PROVISIONS
1. Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4. Effective Date of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. Corporate Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6. Bylaw Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7. Amendments to Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8. Stockholder Protection Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
iii
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
ARTICLE I
OFFICES
1. Principal Office. The principal office of the Corporation shall
be located in New Hanover County, North Carolina, or such other place as is
designated by the Board of Directors.
2. Registered Office. The registered office of the Corporation
required by law to be maintained in the State of North Carolina may be, but
need not be, identical with the principal office.
3. Other Offices. The Corporation may have offices at such other
places, either within or without the State of North Carolina, as the Board of
Directors may from time to time determine or as the affairs of the Corporation
may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
1. Place of Meetings. All meetings of shareholders shall be held at
the principal office of the Corporation or at such other place, either within
or without the State of North Carolina, as shall be designated in the notice of
the meeting or agreed upon by the Board of Directors.
2. Annual Meeting. The annual meeting of the shareholders shall be
held at the principal office of the Corporation or at such other place, either
within or without the State of North Carolina, on such day and at such time
during the month of April or May for the purpose of electing Directors of the
Corporation and for the transaction of such other business as may be properly
brought before the meeting.
1
<PAGE> 6
3. Substitute Annual Meeting. If the annual meeting shall not be
held on the day designated by these Bylaws, a substitute annual meeting may be
called in accordance with the provisions of Paragraph 4 of this Article II. A
meeting so called shall be designated and treated for all purposes as the
annual meeting.
2
<PAGE> 7
4. Special Meetings.
(a) Special meetings of the shareholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the
President, the Chief Executive Officer, the Chairman of the Board, a majority
of the Board of Directors then in office or the holders of not less than
seventy-five percent (75%) of all the outstanding shares of the Corporation
entitled to vote at the meeting.
(b) Any person or persons entitled to call a special meeting of
shareholders shall do so by delivering written notice to the Secretary stating
that a special meeting has been called and certifying to facts establishing
that the person or persons delivering the notice are entitled to call a special
meeting. Any such written notice delivered by a shareholder or shareholders
(acting in such capacity) entitled to call a special meeting of shareholders
shall state the purpose or purposes of the proposed meeting and shall state the
information which would be required in a notice by the shareholder described in
Section 12 of this Article II with respect to the business proposed to be
transacted at the special meeting.
5. Notice of Meetings.
(a) Written or printed notice stating the time and place of
the meeting shall be delivered not less than ten (10) nor more than sixty (60)
days before the date thereof, either personally or by telegraph, teletype or
other form of wire or wireless communication, or by facsimile transmission,
mail or by private carrier, or by any other means permitted by law, by or at
the direction of the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President, the Secretary or other person calling the
meeting, to each shareholder of record entitled to vote at such meeting,
provided that such notice must be given to all shareholders, including
nonvoting shareholders, with respect to any meeting at which a merger, share
exchange, sale of assets other than in the regular course of business, or
voluntary dissolution is to be considered and in such other instances as
required by law. If a new record date for the adjourned meeting is fixed
pursuant to Section 4 of Article VII, notice of the adjourned meeting shall be
given to persons who are shareholders as of the new record date. If
3
<PAGE> 8
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail addressed to the shareholder at his address as it appears on
the record of shareholders of the Corporation, with postage thereon prepaid.
(b) In the case of an annual or substitute annual meeting,
the notice of meeting need not specifically state the business to be transacted
thereat unless it is a matter, other than election of Directors, on which the
vote of the shareholders is expressly required by the provisions of the North
Carolina Business Corporation Act or notice of such purpose is otherwise
required by law to be provided. In the case of a special meeting, the notice
of meeting shall specifically state the purpose or purposes for which the
meeting is called.
(c) When a meeting is adjourned for more than one hundred
twenty (120) days, or a new record date is or must be fixed as required by law,
notice of the adjourned meeting shall be given as in the case of an original
meeting. When a meeting is adjourned for one hundred twenty (120) days or less
in any one adjournment, it shall not be necessary to give any notice of the new
date, time and place of the adjourned meeting or of the business to be
transacted thereat other than by announcement at the meeting at which the
adjournment is taken.
(d) A shareholder in a signed writing may waive notice of any
meeting before or after the date and time stated in the notice by delivering
such waiver to the Corporation for inclusion in the minutes. Attendance by a
shareholder at a meeting constitutes a waiver of notice of such meeting, unless
at the beginning of the meeting the shareholder objects to holding the meeting
or transacting business at the meeting, or objects to considering a matter not
within the purpose or purposes described in the meeting notice before a vote is
taken on it.
6. Shareholders List. After fixing the record date for a meeting,
the Secretary of the Corporation shall prepare an alphabetical list of the
shareholders entitled to notice of such meeting or any adjournment thereof,
arranged by voting group, class and series, with the address of and number of
shares held by each. Such list shall be kept on file at the principal office
of the Corporation, or at a place identified in the meeting notice in the city
where the meeting will be held, beginning two
4
<PAGE> 9
(2) business days after notice of such meeting is given and continuing through
the meeting, and on written demand shall be subject to inspection or copying by
any shareholder, or his agent or attorney, at any time during regular business
hours. This list shall also be produced and kept open at the time and place of
the meeting and shall be subject to inspection by any shareholder, or his agent
or attorney, during the entire time of the meeting or any adjournment.
7. Quorum.
(a) Unless otherwise provided by law, a majority of the votes
entitled to be cast on a matter by a separate voting group shall constitute a
quorum of such voting group on that matter at a meeting of shareholders. A
separate voting group may only take action on a matter at a meeting if a quorum
of those shares are present with respect to that matter. In the absence of a
quorum at the opening of any meeting of shareholders, such meeting may be
adjourned from time to time by the vote of a majority of the shares voting on
the motion to adjourn, but no other business may be transacted until and unless
a quorum is present. When a quorum is present at any adjourned meeting, any
business may be transacted which might have been transacted at the original
meeting. If a quorum is present at the original meeting, aquorum need not be
present at an adjourned meeting to transact business.
(b) At a meeting at which a quorum is present, a separate
voting group may continue to do business until adjournment, notwithstanding the
withdrawal of sufficient shareholders to leave less than a quorum of the
separate voting group.
8. Voting of Shares and Voting Groups.
(a) Except as otherwise provided by the Articles of
Incorporation or by law, each outstanding share having voting rights shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders. All shares entitled to vote and be counted together collectively
on a matter as provided by the Articles of Incorporation or by the North
Carolina Business Corporation Act shall constitute a single voting group.
Additional required voting groups shall be determined in
5
<PAGE> 10
accordance with the Articles of Incorporation, the Bylaws and the North
Carolina Business Corporation Act.
(b) Except in the election of Directors, at a shareholder
meeting duly held and at which a quorum is present, action on a matter by a
voting group shall be approved if the votes cast within the voting group
favoring the action exceed the votes cast opposing the action, unless the vote
by a greater number is required by law or by the Articles of Incorporation or
Bylaws of the Corporation. For such actions, abstentions shall not be treated
as negative votes. Corporate action on such matters shall be taken only when
approved by each and every voting group entitled to vote as a separate voting
group on such matter as provided by the Articles of Incorporation or Bylaws or
by the North Carolina Business Corporation Act.
(c) Voting on all matters except the election of Directors
shall be by voice vote or by a show of hands unless the Chairman of the meeting
directs that voting on such matter shall be by ballot.
(d) Absent special circumstances, shares of the Corporation
shall not be entitled to vote if they are owned, directly or indirectly, by
another corporation in which the Corporation owns, directly or indirectly, a
majority of the shares entitled to vote for directors of the second
corporation; provided that this provision does not limit the power of the
Corporation to vote its own shares held by it in a fiduciary capacity.
9. Proxies. Shares may be voted either in person or by one or more
agents authorized by a written proxy executed by the shareholder or by his duly
authorized attorney-in-fact. A proxy shall not be valid after the expiration
of eleven (11) months from the date of its execution, unless the person
executing it specifies therein the length of time for which it is to continue
in force, or limits its use to a particular meeting. Any proxy shall be
revocable by the shareholder unless the written appointment expressly and
conspicuously provides that it is irrevocable and the appointment is coupled
with an interest as required by law. The shareholder may revoke the proxy by
filing with the Secretary of the Corporation either a written instrument
6
<PAGE> 11
of revocation or a duly executed proxy bearing a later date or by attending the
meeting and voting his shares in person.
10. Inspectors of Election.
(a) Appointment of Inspectors of Election. In advance of any
meeting of shareholders, the Board of Directors may appoint any persons, other
than nominees for office, as inspectors of election to act at such meeting or
any adjournment thereof. If inspectors of election are not so appointed, the
Chairman of any such meeting may appoint inspectors of election at the meeting.
The number of inspectors shall be either one or three. In case any person
appointed as inspector fails to appear or fails or refuses to act, the vacancy
may be filled by appointment by the Board of Directors in advance of the
meeting or at the meeting by the person acting as the Chairman.
(b) Duties of Inspectors. The inspectors of election shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes, ballots or consents, hear and
determine all challenges and questions in any way arising in connection with
the right to vote, count and tabulate all votes or consents, determine the
result and do such acts as may be proper to conduct the election or vote with
fairness to all shareholders. The inspectors of election shall perform their
duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical.
(c) Vote of Inspectors. If there are three or more
inspectors of election, the decision, act or certificate of a majority shall be
effective in all respects as the decision, act or certificate of all.
(d) Report of Inspectors. On request of the Chairman of the
meeting, the inspectors shall make a report in writing of any challenge or
question or matter determined by them and shall execute a certificate of any
fact found by them. Any report or certificate made by them shall be prima
facie evidence of the facts stated therein.
7
<PAGE> 12
11. Informal Action by Shareholders. Any action which is required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall be
signed by all of the persons who would be entitled to vote upon such action at
a meeting and filed with the Secretary of the Corporation to be kept in the
corporate minute book, whether done before or after the action so taken. Such
consent shall have the same force and effect as a unanimous vote of
shareholders. Any shareholder may retract his consent until the last
shareholder entitled to vote has signed the appropriate written consent and all
consents have been delivered to the Secretary of the Corporation. When notice
of a proposed action is required to be given to nonvoting shareholders as
provided in Section 5(a) of this Article II, the Corporation shall give the
nonvoting shareholders notice at least ten (10) days before action is taken in
lieu of a meeting by unanimous consent of the voting shareholders. Such notice
to nonvoting shareholders shall contain or be accompanied by any material that
would have been required to be sent to the nonvoting shareholders in a notice
of meeting at which the proposed action would have been submitted to the
shareholders for action.
12. Shareholder Proposals. Any shareholder wishing to bring any
other business before a meeting of shareholders must provide notice to the
Corporation not more than ninety (90) and not less than fifty (50) days before
the meeting in writing by registered mail, return receipt requested, of the
business to be presented by him at the shareholders' meeting. Any such notice
shall set forth the following as to each matter the shareholder proposes to
bring before the meeting: (A) a brief description of the business desired to
be brought before the meeting and the reasons for conducting such business at
the meeting and, if such business includes a proposal to amend the Bylaws of
the Corporation, the language of the proposed amendment; (B) the name and
address, as they appear on the Corporation's books, of the shareholder
proposing such business; (C) the class and number of shares of the Corporation
which are beneficially owned by such shareholder; (D) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business; and (E) any material interest of the shareholder in such
business. Notwithstanding the
8
<PAGE> 13
foregoing provisions of this Section, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section. In the absence of such notice to the Corporation meeting the
above requirements, a shareholder shall not be entitled to present any business
at any meeting of shareholders.
NOTE: The provisions of this Article II, Section 12 have been adopted
by the shareholders of the Corporation and may not be amended except
by the shareholders in accordance with the provisions of Article IX,
Section 6(a) hereof.
ARTICLE III
DIRECTORS
1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall
be managed by, the Board of Directors or by such committees as the Board of
Directors may establish pursuant to these Bylaws.
2. Number, Term and Qualification.
(a) The number of Directors of the Corporation shall be not
less than eight (8) nor more than twelve (12). Such number may not be changed
by the Board of Directors, but only, within the minimum and maximum, by the
affirmative vote of seventy-five percent (75%) of all eligible votes present in
person or in proxy at a meeting of shareholders at which a quorum is present.
Such number may not be changed at a meeting of shareholders unless the notice
of the meeting states that the purpose, or one of the purposes, of the meeting
is to change the number of Directors of the Corporation.
NOTE: The provisions of this Article III, Section 2(a) have been
adopted by the shareholders of the Corporation and may not be amended
except by the shareholders in accordance with the provisions of
Article IX, Section 6(a) hereof.
(b) Each Director shall hold office until his death,
resignation, retirement, removal, disqualification or his successor is elected
and qualifies. Directors need not be
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residents of the State of North Carolina or shareholders of the Corporation.
(c) Starting with the first annual meeting of the
shareholders following adoption of these bylaws, the Directors shall be divided
into three classes, as nearly equal in number as may be possible, to serve in
the first instance for terms of one, two and three years, respectively, and
thereafter the successors in each class of Directors shall be elected to serve
for terms of three years. In the event of any increase or decrease in the
number of Directors, the additional or eliminated directorships shall be so
classified or chosen that all classes of Directors shall remain or become as
nearly equal in number as may be possible.
Note: The provisions of this Article III, Section 2(c) have been
adopted by the shareholders of the Corporation and may not be amended
except by the shareholders in accordance with the provisions of
Article IX, Section 6(a) of these Bylaws.
3A. Nominations. Nominations for the election of Directors may
only be made by the Board of Directors, by the Nominating Committee of the
Board of Directors (or, if none, any other committee serving a similar
function) or by any shareholder entitled to vote generally in elections of
Directors where the shareholder complies with the requirements of this Section.
Any shareholder of record entitled to vote generally in elections of Directors
may nominate one or more persons for election as Directors at a meeting of
shareholders only if written notice of such shareholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States certified mail, postage prepaid, to the Secretary of the
Corporation (i) with respect to an election to be held at an annual meeting of
shareholders, not more than ninety (90) days nor less than fifty (50) days in
advance of such meeting and (ii) with respect to an election to be held at a
special meeting of shareholders called for the purpose of the election of
Directors, not later than the close of business on the tenth business day
following the date on which notice of such meeting is first given to
shareholders. Each such notice of a shareholder's intent to nominate a
Director or Directors at an annual or special meeting shall set forth the
following: (A) the name and address, as they appear on the Corporation's
books, of the shareholder who intends
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to make the nomination and the name and residence address of the person or
persons to be nominated; (B) the class and number of shares of the Corporation
which are beneficially owned by the shareholder; (c) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (D) a description of
all arrangements or understandings between the shareholder and each nominee and
any other persons or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (E) such other
information regarding each nominee proposed by such shareholder as would be
required to be disclosed in solicitations of proxies for election of Directors,
or as would otherwise be required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, including any
information that would be required to be included in a proxy statement filed
pursuant to Regulation 14A had the nominee been nominated by the Board of
Directors; and (F) the written consent of each nominee to be named in a proxy
statement and to serve as Director of the Corporation if so elected. No person
shall be eligible to serve as a Director of the Corporation unless nominated in
accordance with the procedures set forth in this Section. If the Chairman of
the shareholders meeting shall determine that a nomination was not made in
accordance with the procedures described by the Bylaws, he shall so declare to
the meeting, and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section, a shareholder shall
also comply with all applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder with respect to the
matters set forth in this Section.
Note: The provisions of this Article III, Section 3A have been
adopted by the shareholders of the Corporation and may not be amended
except by the shareholders in accordance with the provisions of
Article IX, Section 6(a) hereof.
3B. Election of Directors. Except as provided in Section 5 of this
Article III, Directors shall be elected at the annual meeting of shareholders;
and those persons who receive the highest number of votes at a meeting at which
a quorum is present
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shall be deemed to have been elected. If any shareholder so demands, election
of Directors shall be by ballot.
4. Removal.
(a) A Director may be removed from office with cause by
the affirmative vote of seventy-five percent (75%) of all eligible votes
present at a meeting of shareholders at which a quorum is present. A Director
may be removed from office without cause by the affirmative vote of
seventy-five percent (75%) of all eligible votes present at a meeting of
shareholders at which a quorum is present, provided that removal without cause
is recommended to the shareholders by the Board of Directors pursuant to a vote
of not less than seventy-five percent (75%) of the Directors then in office.
If a Director is elected by a separate voting group, only the members of that
voting group may participate in the vote to remove him. For purposes of this
Section, "cause" is defined as personal dishonesty, incompetence, mental or
physical incapacity, breach of fiduciary duty involving personal profit, a
failure to perform stated duties, or a violation of any law, rule or regulation
(other than a traffic violation or similar routine offense) based on a
conviction for such offense or an opinion of counsel to the Corporation that
such violation has occurred. The entire Board of Directors may not be removed
except pursuant to the removal of individual Directors in accordance with the
foregoing provisions.
Note: The provisions of this Article III, Section 4(a) are contained
in the Articles of Incorporation of the Corporation. These Bylaw
provisions have been adopted by the shareholders of the Corporation
and may not be amended except by the shareholders in accordance with
the provisions of Article IX, Section 6(a) hereof.
(b) No Director may be removed at a meeting of the
shareholders unless the notice of the meeting states that the purpose, or one
of the purposes, of the meeting is to remove that Director.
5. Vacancies. A vacancy occurring in the Board of Directors of the
Corporation, including, without limitation, a vacancy created by an increase in
the authorized number of Directors or resulting from the shareholders' failure
to elect the full authorized number of Directors, may only be filled by the
Directors remaining in office, or, if the Directors remaining
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in office constitute less than a quorum of the Directors, by the affirmative
vote of a majority of all remaining Directors or by the sole remaining
Director; provided that if any Director was elected by a particular voting
group, a vacancy in that position may be filled only by any remaining Director
or Directors elected by that voting group, if any, and if there are none, by
members of the related voting group. A Director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office.
Note: The provision of this Article III, Section 5 are contained in
the Articles of Incorporation of the Corporation. These Bylaw
provisions have been adopted by the Shareholders and may not be
amended except by the shareholders of the Corporation in accordance
with the provisions of Article IX, Section 6(a) hereof.
6. Chairman. There may be a Chairman of the Board of Directors
elected by the Directors from their number at any meeting of the Board of
Directors. The Chairman shall preside at all meetings of the Board of
Directors and of shareholders and perform such other duties as may be directed
by the Board of Directors. Until a Chairman of the Board of Directors is
elected, the Chief Executive Officer or the President of the Corporation shall
preside at the meetings of the Board of Directors and shareholders.
7. Compensation. The Board of Directors may provide for the
compensation of Directors for their services as such and may provide for the
payment of any and all expenses incurred by the Directors in connection with
such services.
8. Executive and Other Committees.
(a) The Board of Directors, by resolution adopted by
seventy-five percent (75%) of the number of Directors then in office, may
designate from among its members an Executive Committee and one or more other
committees, each consisting of two or more Directors and each of which, to the
extent authorized by law or provided in the resolution, shall have and may
exercise all of the authority of the Board of Directors, except no such
committee shall have authority as to the following matters: (1) authorize
distributions; (2) approve or propose to shareholders action that is required
to be approved by shareholders under the North Carolina Business Corporation
Act or any successor to such
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statutes; (3) fill vacancies on the Board of Directors or on any of its
committees; (4) amend the Articles of Incorporation; (5) adopt, amend or repeal
these Bylaws; (6) approve a plan of merger not requiring shareholder approval;
(7) authorize or approve reacquisition of shares, except according to a formula
or method prescribed by the Board of Directors; or (8) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences and limitations of a class or series of
shares, except that the Board of Directors may authorize a committee (or senior
executive officer of the Corporation) to do so within limits specifically
prescribed by the Board of Directors.
(b) Any resolutions adopted or other action taken by any such
committee within the scope of the authority delegated to it by the Board of
Directors shall be deemed for all purposes to be adopted or taken by the Board
of Directors. The designation of any committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility or liability imposed upon it or him by law.
(c) Regular meetings of any such committee may be held
without notice at such time and place as such committee may fix from time to
time by resolution. Special meetings of any such committee may be called by
any member thereof upon not less than one day's notice stating the place, date
and hour of such meeting, which notice may be written or oral and if mailed,
shall be deemed to be delivered when deposited in the United States mail
addressed to any member of the committee at his business address. Any member
of any committee may in a signed writing waive notice of any meeting and no
notice of any meeting need be given to any member thereof who attends in
person. The notice of a meeting of any committee need not state the business
proposed to be transacted at the meeting.
(d) A majority of the members of any such committee shall
constitute a quorum for the transaction of business at any meeting thereof and
actions of such committee must be authorized by the affirmative vote of a
majority of the members of such committee.
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(e) Any member of any such committee may be removed at any
time with or without cause by resolution adopted by the affirmative vote of at
least seventy-five percent (75%) of the Directors then in office, and vacancies
in the membership of a committee resulting from death, resignation,
disqualification, or removal shall be filled by the Board of Directors pursuant
to the affirmative vote of a majority of the Directors then in office.
Note: The provisions of Sections 8(a) and 8(e) have been adopted by
the shareholders of the Corporation and may not be amended except by
the shareholders in accordance with the provisions of Article IX,
Section 6(a) hereof.
(f) Any such committee shall elect a presiding officer
from among its members and may fix its own rules of procedure which shall not
be inconsistent with these Bylaws. It shall keep regular minutes of its
proceedings and report the same to the Board of Directors for its information
at the meeting thereof held next after the proceedings shall have been taken.
9. Directors Emeritus. The Board of Directors may, by
resolution, duly adopted, appoint Directors Emeritus of the Corporation for
outstanding contributions to the Corporation. Such Director Emeritus shall
have no right to vote on matters before the Board of Directors.
ARTICLE IV
MEETINGS OF DIRECTORS
1. Regular Meetings. A regular meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting
of shareholders. In addition, the Board of Directors may provide, by
resolution, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.
2. Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board (if one has been
duly elected), the Chief Executive Officer, the President or any two Directors.
Such meetings may be held either within or without the State of North Carolina.
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3. Notice of Meetings.
(a) Any regular meetings of the Board of Directors may be
held without notice.
(b) The person or persons calling a special meeting of the
Board of Directors shall, at least two (2) days before the meeting, give notice
thereof either personally or by telephone, telegraph, teletype or other form of
wire or wireless communication or by facsimile transmission, mail or private
carrier or by any other means permitted by law. Such notice need not specify
the business to be transacted at, or the purpose of, the meeting that is
called. Notice of an adjourned meeting need not be given if the time and place
are fixed at the meeting adjourning and if the period of adjournment does not
exceed ten (10) days in any one adjournment.
(c) A Director, in a signed writing, may waive notice of
any meeting before or after the date and time stated in the notice. Attendance
by a Director at a meeting shall constitute a waiver of notice of such meeting,
except where a Director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called
or convened and does not vote for or assent to action taken at the meeting.
4. Quorum. A majority of the Directors in office immediately before
the meeting shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
5. Manner of Acting.
(a) Except as otherwise provided in this Section, the act of
a majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, unless a greater number is required
by law, the Articles of Incorporation or a Bylaw adopted by the shareholders.
(b) A Director who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken shall be presumed to
have assented to the action taken unless his contrary vote is recorded or his
dissent is otherwise entered in the minutes of the meeting or unless he shall
file his
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written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right of dissent shall not apply to a
Director who voted in favor of such action.
(c) The vote of a majority of the number of Directors then in
office shall be required to adopt a resolution constituting an Executive
Committee or other committee of the Board of Directors. The vote of a majority
of the Directors then holding office shall be required to adopt, amend or
repeal a Bylaw or to adopt a resolution dissolving the Corporation without
action by the shareholders in circumstances authorized by law. Vacancies in
the Board of Directors may be filled as provided in Section 5 of Article III of
these Bylaws.
6. Informal Action by Directors. Action taken by the Directors or
members of a committee of the Board of Directors without a meeting is
nevertheless Board or committee action if written consent to the action in
question is signed by all of the Directors or members of the committee, as the
case may be, and filed with the minutes of the proceedings of the Board of
Directors or committee, whether done before or after the action so taken. Such
action will become effective when the last Director or committee member signs
the consent, unless the consent specifies a different date. Such consent will
have the same force and effect as a unanimous vote of the Board of Directors or
the committee, as the case may be.
7. Attendance by Telephone. Any one or more Directors or members of
a committee may participate in a meeting of the Board of Directors or committee
by means of a conference telephone or similar communications device which
allows all persons participating in the meeting to hear each other
simultaneously, and such participation in the meeting shall be deemed presence
in person at such meeting.
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ARTICLE V
OFFICERS
1. Number. The officers of the Corporation shall consist of a
Chairman, a Chief Executive Officer, a President, a Secretary, a Treasurer and
such Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers as the Board of Directors may from time to time appoint. Any two or
more offices, other than that of President and Secretary, may be held by the
same person. In no event, however, may an officer act in more than one
capacity where action of two or more officers is required.
2. Appointment and Term. The officers of the Corporation shall be
appointed by the Board of Directors pursuant to the affirmative vote of at
least seventy-five percent (75%) of the Directors then in office. Such
appointment may be made at any regular or special meeting of the Board of
Directors. Each officer shall hold office until his death, resignation,
retirement, removal, disqualification, or his successor is appointed and
qualifies.
Note: The provisions of this Article V, Section 2 have been adopted
by the shareholders of the Corporation and may not be amended except
by the shareholders in accordance with the provisions of Article IX,
Section 6(a) hereof.
3. Removal. Any officer or agent appointed by the Board of Directors
may be removed by the Board with or without cause pursuant to the affirmative
vote of at least seventy-five percent (75%) of the Directors then in office;
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed.
Note: The provisions of this Article V, Section 3 have been adopted
by the shareholders of the Corporation and may not be amended except
by the shareholders in accordance with the provisions of Article IX,
Section 6(a) hereof.
4. Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
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5. Chairman of the Board. The Chairman of the Board shall,
subject to the direction and control of the Board of Directors, provide
strategic direction to the Corporation.
6. Chief Executive Officer. The Chief Executive Officer of the
Corporation shall, subject to the control of the Board of Directors, supervise
and control the policy and general management of the Corporation. The Chief
Executive Officer shall have authority to sign all documents, instruments and
certificates permitted or authorized to be signed by the President pursuant to
these Bylaws and as directed by the Board of Directors.
7. President. The President shall be the Chief Operating Officer of
the Corporation and, unless the Board of Directors has elected another, the
Chief Executive Officer of the Corporation. The President, subject to the
control of the Board of Directors, shall oversee the day to day operations of
the Corporation in accordance with these Bylaws. He shall, in the absence of
the Chairman of the Board of Directors and the Chief Executive Officer, preside
at all meetings of the Board of Directors and shareholders. He shall sign,
with any other proper officer, certificates for shares of the Corporation and
any deeds, mortgages, bonds, contracts, or other instruments which may be
lawfully executed on behalf of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be delegated by the Board of Directors to
some other officer or agent; and, in general, he shall perform all duties
incident to the office of President and such other duties as may be prescribed
by the Board of Directors from time to time.
8. Vice Presidents. The Vice Presidents, in the order of their
appointment, unless otherwise determined by the Board of Directors, shall, in
the absence or disability of the President, perform the duties and exercise the
powers of that office and shall have authority to sign, with any other proper
officer, certificates for shares of the Corporation and any deeds, mortgages,
bonds, contracts, or other instruments which may be lawfully executed on behalf
of the Corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
delegated by the Board of Directors to some other officer or
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agent. In addition, they shall perform such other duties and have such other
powers as the President or the Board of Directors shall prescribe. The Board
of Directors shall designate one or more Vice Presidents to be responsible for
Finance and may designate one or more Vice Presidents to be responsible for
certain other functions.
9. Secretary. The Secretary shall keep accurate records of the acts
and proceedings of all meetings of shareholders, Directors and committees. He
shall give all notices required by law and by these Bylaws. He shall have
general charge of the corporate books and records and of the corporate seal,
and he shall affix the corporate seal to any lawfully executed instrument
requiring it. He shall have general charge of the stock transfer books of the
Corporation and shall keep, at the registered or principal office of the
Corporation, a record of shareholders showing the name and address of each
shareholder and the number and class of the shares held by each. He shall
deliver to the Secretary of State of North Carolina for filing annual reports
as required under the provisions contained in Section 55-16-22 of the North
Carolina Business Corporation Act or any successor to such statute. He shall
sign such instruments as may require his signature, and, in general, attest the
signature or certify the incumbency or signature of any other officer of the
Corporation and shall perform all duties incident to the office of Secretary
and such other duties as may be assigned him from time to time by the President
or by the Board of Directors.
10. Treasurer. The Treasurer shall have custody of all funds and
securities belonging to the Corporation and shall receive, deposit or disburse
the same under the direction of the Board of Directors. He shall supervise the
accounting affairs of the Corporation and keep full and accurate accounts of
the finances of the Corporation in books especially provided for that purpose,
which may be consolidated or combined statements of the Corporation and one or
more of its subsidiaries as appropriate, that include a balance sheet as of the
end of the fiscal year, an income statement for that year, and a statement of
cash flows for the year unless that information appears elsewhere in the
financial statements. If financial statements are prepared for the Corporation
on the basis of generally accepted accounting principles, the annual financial
statements must also be prepared
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on that basis. Subject to any contrary requirement of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, and the
rules and regulations of any stock exchange upon which the stock of the
Corporation is traded, the Corporation shall mail the annual financial
statements, or a written notice of their availability, to each shareholder
within one hundred twenty (120) days of the close of each fiscal year. The
Treasurer shall, in general, perform all duties incident to his office and such
other duties as may be assigned to him from time to time by the President or by
the Board of Directors.
11. Assistant Secretaries and Treasurers. The Assistant Secretaries
and Assistant Treasurers shall, in the absence or disability of the Secretary
or the Treasurer, perform the respective duties and exercise the respective
powers of those offices, and they shall, in general, perform such other duties
as shall be assigned to them by the Secretary or the Treasurer, respectively,
or by the President or by the Board of Directors.
12. Controller and Assistant Controllers. The Controller, if one has
been appointed, shall, under the supervision of the Treasurer, have charge of
the accounting affairs of the Corporation and shall have such other powers and
perform such other duties as the Board of Directors shall designate. Each
Assistant Controller shall have such powers and perform such duties as may be
assigned by the Board of Directors, and the Assistant Controllers shall
exercise the powers of the Controller during that officer's absence or
inability to act.
13. Bonds. The Board of Directors, by resolution, may require any or
all officers, agents and employees of the Corporation to give bond to the
Corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of
Directors.
14. Voting Upon Stock. Unless otherwise ordered by the Board of
Directors, the President shall have full power and authority on behalf of the
Corporation to attend, act and vote at meetings of the shareholders of any
Corporation in which this Corporation may hold stock, and at such meetings
shall possess and may exercise any and all rights and powers incident to the
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ownership of such stock and which, as the owner, the Corporation might have
possessed and exercised if present. The Board of Directors may by resolution
from time to time confer such power and authority upon any other person or
persons.
ARTICLE VI
CONTRACTS, LOANS AND DEPOSITS
1. Contracts. The Board of Directors may authorize any officer or
officers, or agent or agents, to enter into any contract or execute and deliver
any instrument on behalf of the Corporation, and such authority may be general
or confined to specific instances.
2. Loans. No loans shall be contracted on behalf of the Corporation
and no evidence of indebtedness shall be issued in its name unless authorized
by a resolution of the Board of Directors. Such authority may be general or
confined to specific instances.
3. Checks and Drafts. All checks, drafts or other orders for the
payment of money issued in the name of the Corporation shall be signed by such
officer or officers, or agent or agents, of the Corporation and in such manner
as shall from time to time be determined by resolution of the Board of
Directors.
4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
depository or depositories as the Board of Directors shall direct.
ARTICLE VII
CERTIFICATES FOR SHARES AND OTHER TRANSFER
1. Certificates for Shares. Shares of the capital stock of the
Corporation shall be represented by certificates. Such certificates shall be
in such form as required by law and as determined by the Board of Directors and
such certificates shall be issued to every shareholder for the fully paid
shares owned by him. These certificates shall be signed by the President or
any Vice President or a person who has been designated as the chief executive
officer of the Corporation and by the Vice President of
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Finance, the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer
and may be sealed with the seal of the Corporation or a facsimile thereof. The
signatures of any such officers upon a certificate may be facsimiles or may be
engraved or printed. In case any officer who has signed or whose facsimile or
other signature has been placed upon such certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of its
issue. The certificates shall be consecutively numbered or otherwise
identified; and the name and address of the persons to whom they are issued,
with the number of shares and date of issue, shall be entered on the stock
transfer books of the Corporation.
2. Transfer of Shares. Transfer of shares shall be made on the stock
transfer books of the Corporation only upon surrender of the certificates for
the shares sought to be transferred by the record holder thereof or by his duly
authorized agent, transferee or legal representative. All certificates
surrendered for transfer shall be cancelled before new certificates for the
transferred shares shall be issued.
3. Transfer Agent and Registrar. The Board of Directors may appoint
one or more transfer agents and one or more registrars of transfer and may
require all stock certificates to be signed or countersigned by the transfer
agent and registered by the registrar of transfers.
4. Record Date.
(a) For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof
or entitled to receive payment of any dividend or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case not to be more than
seventy (70) days before the meeting or action requiring a determination of
shareholders.
(b) If no record date is fixed by the Board of Directors for
the determination of shareholders entitled to
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notice of or to vote at a meeting of shareholders or of shareholders entitled
to receive payment of a dividend, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders.
(c) When a determination of shareholders entitled to vote at
any meeting of shareholders has been made as provided in this paragraph, such
determination shall apply to any adjournment thereof unless the Board of
Directors fixes a new record date, which it shall do if the meeting is
adjourned to a date more than one hundred twenty (120) days after the date
fixed for the original meeting.
5. Lost Certificates. The Board of Directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing such issuance of a
new certificate, the Board of Directors may require the claimant to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against loss from any claim with respect to the certificate claimed to have
been lost or destroyed; or the Board of Directors may, by resolution reciting
that the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
6. Holder of Record. Except as otherwise required by law, the
Corporation may treat the person in whose name the shares stand of record on
its books as the absolute owner of the shares and the person exclusively
entitled to receive notification and distributions, to vote and to otherwise
exercise the rights, powers and privileges of ownership of such shares. The
Corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends, and to
vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of North Carolina.
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7. Shares held by Nominees.
(a) The Corporation shall recognize the beneficial owner of
shares registered in the name of a nominee as the owner and shareholder of such
shares for certain purposes if the nominee in whose name such shares are
registered files with the Secretary of the Corporation a written certificate in
a form prescribed by the Corporation, signed by the nominee and indicating the
following: (1) the name, address and taxpayer identification number of the
nominee; (2) the name, address and taxpayer identification number of the
beneficial owner; (3) the number and class or series of shares registered in
the name of the nominee as to which the beneficial owner shall be recognized as
the shareholder; and (4) the purposes for which the beneficial owner shall be
recognized as the shareholder.
(b) The purposes for which the Corporation shall recognize a
beneficial owner as the shareholder may include the following: (1) receiving
notice of, voting at and otherwise participating in shareholders' meetings; (2)
executing consents with respect to the shares; (3) exercising dissenters'
rights under Article 13 of the North Carolina Business Corporation Act; (4)
receiving distributions and share dividends with respect to the shares; (5)
exercising inspection rights; (6) receiving reports, financial statements,
proxy statements and other communications from the Corporation; (7) making any
demand upon the Corporation required or permitted by law; and (8) exercising
any other rights or receiving any other benefits of a shareholder with respect
to the shares.
(c) The certificate shall be effective ten (10) business days
after its receipt by the Corporation and until it is changed by the nominee,
unless the certificate specifies a later effective time or an earlier
termination date.
(d) If the certificate affects less than all of the shares
registered in the name of the nominee, the Corporation may require the shares
affected by the certificate to be registered separately on the books of the
Corporation and be represented by a share certificate that bears a conspicuous
legend stating that there is a nominee certificate in effect with respect to
the shares represented by that share certificate.
25
<PAGE> 30
8. Acquisition by Corporation of its Own Shares. The Corporation may
acquire its own shares and shares so acquired shall constitute authorized but
unissued shares. Unless otherwise prohibited by the Articles of Incorporation,
the Corporation may reissue such shares. If reissue is prohibited, the
Articles of Incorporation shall be amended to reduce the number of authorized
shares by the number of shares so acquired. Such required amendment may be
adopted by the Board of Directors without shareholder action.
ARTICLE VIII
INDEMNIFICATION AND REIMBURSEMENT
OF DIRECTORS AND OFFICERS
1. Indemnification for Expenses and Liabilities.
(a) Any person who at any time serves or has served: (1) as a
director, officer, employee or agent of the Corporation, (2) at the request of
the Corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust, or
other enterprise, or (3) at the request of the Corporation as a trustee or
administrator under an employee benefit plan, shall have a right to be
indemnified by the Corporation to the fullest extent from time to time
permitted by law against Liability and Expenses in any Proceeding (including
without limitation a Proceeding brought by or on behalf of the Corporation
itself) arising out of his status as such or activities in any of the foregoing
capacities or results from him being called as a witness at a time when he has
not been made a named defendant or respondent to any Proceeding.
(b) The Board of Directors of the Corporation shall take all
such action as may be necessary and appropriate to authorize the Corporation to
pay the indemnification required by this provision, including, without
limitation, to the extent needed, making a good faith evaluation of the manner
in which the claimant for indemnity acted and of the reasonable amount of
indemnity due him.
(c) Any person who at any time serves or has served in any of
the aforesaid capacities for or on behalf of the Corporation shall be deemed to
be doing or to have done so in
26
<PAGE> 31
reliance upon, and as consideration for, the rights provided for herein. Any
repeal or modification of these indemnification provisions shall not affect any
rights or obligations existing at the time of such repeal or modification. The
rights provided for herein shall inure to the benefit of the legal
representatives of any such person and shall not be exclusive of any other
rights to which such person may be entitled apart from this provision.
(d) The rights granted herein shall not be limited by the
provisions contained in Sections 55-8-51 through 55-8-56 of the North Carolina
Business Corporation Act or any successor to such statutes.
2. Advance Payment of Expenses. The Corporation shall (upon receipt
of an undertaking by or on behalf of the Director, officer, employee or agent
involved to repay the Expenses described herein unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation against
such Expenses) pay Expenses incurred by such Director, officer, employee or
agent in defending a Proceeding or appearing as a witness at a time when he has
not been named as a defendant or a respondent with respect thereto in advance
of the final disposition of such Proceeding.
3. Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a Director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee or agent of
another domestic or foreign corporation, partnership, joint venture, trust or
other enterprise or as a trustee or administrator under an employee benefit
plan against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability.
4. Definitions. The following terms as used in this Article shall
have the following meanings. "Proceeding" means any threatened, pending or
completed action, suit, or proceeding and any appeal therein (and any inquiry
or investigation that could lead to such action, suit, or proceeding), whether
civil, criminal, administrative, investigative or arbitrative and whether
formal or informal. "Expenses" means expenses of every
27
<PAGE> 32
kind, including counsel fees. "Liability" means the obligation to pay a
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan), reasonable expenses incurred with respect
to a Proceeding and all reasonable expenses incurred in enforcing the
indemnification rights provided herein. "Director," "officer," "employee" and
"agent" include the estate or personal representative of a Director, officer,
employee or agent. "Corporation" shall include any domestic or foreign
predecessor of this Corporation in a merger or other transaction in which the
predecessor's existence ceased upon consummation of the transaction.
ARTICLE IX
GENERAL PROVISIONS
1. Distributions. The Board of Directors may from time to time
declare, and the Corporation may pay, distributions and share dividends on its
outstanding shares in the manner and upon the terms and conditions provided by
law and by its Articles of Incorporation.
2. Seal. The corporate seal shall have the name of the Corporation
inscribed thereon and shall be in such form of as may be approved from time to
time by the Board of Directors. Such seal may be an impression or stamp and
may be used by the officers of the Corporation by causing it, or a facsimile
thereof, to be impressed or affixed or in any other manner reproduced. In
addition to any form of seal adopted by the Board of Directors, the officers of
the Corporation may use as the corporate seal a seal in the form of a circle
containing the name of the Corporation and the state of its incorporation (or
an abbreviation thereof) on the circumference and the word "Seal" in the
center.
3. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
4. Effective Date of Notice. Except as provided in Section 5(a) of
Article II, written notice shall be effective at the earliest of the following:
(1) when received; (2) five days after its deposit in the United States mail,
as evidenced by the postmark, if mailed with postage thereon prepaid and
correctly addressed; (3) upon confirmation of receipt by answer back code,
28
<PAGE> 33
if sent ny facsimile transmission; (4) upon transmission, if sent by telegraph
or teletype; or (5) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested and the receipt is
signed by or on behalf of the addressee.
5. Corporate Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on or be in the form of punch cards,
magnetic tape, photographs, microphotographs or any other information storage
device; provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same. The
Corporation shall maintain at its principal office the following records: (1)
Articles of Incorporation or Restated Articles of Incorporation and all
amendments thereto; (2) Bylaws or Restated Bylaws and all amendments thereto;
(3) resolutions by the Board of Directors creating classes or series of shares
and affixing rights, preferences or limitations to shares; (4) minutes of all
shareholder meetings or action taken without a meeting for the past three
years; (5) all written communications to shareholders for the past three years,
including financial statements; and (6) the Corporation's most recent annual
report filed with the North Carolina Secretary of State.
6. Bylaw Amendments.
(a) Except as otherwise provided herein, these Bylaws may be
amended or repealed and new Bylaws may be adopted by the affirmative vote of a
majority of the Directors present at any regular or special meeting of the
Board of Directors at which a quorum is present or by the shareholders at any
regular or special meeting of shareholders at which a quorum is present if the
votes cast favoring such action exceed the votes cast opposing such action.
Notwithstanding the foregoing, any provision hereof adopted, amended or
repealed by the shareholders may not be readopted, amended or repealed by the
Directors, but only by the affirmative vote of seventy-five percent (75%) of
all eligible votes present at a meeting of shareholders at which a quorum is
present.
29
<PAGE> 34
Note: The provisions of this Article IX, Section 6(a) have been
adopted by the shareholders of the Corporation and may not be amended
except by the shareholders in accordance with this provision.
(b) The Board of Directors shall have no power to adopt a
Bylaw: (1) changing the statutory requirement for a quorum of Directors or
action by Directors or changing the statutory requirement for a quorum of
shareholders or action by shareholders; (2) providing for the management of the
Corporation otherwise than by the Board of Directors or the committees thereof;
(3) except as may be otherwise provided in Article III, Section 2 of these
Bylaws, increasing or decreasing the fixed number for the size of the Board of
Directors or range of Directors, or changing from a fixed number to a range, or
vice versa; or (4) classifying and staggering the election of Directors.
(c) No Bylaw adopted, amended or repealed by the shareholders
may be readopted, amended or repealed by the Board of Directors, except to the
extent that the Articles of Incorporation or a Bylaw adopted by the
shareholders authorizes the Board of Directors to adopt, amend or repeal that
particular Bylaw or the Bylaws generally.
7. Amendments to Articles of Incorporation.
(a) To the extent permitted by law, the Board of Directors
may amend the Articles of Incorporation without shareholder approval to (1)
delete the initial directors' names and addresses; (2) change the initial
registered agent or office in any state in which it is qualified to do
business, provided such change is on file with the respective Secretary of
State; (3) change each issued and unissued share of an outstanding class into a
greater number of whole shares, provided that class is the Corporation's only
outstanding share class; (4) change the corporate name by substituting
"corporation," "incorporated," "company," "limited" or the abbreviations
therefor for a similar word or abbreviation or by adding, deleting or changing
a geographic designation in the name; (5) make any other change expressly
permitted by the North Carolina Business Corporation Act to be made without
shareholder action.
30
<PAGE> 35
(b) All other amendments to the Articles of Incorporation
must be approved by the affirmative vote of seventy-five percent (75%) of the
votes present at a meeting of shareholders at which a quorum is present, in
accordance with Article XII of the Corporation's Articles of Incorporation
unless the provisions of North Carolina law otherwise apply in the
circumstances specified in Article XII. The notice of any such meeting must
state that the purpose, or one of the purposes, of the meeting is to consider
the proposed amendment, and the notice must be accompanied by a copy or summary
of the amendment or amendments. The Board of Directors must recommend any
amendment to the Articles to be considered by shareholders as set forth in, and
subject to the terms of, North Carolina General Statutes Section 55-10-03(a).
Note: The provisions of this Article IX, Section 7(b) are contained
in the Articles of Incorporation. These Bylaw provisions have been
adopted by the by the shareholders and may not be amended except by
the shareholders of the Corporation in accordance with the provisions
of Article IX, Section 6(a) hereof.
8. Stockholder Protection Statutes. The Corporation elects not to be
subject to Article 9 or Article 9A of Chapter 55 of the North Carolina General
Statutes known, respectively, as the "Shareholder Protection Act" and the
"Control Share Acquisition Act", as such Articles may be amended from time to
time.
The foregoing Bylaws were adopted by the Board of Directors
at a meeting held on October 30, 1995 and ordered attested by the Secretary and
filed as part of the minutes of the meeting.
__________________________________________
(Asst.) Secretary
31
<PAGE> 36
AMENDMENT NO. 1
TO
AMENDED AND RESTATED BYLAWS
OF PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
The Amended and Restated Bylaws adopted by the Directors and
Shareholders of the Corporation on October 30, 1995 is amended to provide that
the 120 day requirement set forth in Article V, Section 10 is changed to 180
days.
<PAGE> 37
AMENDMENT NO. 2 TO
AMENDED AND RESTATED BYLAWS
Section 2(c) of Article III of the Amended and Restated Bylaws of the
Corporation is hereby deleted in its entirety.
<PAGE> 1
EXHIBIT 10.57
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
("Amendment") is made this ____ day of _______________, 1996, by and among
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (the
"Company"), the holders of not less than a majority of the Registrable Stock
outstanding on the date hereof prior to execution of this Amendment, which is
owned by the persons set forth on Schedule 1 attached hereto (collectively the
"Existing PPD Shareholders"), and the individuals listed on Schedule 2 attached
hereto (the "New PPD Shareholders").
WHEREAS, the Company and the Existing PPD Shareholders entered
into that certain Registration Rights Agreement dated January 24, 1996 (as
amended, the "Registration Rights Agreement") pursuant to which the Existing
PPD Shareholders were given certain registration rights under the 1933 Act with
respect to their shares of Common Stock of the Company; and
WHEREAS, in connection with the merger (the "Merger") of
Wilmington Merger Corp., a North Carolina corporation and wholly-owned
subsidiary of the Company, with and into Applied Bioscience International Inc.,
a Delaware corporation ("APBI"), the shareholders of APBI will receive shares
of Common Stock of the Company in exchange for shares of common stock of APBI;
and
WHEREAS, the Company and the Existing PPD Shareholders desire
to amend the Registration Rights Agreement to add the New PPD Shareholders as
additional parties to the Registration Rights Agreement and to give them
certain registration rights under the 1933 Act with respect to their shares of
Common Stock of the Company as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby amend and
modify the Registration Rights Agreement as follows:
1. Definitions. Unless otherwise defined or modified in
this Amendment, capitalized terms used herein shall have the same meaning as
given to such terms in the Registration Rights Agreement.
<PAGE> 2
2. Definition of "Holders". The definition of "Holders"
(and all references thereto) in the Registration Rights Agreement is modified
to refer to the Existing PPD Shareholders and the New PPD Shareholders, except
as otherwise expressly provided herein.
3. Definition of "Registrable Stock". The definition of
"Registrable Stock" (and all references thereto) in the Registration Rights
Agreement shall include the aggregate of 6,941,795 shares of Common Stock owned
by the Existing PPD Shareholders as of January 24, 1996 and all of the shares
of Common Stock to be received by the New PPD Shareholders in the Merger,
subject to such adjustments as provided in the Registration Rights Agreement.
4. Limitation on Number of Shares of Registrable Stock.
If pursuant to the terms of the Registration Rights Agreement the number of
shares of Registrable Stock permitted to be registered and offered for sale to
the public is reduced, then in such event the total number of shares of
Registrable Stock to be registered and included in the proposed offering
pursuant to the Registration Rights Agreement shall be allocated among the
Existing PPD Shareholders and the New PPD Shareholders as follows:
(a) Unless otherwise agreed among the Holders, the shares
of Registrable Stock to be registered (other than those to be registered to
cover an overallotment) shall be allocated as follows: (i) Sixteen percent
(16%) of such shares of Registrable Stock to be registered (but in any event
not greater than 400,000 shares of Registrable Stock) shall be allocated to and
registered on behalf of the New PPD Shareholders, pro rata, based upon the
total number of Registrable Stock owned by each New PPD Shareholder at the time
of filing of the registration statement; and (ii) the remaining shares of
Registrable Stock to be registered shall be allocated to and registered on
behalf of the Existing PPD Shareholders, pro rata, based upon the total number
of shares of Registrable Stock owned by each Existing PPD Shareholder at the
time of filing the registration statement;
(b) Any shares of Registrable Stock to be registered to
cover an overallotment option granted to the underwriters of such offering
shall be allocated to and registered on behalf of the Existing PPD Shareholders
and the New PPD Shareholders, pro rata, based upon the total number of
Registrable Stock owned by each
<PAGE> 3
Holder at the time of filing the registration statement;
(c) Any remaining shares of Registrable Stock to be
registered and not otherwise allocated under Sections 4(a) and (b) above shall
be allocated to and registered on behalf of the Existing PPD Shareholders, pro
rata, based upon the total number of shares of Registrable Stock owned by each
Existing PPD Shareholder at the time of filing the registration statement; and
(d) It is expressly agreed and acknowledged by each of
the Holders that the shares of Registrable Stock allocated to the Existing PPD
Shareholders, on the one hand, and to the New PPD Shareholders, on the other
hand, may be reallocated (by such group of shareholders) among the Holders in
each such group to the extent that one or more of the Holders in the group
choose not to participate in such registration.
5. No Other Modifications. Except as specifically
amended hereby, the Registration Rights Agreement shall remain in full force
and effect. No change or modification of this Amendment with respect to the
registration rights granted hereunder to the New PPD Shareholders shall be
valid or binding upon the New PPD Shareholders unless such change or
modification is in writing and is signed by New PPD Shareholders holding a
majority of the Registrable Stock owned by all of the New PPD Shareholders.
[NEXT PAGE IS SIGNATURE PAGE]
3
<PAGE> 4
COUNTERPART SIGNATURE PAGE
TO
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
(FOR PPD AND EXISTING PPD SHAREHOLDERS)
IN WITNESS WHEREOF, the Company, the Existing PPD Shareholders
and the New PPD Shareholders have executed counterpart signature pages to this
Amendment as of the date and year first above written.
---------------------- (SEAL)
---------------------- (SEAL)
---------------------- (SEAL)
---------------------- (SEAL)
---------------------- (SEAL)
---------------------- (SEAL)
[CORPORATE SEAL] PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
ATTEST:
- ------------------ By: ------------------------------------
Its: President
- -------- Secretary
4
<PAGE> 5
COUNTERPART SIGNATURE PAGE
TO
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
(FOR NEW PPD SHAREHOLDERS)
IN WITNESS WHEREOF, the Company, the Existing PPD Shareholders
and the New PPD Shareholders have executed counterpart signature pages to this
Amendment as of the date and year first above written.
-----------------------(SEAL)
JOHN D. BRYER
-----------------------(SEAL)
KENNETH H. HARPER
-----------------------(SEAL)
JOSEPH H. HIGHLAND
-----------------------(SEAL)
JOHN H. TIMONEY
-----------------------(SEAL)
STEPHEN L. WAECHTER
5
<PAGE> 6
SCHEDULE 1
EXISTING PPD SHAREHOLDERS
FREDRIC N. ESHELMAN
ERNEST MARIO
JOHN A. McNEILL, JR.
RONALD B. McNEILL
PETER J. WISE
RICHARD CHARLES
RICHARD JOHNSON
6
<PAGE> 7
SCHEDULE 2
NEW PPD SHAREHOLDERS(1)
JOHN D. BRYER
KENNETH H. HARPER
JOSEPH H. HIGHLAND
JOHN H. TIMONEY
STEPHEN L. WAECHTER
(1) The actual number of shares of the Company to be considered as
Registrable Stock for each of the New PPD Shareholders shall be equal
to the total number of shares of Common Stock of the Company received
by each of the New PPD Shareholders in connection with the Merger
whether based upon the Exchange Ratio set forth in the Agreement and
Plan of Reorganization between the Company, APBI and Wilmington Merger
Corp or received pursuant to the buyout of APBI options or vesting of
restricted stock grants.
7
<PAGE> 1
EXHIBIT 10.58
SHAREHOLDER VOTING AGREEMENT
THIS SHAREHOLDER AGREEMENT, is made and entered into as of
this 7th day of June, 1996, by and among the undersigned shareholders (the
"Shareholders") of PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina
corporation (the "Corporation"), and APPLIED BIOSCIENCE INTERNATIONAL INC., a
Delaware corporation ("APBI").
BACKGROUND STATEMENT
The Corporation is contemplating entering into a certain
Agreement and Plan of Reorganization (the "Merger Agreement") with Wilmington
Merger Corp., a North Carolina corporation and wholly-owned subsidiary of the
Corporation ("Merger Sub"), and APBI in which Merger Sub will merge with and
into APBI pursuant to a tax-free reorganization and as a result APBI will
become a wholly-owned subsidiary of the Corporation (the "Merger Transaction").
Shareholders are the owners and holders of the number of
shares of common stock of the Corporation (the "Shares") set forth opposite
their names and signatures below, have authority to enter into this Agreement
and have entered into this Shareholder Voting Agreement in favor of APBI to
agree to vote their respective Shares in favor of the approval and adoption of
the proposed Merger Agreement, subject to satisfaction of the terms and
conditions set forth hereinafter.
1. Voting Agreement. Subject to the approval of the
Merger Agreement by the Board of Directors of the Corporation and to the right
of the Corporation to terminate the Merger Agreement pursuant to its terms, the
Shareholders agree to vote all of their respective Shares in favor of the
approval and adoption of the Merger Agreement and the Merger Transaction.
2. Restrictions on Transferability. The Shareholders
agree that they will not dispose of or in any way encumber the Shares prior to
the consummation of the transactions contemplated herein and in the proposed
Merger Agreement, including the Merger Transaction, and will not take any
action inconsistent with the approval and consummation of such transaction.
3. Authority. Each of the Shareholders represents and
warrants to APBI that (i) he is the sole and exclusive record and beneficial
owner of the Shares set forth below opposite his name, free and clear of any
liens, pledges, options, rights of first refusal or other encumbrances or
claims of any nature whatsoever, except for those existing as of the date
hereof (ii) that he has all necessary right, power and capacity to execute and
deliver this Agreement and to
<PAGE> 2
consummate the transactions contemplated herein, and (iii) that this Agreement
constitutes the valid and binding agreement of the Shareholder enforceable in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting the enforcement of creditors' rights generally and by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4. Term. The term of this Agreement will commence
effective upon the approval of the Merger Agreement by the Board of Directors
and shall terminate upon the sooner of the Effective Time (as defined in the
Merger Agreement) of the Merger Transaction or the termination of the Merger
Agreement as provided therein.
IN WITNESS WHEREOF, the parties have signed and sealed this
Agreement this 7th day of June, 1996.
- ------------------------------ -----------------
Fred N. Eshelman No. of Shares
- ------------------------------ -----------------
John A. McNeill, Jr. No. of Shares
- ------------------------------ -----------------
Ronald B. McNeill No. of Shares
- ------------------------------ -----------------
Ernest Mario No. of Shares
APPLIED BIOSCIENCE INTERNATIONAL INC.
By:
-------------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 1
EXHIBIT 10.59
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (the "Amendment") is made this
25th day of October, 1995 by and between PHARMACEUTICAL PRODUCT DEVELOPMENT,
INC., a North Carolina corporation (hereinafter, the "Tenant"), and PERIMETER
PARK WEST ASSOCIATES LIMITED PARTNERSHIP, a North Carolina limited partnership
(hereinafter, the "Landlord").
WITNESSETH:
WHEREAS, pursuant to a Lease Agreement dated February 22, 1995 by and
between Landlord and Tenant (the "Lease"), Landlord leased to Tenant certain
premises (the "Premises") containing approximately 20,000 rentable square feet
in the building known as 1500 Perimeter Park Drive (the "Building") located in
Morrisville, Wake County, North Carolina, all as more particularly described in
the Lease; and
WHEREAS, Landlord and Tenant desire to amend the Lease in accordance
with the provisions of this Amendment.
NOW, THEREFORE, in consideration of cash in hand paid and the promises
and the provisions contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant hereby agree to amend and modify the Lease as follows:
1. Definition of Terms. All capitalized terms contained herein
and not otherwise defined shall be defined as provided in the Lease.
2. Termination of Lease. Notwithstanding the provisions of
Section 1 of the Lease to the contrary, upon Tenant entering into occupancy of
1400 Perimeter Park West, Morrisville, North Carolina in accordance with that
certain Lease Agreement (the "1400 Lease") by and between Landlord and Tenant
dated of even date herewith, and provided there is no default or event of
default under this Lease by Tenant, or under the 1400 Lease by Tenant, the
Lease Agreement by and between Landlord and Tenant dated January 13, 1992 at
the Building shall be deemed terminated and the parties thereto shall have no
further liability thereunder, except as expressly provided in the Lease, and
except for obligations accrued thereunder and remaining unpaid and unsatisfied.
3. Effective Date. The provisions of this Amendment shall be and
become effective as of the date first indicated above.
4. Severability. In the event any term, covenant or condition of
this Amendment, the Lease, or any amendments thereto shall to any extent be
invalid or unenforceable, the remainder shall not be affected thereby and each
term, covenant or condition shall be valid and enforceable to the full extent
permitted by law.
<PAGE> 2
5. Successors and Assigns. This Amendment shall apply to, inure
to the benefit of, and be binding upon the parties hereto and upon their
respective heirs, legal representatives, successors and permitted assigns,
except as otherwise provided herein.
6. Interpretation. Although the printed provisions of this
Amendment were drafted by Landlord, such fact shall not cause this Amendment to
be construed either for or against Landlord or Tenant.
7. Full Force and Effect. Except as modified hereby, the Lease
remains unmodified and in full force and effect.
8. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of North Carolina.
9. Mutual Acknowledgment of Non-Existence of Claims. Landlord
and Tenant acknowledge and agree that as of the day hereof there are no known
claims by either party against the other party hereto arising from the
relationship as Landlord and Tenant, respectively, Pursuant to the Lease, as
amended.
IN WITNESS WHEREOF, the parties hereto have hereunto executed
this Amendment under seal as of the day and year first above written.
LANDLORD:
PERIMETER PARK WEST ASSOCIATES LIMITED
PARTNERSHIP, a North Carolina
limited partnership (SEAL)
Date of Execution: By: /s/ Harold S. Lichtin (SEAL)
Nov 30, 1995 -----------------------------
- ----------------- Harold S. Lichtin,
General Partner
TENANT:
PHARMACEUTICAL PRODUCT DEVELOPMENT,
INC., a North Carolina corporation
Date of Execution: By: /s/ Fred N. Eshelman
11-15-95 -------------------------
- ------------------ Fred N. Eshelman, CEO
Witness/Attest:
/s/ Margaret T. Davenport
- ---------------------------------
Print Name: Margaret T. Davenport
Title: Director, Corp. Admin.
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 10.60
FIRST AMENDMENT
TO
LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE ("First Amendment") is made and entered
into this 25th day of March, 1996, by and between LOI BUILDING, INC., a North
Carolina corporation (herein "Landlord"), PHARMACEUTICAL PRODUCT DEVELOPMENT,
INC., a North Carolina corporation (herein "Tenant") and BBC FAMILY LIMITED
PARTNERSHIP, a North Carolina limited partnership (herein "BBC") amends that
certain Lease Agreement between Landlord and Tenant dated August 18, 1995 for
approximately 8,155 rentable square feet (as amended, herein the "Lease
Agreement").
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby amend the Lease
Agreement as follows:
1. All references in the Lease Agreement to "Pinehurst National" or
"Pinehurst National Development Corporation" (being one and the same,
collectively, hereinafter "Pinehurst") shall be deemed to refer to BBC. BBC,
by signing this First Amendment, hereby agrees to be bound by and to perform
all of the agreements, covenants and obligations stated to be performed by
Pinehurst under the Lease Agreement, including but not limited to assumption
and satisfaction in a timely manner of Tenant's liability for any and all
termination fees provided for therein, the same to be paid by BBC on the due
date thereof.
2. This First Amendment constitutes a "Separate Agreement" between
Tenant and BBC, as defined in Section 1.3.2 of the Lease Agreement between
Tenant and BBC of even date herewith.
3. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4. Except as expressly modified or changed herein, the Lease
Agreement shall remain in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment under seal as of the day and year first above written.
LANDLORD: LOI BUILDING, INC.
By: /s/ B. Rex Stephens
-------------------------------------
Title: Vice President
-------------------------------
TENANT: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
By: /s/ Fred Eshelman
-------------------------------------
Title: CEO
-------------------------------
BBC: BBC FAMILY LIMITED PARTNERSHIP
By: /s/
--------------------------------------
Its: General Partner
<PAGE> 3
SECOND AMENDMENT
TO
LEASE AGREEMENT
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered
into this 25th day of March, 1996, by and between LOI BUILDING, INC., a North
Carolina corporation (herein "Landlord"), PHARMACEUTICAL PRODUCT DEVELOPMENT,
INC., a North Carolina corporation (herein "Tenant") and BBC FAMILY LIMITED
PARTNERSHIP, a North Carolina limited partnership (herein "BBC") amends that
certain Lease Agreement between Landlord and Tenant dated May 18, 1994 as
amended by First Amendment dated August 18, 1995 (as amended, herein the "Lease
Agreement").
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby amend the Lease
Agreement as follows:
1. All references in the Lease Agreement to "Pinehurst National"
or "Pinehurst National Development Corporation" (being one and the same,
collectively, hereinafter "Pinehurst") shall be deemed to refer to BBC. BBC, by
signing this Second Amendment, hereby agrees to be bound by and to perform all
of the agreements, covenants and obligations stated to be performed by
Pinehurst under the Lease Agreement, including but not limited to assumption
and satisfaction in a timely manner of Tenant's liability for any and all
termination fees provided for therein, the same to be paid by BBC on the due
date thereof.
2. This Second Amendment constitutes a "Separate Agreement"
between Tenant and BBC, as defined in Section 1.3.2 of the Lease Agreement
between Tenant and BBC of even date herewith.
3. This Second Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4. Except as expressly modified or changed herein, the Lease
Agreement shall remain in full force and effect.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have duly executed this Second
Amendment under seal as of the day and year first above written.
LANDLORD: LOI BUILDING, INC.
By: /s/ B. Rex Stephens
---------------------------
Title: Vice President
--------------------
TENANT: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
By: /s/ Fred Eshelman
---------------------------
Title: CEO
---------------------
BBC: BBC FAMILY LIMITED PARTNERSHIP
By: /s/
---------------------------
Its: General Partner
<PAGE> 5
THIRD AMENDMENT
TO
LEASE AGREEMENT
THIS THIRD AMENDMENT TO LEASE ("Third Amendment") is made and entered
into this 25th day of March, 1996, by and between LOI BUILDING, INC., a North
Carolina corporation (herein "Landlord"), PHARMACEUTICAL PRODUCT DEVELOPMENT,
INC., a North Carolina corporation (herein "Tenant") and BBC FAMILY LIMITED
PARTNERSHIP, a North Carolina limited partnership (herein "BBC") amends that
certain Lease Agreement between Landlord and Tenant dated February 9, 1993, as
amended by First Amendment dated December 14, 1994 and Second Amendment dated
August 18, 1995 (as amended, herein the "Lease Agreement").
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained and for other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby amend the Lease
Agreement as follows:
1. All references in the Lease Agreement to "Pinehurst National" or
Pinehurst National Development Corporation" (being one and the same,
collectively, hereinafter "Pinehurst") shall be deemed to refer to BBC. BBC,
by signing this Third Amendment, hereby agrees to be bound by and to perform
all of the agreements, covenants and obligations stated to be performed by
Pinehurst under the Lease Agreement, including but not limited to assumption
and satisfaction in a timely manner of Tenant's liability for any and all
termination fees provided for therein, the same to be paid by BBC on the due
date thereof.
2. This Third Amendment constitutes a "Separate Agreement" between
Tenant and BBC, as defined in Section 1.3.2 of the Lease Agreement between
Tenant and BBC of even date herewith.
3. This Third Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
4. Except as expressly modified or changed herein, the Lease Agreement
shall remain in full force and effect.
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed this Third
Amendment under seal as of the day and year first above written.
LANDLORD: LOI BUILDING, INC.
By: /s/ B. Rex Stephen
-------------------------------------
Title: Vice President
-------------------------------
TENANT: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
By: /s/ Fred Eshelman
-------------------------------------
Title: CEO
-------------------------------
BBC: BBC FAMILY LIMITED PARTNERSHIP
By: /s/
--------------------------------------
Its: General Partner
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated February 22, 1996, on our audits of the combined financial
statements of Pharmaceutical Product Development, Inc., its affiliates and its
consolidated subsidiaries. We also consent to the reference of our firm under
the captions "Selected Historical and Unaudited Pro Forma Combined Financial
Data", "Accounting Treatment" and "Experts".
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
July 11, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Washington, D.C.,
July 12, 1996
