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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______________ to ______________.
Commission File Number 0-27570
PHARMACEUTICAL PRODUCT
DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1640186
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3151 SOUTH SEVENTEENTH STREET
WILMINGTON, NORTH CAROLINA
(Address of principal executive offices)
28412
(ZIP CODE)
Registrant's telephone number, including area code (910) 251-0081
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 24,526,281 shares of common
stock, par value $0.10 per share, as of April 26, 1999.
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<PAGE>
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 .................................................................. 3
Consolidated Condensed Balance Sheets as of March 31,1999
and December 31, 1998 .................................................................... 4
Consolidated Condensed Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 .................................................................. 5
Notes to Consolidated Condensed Financial Statements ....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ....................................................... 15
Signatures ..................................................................................... 16
</TABLE>
2
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Three Months Ended
March 31,
------------------------
1999 1998
-------- -------
Life sciences revenues, net of subcontractor costs of
$23,152 and $19,127, respectively $ 68,773 $51,977
Discovery sciences revenues, net of subcontractor costs of
$16 and $22, respectively 837 177
-------- -------
Net revenue 69,610 52,154
-------- -------
Direct costs - Life sciences 33,378 26,427
Direct costs - Discovery sciences 1,483 1,095
Selling, general and administrative expenses 22,037 17,630
Depreciation and amortization 3,465 3,025
Merger costs 218 -
-------- -------
60,581 48,177
-------- -------
Operating income 9,029 3,977
Interest income, net 804 238
Other income, net 389 1,395
-------- -------
Income from continuing operations before provision
for income taxes 10,222 5,610
Provision for income taxes 3,966 2,176
-------- -------
Income from continuing operations 6,256 3,434
-------- -------
Income (loss) from operations of discontinued environmental
sciences segment, net of income taxes of $(79) and $720,
respectively (125) 1,103
-------- -------
Net income $ 6,131 $ 4,537
======== =======
Income from continuing operations per share:
Basic $ 0.26 $ 0.15
========= =======
Diluted $ 0.25 $ 0.15
========= =======
Income (loss) from discontinued operations per share:
Basic $ (0.01) $ 0.05
========= =======
Diluted $ (0.01) $ 0.05
========= =======
Net income per share:
Basic $ 0.25 $ 0.20
========= =======
Diluted $ 0.25 $ 0.20
========= =======
Weighted average number of common shares outstanding:
Basic 24,434 23,025
Dilutive effect of stock options 481 82
--------- -------
Diluted 24,915 23,107
========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
(unaudited)
Current assets
Cash and cash equivalents $ 38,168 $ 34,083
Accounts receivable and unbilled services, net 119,245 126,815
Investigator advances 1,353 1,505
Prepaid expenses and other current assets 7,561 7,812
Deferred tax asset 3,047 2,751
--------- ---------
Total current assets 169,374 172,966
Property, plant and equipment, net 45,513 42,509
Goodwill, net 10,292 14,869
Other assets, net 26,316 6,238
--------- ---------
Total assets $ 251,495 $ 236,582
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 6,372 $ 3,580
Accounts payable 6,813 7,812
Payables to investigators 5,739 5,204
Other accrued expenses 24,187 28,007
Unearned income 37,967 34,446
--------- ---------
Total current liabilities 81,078 79,049
Long-term debt, less current maturities 164 161
Deferred rent and other 1,803 1,962
--------- ---------
Total liabilities 83,045 81,172
--------- ---------
Shareholders' equity
Common stock 2,453 2,343
Paid-in capital 131,806 123,709
Retained earnings 36,332 29,929
Accumulated other comprehensive income (2,141) (571)
--------- ---------
Total shareholders' equity 168,450 155,410
--------- ---------
Total liabilities and shareholders' equity $ 251,495 $ 236,582
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Three Months Ended
March 31,
-----------------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net income $ 6,131 $ 4,537
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of CCCR - (1,071)
Depreciation and amortization 3,662 3,479
Change in operating assets and liabilities (3,070) (6,954)
Other (880) 1,508
--------- --------
Net cash provided by operating activities 5,843 1,499
--------- --------
Cash flows from investing activities:
Cash received from repayment of note receivable 500 -
Sale of investments - 8,000
Purchases of investments (3,500) -
Purchases of property and equipment (6,457) (4,086)
Net cash received (paid) for acquisitions 738 (1,006)
Net cash received in sale of business 3,421 5,285
--------- --------
Net cash (used in) provided by investing activities (5,298) 8,193
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 982 -
Repayment of long-term debt (102) (554)
Proceeds from issuance of common stock 4,230 1,111
Other - 48
--------- --------
Net cash provided by financing activities 5,110 605
--------- --------
Effect of exchange rate changes on cash (1,570) 46
--------- --------
Net increase in cash and cash equivalents 4,085 10,343
Cash and cash equivalents, beginning of the period 34,083 15,879
--------- --------
Cash and cash equivalents, end of the period $ 38,168 $ 26,222
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 condensed 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 consolidated condensed 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 on Form 10-K for the year ended December 31, 1998. The results of
operations for the three month period ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year or any other period.
The amounts on the December 31, 1998 consolidated condensed balance sheet have
been derived from the audited financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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.
RECLASSIFICATIONS
Certain 1998 financial statement amounts have been reclassified to
conform with the 1999 presentation.
2. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated condensed financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
3. ACQUISITIONS
POOLINGS
In March 1999, the Company acquired ATP, Inc. ("ATP"), a health
information services company. The Company acquired ATP in exchange for
approximately 876,000 shares of the Company's common stock. Outstanding ATP
options were exchanged for options to acquire approximately 216,000 shares of
the Company's common stock. This acquisition was accounted for as a pooling of
interests transaction as of January 1, 1999. Pro forma information is not
presented nor have the Company's consolidated financial statements for 1998 been
restated to reflect the impact of this acquisition because the results of
operations of ATP for the year ended December 31, 1998 were not material to the
consolidated results of the Company.
PURCHASES
In January 1998, the Company acquired two environmental consulting
businesses for a total of $1,006,000 in cash and the potential for the former
owners to earn an additional amount depending on the profitability of the
businesses for a certain period after the acquisition. In connection with these
acquisitions, the Company recorded approximately $900,000 in goodwill. These
businesses were disposed of within the environmental sciences segment on January
31, 1999 (see Note 6 of Notes to Consolidated Condensed Financial Statements).
Pro forma information is not presented as the acquired companies' results of
operations prior to the dates of the acquisitions were not material individually
or collectively to the Company.
6
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. EARNINGS PER SHARE
The computation of basic income per share information is based on the
weighted average number of common shares outstanding during the period. The
computation of diluted income per share information is based on the weighted
average number of common shares outstanding during the period plus the effects
of any dilutive common stock equivalents at the end of the period.
5. SALE OF BUSINESS
In February 1998, the Company, through its subsidiary Clinix
International Inc., sold substantially all of the assets of the Chicago Center
for Clinical Research ("CCCR"). The consideration received by the Company for
CCCR totaled approximately $7,785,000, which was comprised of $5,285,000 in cash
and a promissory note of $2,500,000 payable over five years. The sale resulted
in a gain of approximately $1,071,000 that was recognized as other income during
the first quarter of 1998. As part of the sales agreement, the Company continued
to provide CCCR with certain clinical and administrative services for an agreed
upon amount through the first quarter of 1999.
6. DISCONTINUED OPERATIONS
Effective January 31, 1999, the Company sold its environmental sciences
segment to Environ Holdings, Inc., a new company formed by the management of the
segment, for total consideration of approximately $26,244,000. The Company
received as consideration cash of $1,244,000, a four-year note for $7,000,000
and a 12-year note for $18,000,000. The sale resulted in no gain or loss because
the sales price was equal to the book value of the net assets sold at January
31, 1999. In the first quarter of 1999, the Company received full pre-payment of
the four-year note. Results of operations for the three months ended March 31,
1998 have been restated to reflect the environmental services segment as
discontinued operations.
The consolidated balance sheet at December 31, 1998 includes the
following assets and liabilities of the environmental sciences segment (in
thousands):
December 31,
------------
1998
----
Current assets $ 24,214
Total assets 32,527
Current liabilities 6,030
Total liabilities 6,209
--------
Net assets of discontinued operations $ 26,318
========
7. COMPREHENSIVE INCOME
The Company's total comprehensive income for the three month periods
ended March 31, 1999 and 1998 was $4,561,000 and $4,583,000, respectively.
Information concerning the components of the Company's other comprehensive
income (loss) for the three month periods ended March 31, 1999 and 1998 is as
follows (in thousands):
Three Months Ended March 31,
1999 1998
----------------------------
Changes in cumulative translation adjustment $ (1,570) $ 46
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY OVERVIEW
Pharmaceutical Product Development, Inc. and its subsidiaries,
collectively (the "Company"), provide a broad range of research and development
and consulting services in the life sciences and discovery sciences segments.
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. Discovery sciences
services include target identification and validation, compound creation,
screening and compound selection. The Company provides its services under
contract to clients in the pharmaceutical, general chemical, agrochemical,
biotechnology and other industries. In addition, Discovery sciences services
performs discovery research on certain compounds for which the Company holds a
license. The Company's life sciences services are marketed primarily in the
United States and Europe. Revenues derived from the Company's discovery segment
were all generated in the United States.
Prior to the divestiture of its environmental sciences segment on
January 31, 1999 (see Note 6 of Notes to Consolidated Condensed Financial
Statements), the Company also provided environmental sciences services.
Environmental sciences services included assessment and management of chemical
and environmental health risk, site investigation and remediation planning and
litigation support. In addition to the industries mentioned above, the
environmental sciences segment also marketed services to clients in the
industrial, manufacturing and oil and gas industries. The environmental sciences
segment marketed its services primarily in the United States and Europe.
LIFE SCIENCES GROUP
The Company's Life Sciences Group provides services through PPD
Pharmaco, Inc. and its wholly owned subsidiaries (collectively "PPD Pharmaco")
in the Americas (United States, Canada, South America), Africa, Asia, Europe and
the Pacific Rim. PPD Informatics, a division of PPD Pharmaco, provides software
development and system integration services to the pharmaceutical and
biotechnology industries.
PPD Pharmaco provides its clients 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 Pharmaco's integrated
services offer its clients a variable cost alternative to the fixed costs
associated with internal drug development. PPD Pharmaco's professional CRO
services include Phase I clinical testing, laboratory services, patient and
investigator recruitment, Phase II-IV clinical trial monitoring and management,
clinical data management and biostatistical analysis, regulatory consulting and
submissions, medical writing, pharmacovigilance, and healthcare economics and
outcomes research. The Company believes that it is one of a few CROs in the
world capable of providing such a broad range of clinical development services.
PPD Informatics became a division of the Company through the Company's
acquisition of Belmont Research, Inc. in March 1997. PPD Informatics clients
include international and domestic pharmaceutical and biotechnology companies,
scientific software vendors and government agencies, including the FDA. PPD
Informatics develops specialized software products to support different aspects
of the pharmaceutical research and development process, including drug
discovery, clinical trials and regulatory review. Current PPD Informatics
software products include ResolveTM, which manages data queries to investigator
sites, TableTrans(R), which enables ease of data transformation, and
CrossGraphs(R), which is used for exploration and presentation of research data.
During 1998, the Life Sciences Group also included Intek Labs, Inc.
("Intek"), which was acquired in November 1997. Intek provides molecular
genotyping, phenotyping and large-scale genomic DNA purification and archiving
services through its Good Laboratory Practice (GLP) certified laboratories.
Intek also furnishes pharmacogenetic services for clinical trials. In February
1999, Intek became a subsidiary of PPGx, Inc. ("PPGx"), the Company's
pharmacogenomics joint venture with Axys Pharmaceuticals, Inc. PPGx provides
pharmacogenomics products and services to pharmaceutical and biotechnology
companies. Pharmacogenomics is the use of genetic information to predict the
safety, toxicity and/or efficacy of drugs in individual patients or groups of
patients. Pharmacogenomics is becoming widely adopted as a drug discovery and
development tool and increasingly important as part of an individual's diagnosis
and treatment regimen. The Company has exclusive marketing rights to PPGx
pharmacogenomics products and services. The Company also owns a minority
position in PPGx, with the option to increase its ownership share.
8
<PAGE>
In March 1999, the Company acquired ATP, Inc. ("ATP"), a healthcare
information services company. ATP provides customized inbound and outbound
telecommunications programs targeting consumers and health care providers. For
more detailed information on the Company's Life Sciences Group, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
DISCOVERY SCIENCES GROUP
PPD Discovery, Inc. ("PPD Discovery") was established in June 1997 when
the Company acquired SARCO, Inc. ("SARCO"), a combinational chemistry company,
and the GSX System, a functional genomics platform technology. PPD Discovery
focuses on the discovery research segment of the research and development
outsourcing market. In May 1998, the Company created GenuPro, Inc. ("GenuPro"),
a wholly owned subsidiary, which holds licenses to a number of compounds in the
genitourinary field. GenuPro manages and performs the discovery research and
development of these compounds. For more detailed information on the Company's
Discovery Sciences Group, see the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
Statements in this Management's Discussion and Analysis that are not
descriptions of historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 reflecting
management's current view with respect to certain future events and financial
performance that are subject to risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those set forth herein and in the Company's other SEC filings, and
including, in particular, risks relating to government regulation; dependence on
certain industries; the fixed price nature of contracts; the commencement,
completion or cancellation of large contracts; progress of ongoing contracts;
potential liability associated with the Company's lines of business; dependence
on personnel; management of growth and competition. Since a large percentage of
the Company's operating costs are relatively fixed variations in the timing and
progress of large contracts can materially affect results. See "Potential
Volatility of Quarterly Operating Results and Stock Price".
RESULTS OF OPERATIONS
GENERAL
During the first quarter of 1999, the Company reported net income of
$6.1 million, or $0.25 per diluted share, compared to net income of $4.5
million, or $0.20 per diluted share, during the first quarter of 1998. Net
income from continuing operations (excluding merger costs, operations of the
discontinued division and gain on sale of CCCR) of $6.4 million was 132.8%
higher than net income from continuing operations for the same period a year
ago.
In March 1999, the Company acquired ATP, Inc. ("ATP"), a health
information services company. ATP provides customized inbound and outbound
telecommunications programs targeting consumers and health care providers. The
Company acquired ATP in exchange for approximately 876,000 shares of the
Company's common stock. Outstanding ATP options became options to acquire
approximately 216,000 shares of the Company's common stock. This acquisition was
accounted for as a pooling of interests transaction. Results of operations for
ATP as included in the consolidated results of operations of the Company
beginning January 1, 1999. Results of operations of the Company for the period
prior to the acquisition were not restated as ATP's results of operations for
the year ended December 31, 1998 were not material to the Company's 1998
operating results.
In February 1999, the Company formed a joint venture, PPGx, with Axys
Pharmaceuticals, Inc. to pursue the business of pharmacogenomics. The Company
contributed $1.5 million in cash, Intek, and the rights to a software license
from Axys for an 18.2% ownership interest in PPGx. Separately, the Company and
Axys entered into a software licensing agreement whereby the Company licensed
certain software from Axys for $2.0 million. The Company has exclusive marketing
rights to PPGx pharmacogenomics products and services and an option to increase
its ownership share of PPGx after the first anniversary of PPGx.
Effective January 31, 1999, the Company sold its environmental sciences
segment to Environ Holdings, Inc., a new company formed by the management of the
segment. The Company received as consideration cash of $1.4 million, a four-year
note in the amount of $7.0 million and a 12-year note in the amount of $18.0
million. The Company received an opinion from Lehman Brothers to the effect that
the consideration received was fair from a financial standpoint. The Company did
not recognize a gain or loss as a result of the sale because the sales price
9
<PAGE>
was equal to the book value of the net assets sold at January 31, 1999. The
Company also entered into a three-year consulting agreement to provide certain
consulting services to Environ Holdings for a fee of $0.5 million per year.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998
Net revenue increased $17.5 million, or 33.5%, to $69.6 million in 1999
from $52.1 million in 1998. The Life Sciences Group's operations accounted for
98.8% of the Company's net revenue for the first quarter of 1999. The Life
Sciences Group generated net revenue of $68.8 million, up $16.8 million, or
32.3%, from the 1998 first quarter. The growth in the Life Sciences Group
operations was primarily attributable to an increase in the size, scope and
number of contracts in the global CRO Phase II-IV division. The ATP acquisition
contributed net revenue of $3.3 million for the three months ended March 31,
1999. The Discovery Sciences Group generated net revenue of $0.8 million, up
$0.7 million, or 372.9%, from the 1998 first quarter. The growth in the
Discovery Sciences operations was primarily attributable to an increase in the
number of contracts in the combinatorial chemistry division and a joint
development and license agreement (signed during the fourth quarter of 1998) in
the functional genomics division.
Total direct costs increased 26.7% to $34.9 million from $27.5 million
in the same period last year, and gross margin increased 2.7% from the same
period a year ago. Life Sciences Group direct cost increased to $33.4 million in
1999 as compared to $26.4 million in 1998. The ATP acquisition contributed
direct costs of $1.6 million for the three months ended March 31, 1999. Life
Sciences Group direct costs decreased as a percentage of related net revenue to
48.5% from 50.8%. This decrease was principally due to higher utilization of
direct labor employees, the different mix of contracts performed and a focused
effort to control costs. Discovery Sciences Group direct costs increased to $1.5
million in 1999 as compared to $1.1 million in 1998. This increase was due to
the addition of GenuPro's costs in the 1999 period. (GenuPro was created in
May 1998.)
Selling, general and administrative ("SG&A") expenses increased 25.0% to
$22.0 million in 1999 from $17.6 million in the same period last year. The
increase is primarily attributable to investment in additional personnel to
support the Company's expanding operations. As a percentage of net revenue, SG&A
expenses decreased to 31.7% from 33.8% last year.
Total depreciation and amortization expense of $3.5 million in 1999 was
$0.4 million, or 14.6%, higher than the same period last year. The increase was
related to the Company's growth, as well as the depreciation of the ongoing
capital investment in the Company's business. The Company's capital expenditures
were $6.5 million in the first quarter of 1999. Expanded capabilities in the
Company's labs and Discovery Sciences Group accounted for approximately 43% of
this capital investment, while the enhancement and expansion of information
technology capacities accounted for approximately 25% of this capital
investment. The remaining capital expenditures were predominately incurred in
connection with the expansion of existing operations and the opening of new
offices.
During the first quarter of 1999, the Company recorded merger costs of
$0.2 million in connection with acquisition of ATP. These costs were primarily
cash expenses, such as legal and accounting fees related to this transaction.
Operating income improved to $9.0 million for the three months ended
March 31, 1999, from $4.0 million for the three months ended March 31, 1998.
Excluding merger costs, the Company's adjusted operating income of $9.2 million
in 1999 was 132.5% higher than operating income of $3.9 million for the same
period last year. As a percentage of net revenue, the quarterly operating income
of 13.0% represents a dramatic improvement from 7.6% of net revenue for the same
period last year.
Net interest and other income decreased $0.4 million, falling to $1.2
million for the three months ending March 31, 1999 from $1.6 million for the
three months ending March 31, 1998. Excluding the gain related to the sale of
CCCR in 1998, net interest and other income of $1.2 million was $0.6 million
higher than the prior year for the same period. The improvement was primarily
the result of the increase in interest income of $0.5 million. During the first
quarter of 1999, the Company received $0.4 million in interest income related to
the notes receivable from CCCR and Environ Holdings. The Company expects to
receive an additional $0.4 million per quarter during 1999 related to interest
income unless the notes are paid off early.
The Company recorded a loss from discontinued operations, net of income
tax expense or benefit, related to its environmental sciences segment, of $0.1
million in the first quarter of 1999, as compared to income of $1.1 million in
the first quarter of 1998. The environmental sciences segment was sold on
January 31, 1999.
10
<PAGE>
The provision for income taxes increased $1.8 million to $4.0 million
for the three months ended March 31, 1999, as compared to $2.2 million for the
three months ended March 31, 1998 due to the Company's increase in earnings
before income taxes. As a percentage of income before income taxes, the
provision for income taxes has remained consistent at 38.8%.
The net income of $6.1 million in the first quarter of 1999 represents
an improvement of $1.6 million over the $4.5 million over the same quarter a
year ago. Net income per basic and diluted share of $0.25 for the first quarter
of 1999 compares to $0.20 in the first quarter of 1998. Excluding non-recurring
items (merger costs, results of operations of the discontinued environmental
services segment and gain on sale of CCCR), the Company's first quarter 1999
income from continuing operations of $6.4 million is 132.8% higher than income
from continuing operations of $2.7 million for the first quarter of 1998. On an
equivalent earnings-per-share basis, net income per diluted share (excluding
non-recurring costs) of $0.26 compares to net income per diluted share of $0.12
for the same period last year computed on 1.8 million less shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $38.2 million of cash and cash
equivalents on hand. The Company has historically funded its operations and
growth, including acquisitions, with cash flow from operations, borrowings and
through the sale of the Company's stock.
For the three months ended March 31, 1999, the Company experienced a net
increase in cash from operating activities of $5.8 million. For the period, net
income of $6.1 million and depreciation and amortization of $3.7 million were
partially offset by the net change of $3.1 million in operating assets and
liabilities (which includes a $8.7 million increase in billed and unbilled
receivables, primarily as a result of growth in net revenue). The number of days
revenue outstanding in accounts receivable and unbilled services, net of
unearned income, were 72.0 and 73.3 days as of March 31, 1999 and March 31,
1998, respectively. The decrease is a result of a focused effort by management
on collections.
For the three months ended March 31, 1999, the Company's investing
activities used $5.3 million in cash. Capital expenditures of $6.5 million and
the purchase of investment in PPGx of $3.5 million were partially offset by net
cash received in the sale of business of $3.4 million and $0.5 million from the
repayment of note receivable.
For the three months ended March 31, 1999, the Company's financing
activities provided $5.1 million in cash, as net proceeds from stock option
exercises of $4.2 million and the proceeds from long-term debt related primarily
to ATP's building loan of $1.0 million were partially offset by $0.1 million in
net repayment of long-term debt.
Working capital as of March 31, 1999 was $88.3 million compared to $93.9
million at December 31, 1998. The decrease in working capital is a result of the
divestiture of the environmental sciences segment as of January 31, 1999.
Excluding the environmental sciences segment from the balance sheet as of
December 31, 1998, the working capital would have been $74.6 million.
In June 1998, the Company obtained a $50.0 million revolving credit
facility with First Union National Bank. Interest accrues on amounts borrowed at
a floating rate currently equal to LIBOR plus 0.625% per year. Indebtedness
under the line is unsecured and subject to certain covenants relating to
financial ratios and tangible net worth. The unused portion of the loan is
available to provide working capital and for general corporate purposes. As of
March 31, 1999, the Company had $15.0 million reserved under this facility in
the form of a letter of credit. This credit facility expires in June 2000, at
which time any outstanding balance is due.
In August 1998, the Company renegotiated a credit facility for $50.0
million with Wachovia Bank, N.A. Interest accrues on amounts borrowed at a
floating rate currently equal to LIBOR plus 0.70% per year. Indebtedness under
the line is unsecured and subject to certain covenants relating to financial
ratios and tangible net worth. The unused portion of the loan is available to
provide working capital and for general corporate purposes. As of March 31,
1999, the Company had $3.3 million outstanding under this facility. This credit
facility expires in August 1999, at which time the outstanding balance is due.
The Company plans to renegotiate this credit facility before its expiration
date.
The Company expects to continue expanding its operations through
internal growth and strategic acquisitions. The Company expects such activities
will be funded from existing cash, cash flow from operations, borrowings under
its credit facilities and through the sale of the Company's stock. The Company
believes that such
11
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sources of cash will be sufficient to fund the Company's operations for at least
the next 12 months. The Company is currently evaluating a number of acquisitions
and other growth opportunities which may require additional external financing,
and the Company may from time to time seek to obtain funds from public or
private issuances of equity or debt securities.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year. As a
result, computer systems and/or software used by many companies in a very wide
variety of applications may experience operating difficulties unless they are
modified or upgraded to adequately process information involving, related to or
dependent upon the four digit field. Significant uncertainty exists concerning
the scope and magnitude of problems associated with the Year 2000.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 failures and has established an internal review
team to address the Year 2000 issue that encompasses operating and
administrative areas of the Company. During the first quarter of 1997, a team of
experienced information technology staff was assigned to work with Company
personnel to identify and resolve significant Year 2000 issues in a timely
manner. In addition, executive management regularly monitors the status of the
Company's Year 2000 remediation plans. The process includes an assessment of
affected equipment and software, development of remediation plans, execution of
those plans and testing of all technology affected by this issue. In addition,
the Company is engaged in assessing the Year 2000 issue with significant
suppliers and clients.
At March 31, 1999, the assessment process is 98% complete for all
equipment (including computer hardware and software technology) used internally
by the Company as compared to 95% at December 31, 1998. Remediation is well
underway, with approximately 90% of all systems requiring remediation completed
at March 31, 1999 as compared to 80% at December 31, 1998. All systems,
regardless of whether they require remediation, are being tested to ensure Year
2000 compliance. The Company has completed testing for Year 2000 compliance as
of March 31, 1999 for 95% of our systems. The Company expects to complete the
remaining effort by June 1999. The Company has initiated formal communications
with its significant suppliers in North America and Europe to determine the
extent to which the Company is vulnerable to third party failure to remediate
Year 2000 compliance problems. The Company is in regular communication with key
suppliers and clients, and responds promptly to all requests for information
regarding Year 2000 compliance. Although there can be no assurance, based on
current information available, management believes that it will be able to
perform all services and provide all products it currently offers without any
material adverse effects arising from failure to remediate deficiencies arising
from Year 2000.
External and internal costs specifically associated with applying vendor
upgrades, testing and modifying internal use software for Year 2000 compliance
are expensed as incurred. The Company pays for Year 2000 expenses with cash from
operating activities. The percentage of the Company's information technology
budget used for remediation is approximately 11% in 1998 and 5% in 1999. To
date, the Company has spent $1.5 million on Year 2000 compliance, and expects to
spend an additional $0.15 million to complete the compliance process. Of the
total amount that the Company expects to spend, $1.25 million is attributable to
internal labor costs for assessment and testing. Although internal resources
have been dedicated to Year 2000 efforts, work has been spread across all areas
and there has been no material delay in any major projects.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company has
represented to some clients that it intends to be nearly complete with our Year
2000 compliance by April 1999. If unexpected issues arise causing delays in the
clinical studies being performed for these clients, the Company will have a
specified period of time to correct those issues. If not corrected, the client
can modify or terminate its contract with the Company. The Company believes that
modification or termination of one or more client contracts represents the most
reasonably likely adverse event, which might arise from material Year 2000
compliance failures. Business contingency plans are being developed in case of
periodic outages of power and communications across our locations worldwide. Due
to the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party suppliers and
clients, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on its results of
operations, liquidity or financial condition.
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The Company has significantly reduced the level of uncertainty about
Year 2000 problems and, in particular, about Year 2000 compliance and readiness
of its key suppliers and clients, as it nears completion of the inquiry, testing
and replacement phase. The Company also believes that its information technology
staff, which has been instrumental in the Company's Year 2000 compliance
efforts, may be able to mitigate many Year 2000 problems. However, the Company
will continue to assess and develop contingency plans for a possible Year 2000
failure as it completes its testing of Year 2000 issues.
The cost of the Year 2000 compliance project and the time by which the
Company expects to complete its Year 2000 assessment and remediation are
estimates, based on numerous assumptions, including the continued availability
of funding resources and third party modification plans. However, there can be
no guarantee that these estimates are accurate and will be achieved, and actual
results could differ significantly from management's expectations. In addition,
there is no guarantee that the Company's evaluation of the most likely effects
of a material Year 2000 compliance failure is correct, or that its plan to
address such failure will be adequate. In either instance, the effect upon the
Company's financial condition could be material.
INFLATION
The Company believes the effects of inflation have not had a material
adverse effect on its results of operations or financial condition.
EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS
The vast majority of the Company's contracts are entered into by the
Company's United States or United Kingdom subsidiaries. The contracts entered
into by the United States subsidiaries are almost always denominated in United
States dollars.
Contracts between the Company's United Kingdom subsidiaries and their
clients are generally denominated in pounds sterling. Substantially all of the
United Kingdom subsidiaries' expenses, such as salaries, services, materials and
supplies, are paid in pounds sterling. However, the Company'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 the Company's consolidated financial results, and also affect the
amounts in dollars actually received by the Company from such subsidiaries.
The Company currently participates in only a small number of
transactions involving multiple currencies. In most of those situations,
contractual provisions either limit or reduce the translation risk. Financial
statement translation has not, to date, been material to the Company's balance
sheet. The reasons for this are that the majority of international operations
are located in the United Kingdom, which traditionally has had a relatively
stable currency, and that international operations have not accounted for a
significant portion of total operations (approximately 15%). It is anticipated
that those conditions will persist for at least the next 12 months.
There are no material exchange controls currently in effect in any
country in which the Company'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 the Company performs services
for clients located in a number of foreign jurisdictions, to date, the Company
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 the Company, such
restrictions could have an adverse effect on the Company's business.
POTENTIAL VOLATILITY OF QUARTERLY OPERATING RESULTS AND STOCK PRICE
The Company'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, management of growth and changes in the mix of
services. Since a large percentage of the Company's operating costs are
relatively fixed, variations in the timing and progress of large contracts can
materially affect quarterly results. To the extent the Company's international
business increases, exchange rate fluctuations and other international business
risks may also influence these results. The Company 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 or other factors beyond the Company's control, such as changes
in earnings estimates by analysts, market conditions in the CRO,
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pharmaceutical and biotechnology industries and general economic conditions
could affect the market price of the Common Stock in a manner unrelated to the
longer-term operating performance of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to foreign currency risk by virtue of its
international operations. The Company conducts business in several foreign
countries and approximately 15% and 13% of the Company's net revenues for the
three months ended March 31, 1999 and 1998, respectively, were derived outside
the United States. Funds generated by each subsidiary of the Company are
generally reinvested in the country where they are earned. The operations in the
United Kingdom have generated more than 45% of the Company's revenue from
foreign operations. Accordingly, some exposure exists to potentially adverse
movements in the pound sterling. The United Kingdom has traditionally had a
relatively stable currency. It is anticipated that those conditions will persist
for at least the next 12 months.
Additionally, the Company's consolidated financial statements are
denominated in U.S. dollars and, accordingly, changes in the exchange rates
between the Company's subsidiaries' local currency and the U.S. dollar will
affect the translation of such subsidiaries' financial results into U.S. dollars
for purposes of reporting the Company's consolidated financial results.
Translation adjustments are reported as a component of accumulated other
comprehensive income (loss) as a separate component of the balance sheet.
Financial statement translation has not, to date, been material to the Company's
balance sheet. Such adjustments may in the future be material to the Company's
financial statements.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 10.129 First Amendment to Credit and Security Agreement dated
March 30, 1999, between Applied Bioscience International
Inc., Environ Holdings, Inc. and Environ International
Corporation (formerly APBI Environmental Sciences Group,
Inc.).
Exhibit 10.130 Subordination and Intercreditor Agreement dated March
30, 1999, between First Union National Bank and Applied
Bioscience International, Inc.
Exhibit 27 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
----------------------------------------------------------------
(Registrant)
By /s/ Rudy C. Howard
----------------------------------------------------------------
Chief Financial Officer, Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: May 5, 1999
16
AMENDMENT NO. 1
TO
CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 TO CREDIT AND SECURITY AGREEMENT (this
"Amendment") is made this 30th day of March, 1999, by and among APPLIED
BIOSCIENCE INTERNATIONAL INC., a Delaware corporation ("Lender"), ENVIRON
HOLDINGS, INC., a Delaware corporation ("EHI"), and ENVIRON INTERNATIONAL
CORPORATION, a Virginia corporation (formerly APBI Environmental Sciences Group,
Inc. and referred to herein as "US Corporation"), is the first amendment to that
certain Credit and Security Agreement entered into by and among Lender, EHI and
US Corporation dated February 2, 1999 (the "Credit and Security Agreement").
WITNESSETH:
WHEREAS, in connection with the payment by Borrower in full of
the Term Loan and the execution and delivery of a Subordination and
Intercreditor Agreement of even date by and among the Lender, First Union
National Bank, and others (the "Subordination Agreement"), Lender, EHI and the
US Corporation have agreed to amend the Credit and Security Agreement on the
terms and conditions set forth hereinbelow. Capitalized terms not otherwise
defined herein shall have the meanings ascribed to them in the Credit and
Security Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Lender, EHI and the US Corporation covenant and agree that the
Credit and Security Agreement is amended as follows:
1. Security Interest; Borrower's Collection Privileges. Sections
4A.01. and 4A.03. are amended by deleting the word "Obligations" in line 1
thereof and inserting in lieu thereof the following:
"Seller Note, and all principal, interest, costs and expenses
(including, without limitation, all costs of collection related
thereto and all amounts advanced to protect the validity,
security and priority of Lender's Liens in the Collateral
securing the Seller Note) due Lender in respect thereof, and all
amendments, allonges, extensions, modifications, renewals,
restatements and substitutions thereto and therefor".
2. Full Force and Effect; Ratification. Except as otherwise
amended by this Amendment, all of the covenants, agreements, obligations and
other provisions of the Credit and Security Agreement shall remain in full force
and effect without change, and all of such covenants, agreements, obligations
and other provisions, as amended by this Amendment, are hereby ratified and
confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, the Lender, EHI and the US Corporation have
caused this Amendment to be duly executed all of the date first above written.
WITNESS: APPLIED BIOSCIENCE INTERNATIONAL INC.
Jean Wactel By: /s/ Fred B. Davenport, Jr. (SEAL)
Name: Fred B. Davenport, Jr.
Title: Vice President
ENVIRON HOLDINGS, INC.
Guy Lewis By: /s/ Mitchell Smith (SEAL)
Name: Mitchell Smith
Title: President
ENVIRON INTERNATIONAL CORPORATION
Guy Lewis By: /s/ Mitchell Smith (SEAL)
Name: Mitchell Smith
Title: President
SUBORDINATION AND INTERCREDITOR AGREEMENT
BETWEEN
FIRST UNION NATIONAL BANK
(SENIOR CREDITOR)
AND
APPLIED BIOSCIENCE INTERNATIONAL, INC.
(SUBORDINATE CREDITOR)
WITH REGARD TO
ENVIRON HOLDINGS, INC.
(DEBTOR)
ENVIRON INTERNATIONAL CORPORATION
(DEBTOR)
DATED AS OF MARCH 30, 1999
==============================================================================
<PAGE>
SUBORDINATION AND INTERCREDITOR AGREEMENT
THIS AGREEMENT made as of the 30th day of March, 1999, by and among:
FIRST UNION NATIONAL BANK, a national banking association, having an
address from which information concerning security interests may be obtained at
First Union National Bank, Portfolio Management - 3 South, 1970 Chain Bridge
Road, McLean, Virginia 22102 (referred to herein as "Senior Creditor"),
APPLIED BIOSCIENCE INTERNATIONAL INC., a Delaware corporation ("ABI"),
having its chief executive office and mailing address at 3151 Seventeenth Street
Extension, Wilmington, North Carolina 28412, and
PPD UK HOLDINGS LIMITED, a private company incorporated in England and
Wales ("PPDUK," and together with ABI, the "Subordinate Creditors"), having its
chief executive office and mailing address at 3151 Seventeenth Street Extension,
Wilmington, North Carolina 28412.
PRELIMINARY STATEMENTS
Senior Creditor and Subordinate Creditors have extended and may from
time to time extend certain financing or other credits to ENVIRON HOLDINGS,
INC., a Delaware corporation, having a mailing address at 4350 North Fairfax
Drive, Suite 300, Arlington, Virginia 22203 ("EHI") and ENVIRON INTERNATIONAL
CORPORATION (formerly known as ENVIRON ENVIRONMENTAL SCIENCES GROUP, INC.), a
Virginia corporation, having a mailing address at 4350 North Fairfax Drive,
Suite 300, Arlington, Virginia 22203 ("ENVIRON") (EHI and ENVIRON are each
referred to herein as a "Borrower" and are referred to herein collectively as
"Borrowers").
The financing or other credits extended by Senior Creditor or
Subordinate Creditor to the Borrowers may be guaranteed by ENVIRONMENTAL
ASSESSMENT GROUP LIMITED, a private company limited by shares incorporated in
England and Wales (referred to herein individually as a "Guarantor").
The Borrowers, the Guarantor and their respective subsidiaries each are
referred to herein individually as a "Debtor" and referred to herein
collectively as "Debtors."
Senior Creditor and Subordinate Creditors desire to set forth their
relative rights and priorities with respect to payment and performance of the
indebtedness and any other obligations of Debtors to them.
NOW, THEREFORE, in consideration of the foregoing, and the receipt of
One Dollar ($1.00) and other good and valuable consideration, the receipt of
which is hereby acknowledged, Senior Creditor and Subordinate Creditors hereby
covenant and agree as follows:
<PAGE>
ARTICLE I
CONSTRUCTION AND DEFINED TERMS
Section 1.01. Articles and Sections. The Article and Section headings
and captions in this Agreement are for convenience only and shall not affect the
construction or interpretation of this Agreement.
Section 1.02. Schedules. The references in this Agreement to specific
Schedules shall be read as references to such specific Schedules attached, or
intended to be attached, to this Agreement and any counterpart of this Agreement
and regardless of whether they are in fact attached to this Agreement, and
including any amendments, supplements, and replacements thereto from time to
time.
Section 1.03. [Omitted.]
Section 1.04. Time. Time is of the essence of this Agreement.
Section 1.05. Defined Terms. Unless otherwise expressly stated in this
Agreement, capitalized terms used in this Agreement shall have the following
meanings:
"ACQUISITION LOAN" The term loan in the amount of up to Seven
Million Dollars ($7,000,000) made by the Senior Creditor to the Borrowers under
the Bank Credit Agreement. The Acquisition Loan may not, without the prior
written consent of the Subordinate Creditors, be amended, supplemented or
replaced in any manner which (i) increases the amount of principal or interest
due from Borrowers in respect thereof, or (ii) extends the term of the
Acquisition Loan.
"BANK CREDIT AGREEMENT" The Credit and Security Agreement dated
as of March 30, 1999 between Senior Creditor and the Borrowers, and, subject to
the limitation in the immediately following sentence, any amendments,
supplements, and replacements as may be made thereto or therefor from time to
time. The Credit and Security Agreement may not, without the prior written
consent of the Subordinate Creditors, be amended, supplemented or replaced in
any respect which (i) increases the amount of the Senior Creditor Obligations,
(ii) extends the term of the Acquisition Loan, or (iii) extends the term of the
Working Capital Loan beyond the fourth (4th) year (if the Working Capital Loan
is extended for a 4th year) of the term of the Working Capital Loan.
"BANK LETTER OF CREDIT APPLICATIONS" Any Letter of Credit
Application (as defined in the Bank Credit Agreement).
"BANK NOTES" The Term Note and any Revolving Credit Notes (as
defined in the Bank Credit Agreement) and, subject to the limitation in the
immediately following sentence, any amendments, supplements, and replacements as
may be made thereto or therefor from time to time. The Term Note and any
Revolving Credit Notes may not, without the prior written consent of the
Subordinate Creditors, be amended, supplemented, or replaced in any respect
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<PAGE>
which (i) increases the amount of the Senior Creditor Obligations, (ii) extends
the term of the Acquisition Loan, or (iii) extends the term of the Working
Capital Loan beyond the fourth (4th) year (if the Working Capital Loan is
extended for a 4th year) of the term of the Working Capital Loan.
"BANK PLEDGE AGREEMENTS" The Pledge Agreements and any other
pledge agreements or share charges as may be made to or for the benefit of the
Bank from time to time, and any amendments, supplements, and replacements as may
be made thereto or therefor from time to time.
"BANKRUPTCY CODE" The United States Bankruptcy Code, as it may be
amended from time to time.
"COLLATERAL" Any Property in which Senior Creditor or Subordinate
Creditors have a Lien.
"CONSULTING AGREEMENT" The Consulting Agreement referred to in
Section 2.4(c) of the Stock Purchase Agreement which provides for consulting
payments to PPDI not to exceed One Hundred Twenty-Five Thousand Dollars
($125,000) in any fiscal quarter, or Five Hundred Thousand Dollars ($500,000) in
any fiscal year.
"DEBTOR" OR "DEBTORS" The same meaning given in the Preliminary
Statements to this Agreement.
"ENFORCEMENT ACTION" Any action to accelerate or declare due any
Obligations, or to demand payment of any Obligations, or any action taken and
any public or private proceeding commenced (including any litigation whether at
law or in equity, any mediation, and any arbitration) to collect any Obligations
from any borrower, guarantor or any other obligor, or to collect, repossess,
sell, liquidate, or otherwise dispose of any Collateral, or to foreclose any
Lien in any Collateral (including any foreclosure conducted pursuant to any
power-of-sale, or pursuant to any assent to the passage of a decree, or through
judicial foreclosure), or to otherwise enforce any Lien in any Collateral, or to
transfer or assign to Senior Creditor or Subordinate Creditors any Collateral in
full or partial satisfaction of any Obligations, or to enforce any Loan
Documents evidencing any Obligations secured by any Collateral, or to move or
store any Collateral, or to prepare any Collateral for sale or other
disposition, or to advertise or conduct any such sale or other disposition, or
to exercise any right of set-off or counterclaim, or to make demand for payment
of or under any standby letter of credit, bond, guaranty, or endorsement in
which Senior Creditor or Subordinate Creditors has a Lien, or to seek the
appointment of a Receiver to do any of the foregoing.
"EXCLUDED SUBORDINATE CREDITOR OBLIGATIONS" The following: (a)
payment obligations to PPDI in accordance with the terms of the Consulting
Agreement; (b) rental payments under the sublease for certain equipment referred
to in Section 2.4(d) of the Stock Purchase Agreement; and (c) Post-Closing
Service Contract Obligations. None of the provisions
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<PAGE>
of this Agreement shall apply to the Excluded Subordinate Creditor Obligations,
except that the provisions of this Agreement shall apply with respect to any
Enforcement Action against the Collateral.
"GOVERNMENTAL AUTHORITY" Any executive, judicial, legislative or
other branch, department, office, commission, board, bureau, agency, or
instrumentality of the government of any jurisdiction, including any federal,
state, provincial, county, local or municipal government, and including the
Persons holding or exercising the powers, privileges, discretions, titles,
offices or authorities of any thereof.
"GUARANTOR" The same meaning given in the Preliminary Statements
to this Agreement.
"INSOLVENCY EVENT" Any of the following: (a) Any Debtor
commencing any case, proceeding or other action (i) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, conservatorship, or relief from debtors, seeking to
have any order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (ii) seeking appointment of a Receiver for it or for all
or any substantial part of its assets, or any Debtor making a general assignment
for the benefit of its creditors, or (b) there being commenced against any
Debtor any case, proceeding or other action of a nature referred to in this
definition, or (c) there being commenced against any Debtor any case, proceeding
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its assets
which results in the entry of any order for any such relief, or (d) any Debtor
taking any action in furtherance of, or indicating its consent to, approval of,
or acquiescence in, any of the acts set forth in clause (a), (b) or (c) above,
or (e) any Debtor generally not paying, or being unable to pay, or admitting in
writing its inability to pay, its debts as they become due.
"LAWS" All laws, statutes, regulations, ordinances, rules, codes,
decrees, orders, and other directives of any Governmental Authority applicable
to any party to this Agreement, any Collateral, or Debtors.
"LEVEL I SENIOR CREDITOR LOAN DOCUMENTS" All Senior Creditor Loan
Documents that evidence, secure or guarantee the Level I Senior Creditor
Obligations.
"LEVEL I SENIOR CREDITOR OBLIGATIONS" means at any time all
Senior Creditor Obligations of the following types and amounts:
(a) the outstanding balance of the Acquisition Loan (including
principal (not to exceed Seven Million Dollars ($7,000,000)), and all
accrued interest and charges, fees, and expenses permitted under the
Level I Senior Creditor Loan Documents); plus
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<PAGE>
(b) the outstanding balance of the Working Capital Loan
(including all advances and readvances of principal (and the stated
amount of any outstanding letters of credit) up to the Working Capital
Loan Maximum Amount at any time, and all accrued interest and charges,
fees, and expenses permitted under the Level I Senior Creditor Loan
Documents); plus
(c) at any time that the outstanding principal portion (including
loans and the stated amount of outstanding letters of credit) of the
outstanding balance of the Working Capital Loan is less than the Working
Capital Loan Maximum Amount, Non-Loan Bank Credits in an amount equal to
the lesser of (x) the amount by which the outstanding principal portion
(including loans and the stated amount of outstanding letters of credit)
of the balance of the Working Capital Loan is less than the Working
Capital Loan Maximum Amount or (y) the stated amount of outstanding
balance of Non-Loan Bank Credits; plus
(d) (to the extent not otherwise included in clauses (a), (b),
and (c) of this definition) the amount of Senior Creditor's charges,
fees and expenses permitted under the Bank Credit Agreement of
collecting the amounts referred to in clauses (a), (b), and (c) of this
definition and in enforcing Senior Creditor's rights and remedies under
the Level I Senior Creditor Loan Documents as to Level 1 Senior Creditor
Obligations, and including any such costs and expenses incurred in
enforcing Senior Creditor's rights and remedies under this Agreement
with respect to Level I Senior Creditor Obligations. In addition, any
proceeds of one or more advances under the Working Capital Loan that are
permitted under Section 2A.07 of the Bank Credit Agreement used for the
purpose of repaying any other non-Level I Senior Creditor Obligations
shall retain their status as Level I Senior Creditor Obligations. Except
for the Non-Loan Bank Credits, Senior Creditor shall not make, extend,
amend, supplement, or replace any non-Level I Senior Creditor
Obligations without the prior written consent of Subordinated Creditors.
"LIEN" Any security agreement, mortgage, deed of trust, factor's
lien, chattel mortgage, title retention contract, grant, pledge, security
interest, lien (statutory or otherwise), hypothecation, assignment, deed-in-lieu
of foreclosure or to secure debt, transfer for other than fair consideration, or
other arrangement for security purposes, condemnation or other governmental
taking, encumbrance, easement, franchise, license, judgment, right of
subrogation, charge of any kind, joint ownership, or co-ownership, or any
subordination agreement, and including any of the foregoing arising by operation
of Law or the application of equitable principles, whether perfected or
unperfected, avoidable or unavoidable, consensual or nonconsensual, and any Lien
Notice, whether or not filed, and any agreement to give a Lien Notice, and
including any rights under any letter of credit, bond, guaranty or endorsement
relating to any of the foregoing, and including the interest of a lessor under
any lease having the same or substantially the same economic effect as any of
the foregoing.
"LIEN DOCUMENTS" Any instrument, document, or agreement, and any
Lien Notice, that evidences, creates or otherwise relates to any Lien in any
Property, and all
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<PAGE>
amendments, supplements, and continuations thereof, and all exhibits, schedules,
attachments and annexes thereto from time to time.
"LIEN NOTICE" Any instrument, document, agreement, or notice
given to, or filed, recorded, or registered with, any Person (including any
Governmental Authority), and regardless of whether required by any Law, to
perfect or giving notice of any Lien (or the possibility of a Lien and
regardless of whether any Lien other than the Lien Notice exists or the effect
of the Lien Notice) upon any Property of any Debtor, or for any precautionary
purposes, including any of the following that may be given to, or filed,
recorded, or registered with, any Person for any of the foregoing purposes:
Uniform Commercial Code financing statements and amendments and continuations
thereof, vehicle security interest or lien filings, mortgages, deeds of trust,
leases, indentures, security agreements, collateral assignments, and notices of
any of the foregoing.
"LOAN DOCUMENTS" Any Lien Documents and any promissory notes,
credit agreements, loan agreements, credit and security agreements, security
agreements, collateral assignments, pledge agreements, share charges, mortgage
debentures, guarantees, financing statements, control agreements, subordination
agreements, or other instruments, agreements or documents that evidence, secure,
perfect, guarantee or give notice of any Senior Creditor Obligations or
Subordinate Creditor Obligations.
"INCLUDE AND INCLUDING" Unless otherwise expressly limited
herein, the words "include" and "including" shall be read to mean "include,
without limitation," and "including, without limitation," as the case may be.
"NON-LOAN BANK CREDITS" means indebtedness, liabilities and other
obligations to Senior Creditor, other than in respect of loans, which arise out
of automated clearing house transactions, cash management transactions, interest
rate swap agreements, or other non-loan credit risks and which do not, in the
aggregate, exceed One Million Dollars ($1,000,000).
"OBLIGATIONS" All now existing and hereafter arising obligations,
indebtedness, and liabilities of Debtors to Senior Creditor and/or Subordinate
Creditors, as the case may be, of any kind, whether primary, secondary,
contingent, direct or indirect, joint or several, or for payment or for
performance, and including any claims for indemnity or to be held harmless, or
any claims for contribution or reimbursement or otherwise, and including
Debtors' obligations to pay to Senior Creditor or Subordinate Creditors as and
when due all principal, interest, costs and expenses and fees arising from or
relating to loans made, or other credits granted or created, or financial
accommodations extended, by Senior Creditor or Subordinate Creditors to Debtors
at any time and in any amount, and including future advances, and such thereof
as may arise in respect of letters of credit issued, advised, confirmed, or paid
by Senior Creditor or Subordinate Creditor on Debtors' application or for
Debtors' account, and including any other claims or judgments that Senior
Creditor or Subordinate Creditors may have against Debtors at any time, and
including any Debtor's obligations to Senior Creditor under any swap agreement
(as defined in 11 U.S.C. Section 101), and including any of the foregoing
arising before, during, or after the initial or any renewal term (as permitted
hereunder and under the applicable Loan Documents) of
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the applicable Loan Documents and after the commencement of any case with
respect to any Debtor under the Bankruptcy Code or any similar statute
(including, without limitation, the payment of interest and other amounts which
would accrue and become due but for the commencement and pendency of such case),
but expressly excluding the Excluded Subordinate Creditor Obligations.
"PAYMENT BLOCKAGE EVENT" The occurrence of any Default or Event
of Default, under and as defined in the Level I Senior Creditor Loan Documents,
with respect to Level 1 Senior Creditor Obligations or Subordinate Creditor
Obligations, it being understood and agreed that the Senior Creditor has the
right, but not the obligation, to send a Payment Blockage Event Notice at any
time after the occurrence of a Payment Blockage Event.
"PAYMENT BLOCKAGE EVENT NOTICE" A written notice from the Senior
Creditor to PPDI that a Payment Blockage Event has occurred.
"PERMITTED PURCHASE PRICE ADJUSTMENT PAYMENTS" The Adjustment
Amount to the Purchase Price to be paid under Section 2.5 of the Stock Purchase
Agreement.
"PERMITTED SUBORDINATED DEFAULT RATE INTEREST PAYMENTS" Payment
to Subordinate Creditors of interest at a default rate of eleven percent (11%)
per annum, as provided in the Seller Note, in respect of any Permitted
Subordinated Interest Payments or Permitted Subordinated Principal Payments, as
applicable, to the extent any such payments were not made to Subordinate
Creditors when due (or within the cure period stated in the Seller Note).
Interest at the default rate provided above shall accrue only on the Permitted
Subordinated Interest Payment or Permitted Subordinated Principal Payment, as
applicable, which was not paid when due and shall accrue from the due date
thereof until such time as the missed payment is paid in full. The Permitted
Subordinated Default Rate Interest Payments shall be paid to Subordinate
Creditors at the same time as and with the payment of the missed Permitted
Subordinated Interest Payments or Permitted Subordinated Principal Payments, as
applicable, which are made as permitted in this Subordination Agreement.
"PERMITTED SUBORDINATED INTEREST PAYMENTS" One (1) interest
payment to the Subordinate Creditors per calendar year that satisfies each of
the following requirements:
(i) such payment is made not more frequently than once
each calendar year (each such
period referred to herein as an "Interest Accrual Period");
(ii) such interest payment is made in arrears in the
amount of the interest accrued
on the outstanding principal balance of the Seller Note at the interest rate of
eight percent (8%) per annum simple interest (using an actual days/360 accrual)
during the Interest Accrual Period most recently ended prior to such interest
payment;
(iii) such payment is made on or within one hundred eighty
(180) days after the last day of the Interest Accrual Period for which it is
made;
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(iv) on the last day of the Interest Accrual Period for
which such payment is made and on the date that such payment is made no Payment
Event Blockage Notice has been given; and
(v) such interest payment is not made prior to January 31,
2000;
provided; however, if for any reason no Permitted Subordinated Interest Payment
can be made (or could have been made, but is not made within the one hundred
eighty (180) day period referred to in clause (iii) of this definition) in
respect of an Interest Accrual Period, then no interest payment shall be made on
the Seller Note in respect of such Interest Accrual Period without the Senior
Creditor's prior written consent.
"PERMITTED SUBORDINATED PRINCIPAL PAYMENTS" One (1) principal
payment to the Subordinate Creditors per calendar year that satisfies each of
the following requirements:
(i) the principal payments are made not more frequently
than annually;
(ii) each principal payment is in an amount not in excess
of Two Million Two Hundred Fifty Thousand Dollars ($2,250,000);
(iii) each principal payment is made on or within one
hundred eighty (180) days after January 31;
(iv) on January 31 of the year in which the principal
payment is to be paid, and on the day the principal payment is made no Payment
Event Blockage Notice has been given;
(v) no principal payment shall be made on the Seller Note
prior to January 31, 2004; and, provided, however, accelerated payments
(regardless of the terms or basis of acceleration) shall not under any
circumstances be Permitted Subordinated Principal Payments, and if for any
reason no Permitted Subordinated Principal Payment can be made (or could have
been made but is not made within the one hundred eighty (180) day period in
clause (iii) of this definition) for any year, then no principal payment shall
be made on the Seller Note for such year without the Senior Creditor's prior
written consent.
"PERMITTED SUBORDINATED PAYMENTS" Permitted Subordinated Interest
Payments, Permitted Subordinated Principal Payments, Permitted Subordinated Tax
and Indemnity Payments, and Permitted Subordinated Default Rate Interest
Payments.
"PERMITTED SUBORDINATED TAX AND INDEMNITY PAYMENTS" means
payments in respect of tax refund (as applicable) obligations referred to in
Section 11.4 of the Stock Purchase Agreement, and payments in respect of
obligations to indemnify or hold harmless the Subordinate Creditors from and
against any expense, loss, damage, penalty, claim, indebtedness,
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liability, or obligation (including indemnity provisions of the Stock Purchase
Agreement), and obligations of Debtors to reimburse the Subordinate Creditors
any amounts; provided that on the day the payment is made no Payment Event
Blockage Notice has been given; and provided further that the total amount of
all Permitted Subordinated Tax and Indemnity Payments shall not exceed the
Permitted Subordinated Tax and Indemnity Maximum Amount, so that any such
obligations (referred to in this definition) of the Debtors to the Subordinate
Creditors in excess of the Permitted Subordinated Tax and Indemnity Maximum
Amount shall not be Permitted Subordinated Tax and Indemnity Payments.
"PERMITTED SUBORDINATED TAX AND INDEMNITY MAXIMUM AMOUNT" One
Million Two Hundred Fifty Thousand Dollars ($1,250,000).
"PERSON" Any natural person, corporation, limited liability
company, partnership, joint venture, entity, association, joint-stock company,
trust or unincorporated organization and any Governmental Authority.
"POST-CLOSING SERVICE CONTRACT OBLIGATIONS" Means obligations for
services rendered in transactions in the ordinary course of business between any
Debtor and any Subordinate Creditor after the date of this Agreement that are
not restricted by the terms of the Level I Senior Creditor Loan Documents.
"PPDI" Means PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North
Carolina corporation ("PPDI"), having its chief executive office and mailing
address at 3151 Seventeenth Street Extension, Wilmington, North Carolina 28412.
"PRIME RATE" As of any date, the prime rate published in the
"Money Rates" column of The Wall Street Journal on such date, or if the prime
rate is not published on such date, then the prime rate most recently published
prior to such date. If The Wall Street Journal ceases to publish the prime rate,
then Senior Creditor shall select a new comparable interest rate to use as the
Prime Rate.
"PROPERTY" Any and all of Debtors' right, title or interest in or
to property of any kind whatsoever, now owned and hereafter acquired, and
wherever located, whether real property, personal property, or mixed, and
whether tangible property or intangible property, and including all property
included within the definition of "Collateral" in the Bank Credit Agreement and
any other property described as collateral in any other Senior Creditor Loan
Documents.
"QUALIFIED ENFORCEMENT ACTION" Has the meaning set forth in
Section 3.04.
"RECEIVER" Any receiver, trustee, custodian, conservator,
liquidator or other similar court-appointed fiduciary or official.
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"STANDSTILL PERIOD" As to the Subordinate Creditor Obligations, a
180-day period commencing on the date the Subordinated Creditors receive a
Payment Blockage Event Notice.
"STANDSTILL TERMINATION DATE" The date of the last day of a
Standstill Period.
"SELLER NOTE" The seller take-back promissory note dated as of
February 2, 1999 in the original principal amount of Eighteen Million Dollars
and no/100 Dollars ($18,000,000.00) made payable by Borrowers to the Subordinate
Creditors, and any amendments, supplements, and replacements as may be made
thereto or therefor from time to time; provided, that the Seller Note shall not,
without the prior written consent of the Senior Creditor, be amended,
supplemented or replaced in any respect which (i) increases the amount of
principal or interest due under the Seller Note, or (ii) shortens the term of
the Seller Note.
"SENIOR CREDITOR LOAN DOCUMENTS" Loan Documents regarding Senior
Creditor Obligations, including, without limitation, the Bank Credit Agreement
(and the Credit Documents referred to therein), the Bank Notes, the Bank Letter
of Credit Applications, the Bank Pledge Agreements, the U.K. Mortgage
Debentures, and any documentation relating to any swap agreements.
"SENIOR CREDITOR OBLIGATIONS" All Obligations of the Debtors,
jointly and severally, to Senior Creditor.
"STOCK PURCHASE AGREEMENT" The Stock Purchase Agreement dated as
of January 31, 1999 by and among PPDI (as joinder party), ABI, PPDUK, and EHI,
and any amendments, supplements, and replacements as may be made thereto or
therefor from time to time.
"SUBORDINATE AND JUNIOR IN RIGHT OF PAYMENT" As between the
Subordinate Creditor Obligations and the Level I Senior Creditor Obligations,
that:
(i) no part of the Subordinate Creditor Obligations shall
have any claim to the assets of any Debtor on parity with or prior to any claims
of Senior Creditor to such assets for payment or satisfaction of Level I Senior
Creditor Obligations; and
(ii) unless and until each of the Level I Senior Creditor
Obligations shall have been paid in full, Subordinate Creditors shall not,
except as otherwise expressly permitted herein, without the express prior
written consent of Senior Creditor:
(A) take or receive from Debtors, and Debtors shall
not make, give or permit, directly or indirectly, by set-off, redemption,
purchase or in any other manner, any payment of any nature or type or security
(other than any Lien that is a Permitted Lien under the Bank Credit Agreement)
for the whole or any part of the Subordinate Creditor Obligations,
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(B) demand or accelerate any amount owing under the
Subordinate Creditor Obligations,
(C) take or accept, and Debtors will not grant or
permit to be granted, any Lien (other than any Lien that is a Permitted Lien
under the Bank Credit Agreement) to secure payment or performance of the
Subordinate Creditor Obligations, and
(D) commence or prosecute, or permit to be
commenced or prosecuted in the name of any Subordinate Creditor or on behalf of
any Subordinate Creditor, any Enforcement Action pertaining to the Subordinate
Creditor Obligations, excepting actions to declare any default or event of
default under the Subordinate Creditor Loan Documents;
and it is expressly provided further that if Senior Creditor shall consent to
any such act or circumstance set forth above that would not otherwise be
permitted without such consent, Senior Creditor's consent shall not be construed
as giving parity or priority in payment to any Subordinate Creditor Obligations
which shall in each and every case be and remain "subordinate and junior in
right of payment" to all Level I Senior Creditor Obligations.
"SUBORDINATE CREDITOR LOAN DOCUMENTS" Loan Documents regarding
Subordinate Creditor Obligations, including the Seller Note, the Stock Purchase
Agreement, the Credit and Security Agreement between Borrowers and ABI dated
February 2, 1999, and all other documents or instruments evidencing, securing or
guaranteeing the Seller Note and the Subordinate Creditor Obligations.
"SUBORDINATE CREDITOR OBLIGATIONS" All Obligations of Debtors,
jointly and severally, to Subordinate Creditors, other than Excluded Subordinate
Creditor Obligations, including, without limitation, all costs and fees
permitted under the Subordinate Creditor Loan Documents of collecting the
Subordinate Creditor Obligations and enforcing the Subordinate Creditor's rights
and remedies under the Subordinated Creditor Loan Documents, and including any
such costs and expenses incurred in enforcing Subordinated Creditors' rights and
remedies under this Agreement with respect to the Subordinated Creditor
Obligations. Without limiting the generality of the preceding sentence, the
Obligations of any Debtors under any Subordinate Creditor Loan Documents that
secure or guarantee obligations under the Seller Note, are Subordinate Creditor
Obligations.
"SUBORDINATION NOTICE" OR "SUBORDINATION NOTICES" Any instrument,
deed, memorandum, agreement, letter, notice, and any termination statement or
other Uniform Commercial Code filing relating to any financing statement, or
other document made for the purpose of being given to, or filed, recorded, or
registered with, any Person to give notice (public or private) of this Agreement
or any of the relative rights or priorities established by this Agreement or to
give further necessary or appropriate legal effect to this Agreement and/or any
of such relative rights or priorities, including any release or Uniform
Commercial Code termination statement (UCC-3) with the effect of releasing,
terminating or rendering unperfected any Lien that secures any Subordinate
Creditor Obligations.
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"U.K. MORTGAGE DEBENTURES" Any Mortgage Debentures made by any
Guarantor in favor of the Senior Creditor, and any amendments, supplements, and
replacements as may be made thereto or therefor from time to time.
"UNSECURED" means not secured by any Lien.
"WORKING CAPITAL LOAN" The Working Capital Loan in the form of a
revolving line of credit available for direct advances (and for standby letters
of credit) in accordance with the Bank Credit Agreement in a maximum aggregate
principal amount equal to the Working Capital Loan Maximum Amount. Senior
Creditor shall not, without the prior written consent of the Subordinate
Creditors, extend the term of the Working Capital Loan beyond the fourth (4th)
year of the term of the Working Capital Loan.
"WORKING CAPITAL LOAN MAXIMUM AMOUNT" means the lesser of (a)
Three Million Five Hundred Thousand Dollars ($3,500,000), or (b) the sum of (x)
Two Million Dollars ($2,000,000) plus (y) the amount equal to one-third of the
amount of the principal payments made by Borrowers to the Senior Creditor on the
Acquisition Loan.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 2.01. Representations and Warranties of Subordinate Creditors.
Each Subordinate Creditor makes the following representations and warranties to
Senior Creditor:
(a) Such Subordinate Creditor is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, and has the corporate power to
execute, deliver and perform this Agreement.
(b) The execution, delivery and performance of this
Agreement have been duly authorized by all requisite corporate action on the
part of such Subordinate Creditor and will not (i) contravene any provision of
law, any order of any court or other agency of government, or (ii) contravene
the Articles of Incorporation or By-laws or any indenture, agreement or other
instrument binding upon such Subordinate Creditor, or (iii) be in conflict with,
result in the breach of or constitute (with due notice or lapse of time or both)
a default under any such indenture, agreement or other instrument binding upon
such Subordinate Creditor, or (iv) result in the creation or imposition of any
Lien upon the property or assets of such Subordinate Creditor, except pursuant
to this Agreement.
(c) This Agreement constitutes a legal, valid and binding
obligation of such Subordinate Creditor, which is enforceable against such
Subordinate Creditor in accordance with its terms.
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(d) The Subordinate Creditor Loan Documents listed on
Schedule 2.01 to this Agreement as of the date hereof are the only Loan
Documents that evidence, create, perfect or otherwise relate to any interest of
Subordinate Creditors in the Collateral or any other Property of the Debtors,
and Schedule 2.01 is true, accurate and complete in all material respects. The
Subordinate Creditor Obligations have been created for good and valuable
consideration, are owned by Subordinate Creditors free and clear of any security
interests, Liens, charges or encumbrances whatsoever arising from, through or
under Subordinate Creditors, other than the interest of Senior Creditor under
this Agreement, and are payable solely and exclusively to Subordinate Creditors
and to no other Person and are payable without deduction for any defense,
set-off or counterclaim.
(e) No consent or authorization of, filing with, or other
act by or in respect of, any arbitrator or regulatory body or Governmental
Authority and no consent of any other Person (including any stockholder, holder
of partnership interests or creditor of Subordinate Creditors), is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement.
(f) Other than the Seller Note, the Subordinate Creditor
Obligations are Unsecured.
Section 2.02 Representations and Warranties of Senior Creditor. Senior
Creditor makes the following representations and warranties to each of the
Subordinate Creditors:
(a) Such Senior Creditor is a national banking association
duly created, validly existing, and has the power to execute, deliver and
perform this Agreement.
(b) The execution, delivery and performance of this
Agreement has been duly authorized by all requisite action on the part of such
Senior Creditor and will not (i) contravene any provision of law, any order of
any court or other agency of government, or (ii) contravene the Articles of
Incorporation or By-laws or any indenture, agreement or other instrument binding
upon such Senior Creditor, or (iii) be in conflict with, result in the breach of
or constitute (with due notice or lapse of time or both) a default under any
such indenture, agreement or other instrument binding upon such Senior Creditor,
or (iv) result in the creation or imposition of any Lien upon the property or
assets of such Senior Creditor, except pursuant to this Agreement.
(c) This Agreement constitutes a legal, valid and binding
obligation of such Senior Creditor, which is enforceable against such Senior
Creditor in accordance with its terms.
(d) The Senior Creditor Loan Documents listed on Schedule
2.02 to this Agreement are as of the date hereof, the only Loan Documents that
evidence, create, perfect or otherwise relate to any interest of Senior
Creditors in the Collateral or any other Property of the Debtors, and Schedule
2.02 is true, accurate and complete in all material respects. The Senior
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Creditor Obligations are owned by Senior Creditors free and clear of any
security interests, Liens, charges or encumbrances whatsoever arising from,
through or under Senior Creditors, other than the interest of Subordinate
Creditor under this Agreement, and are payable solely and exclusively to Senior
Creditors and to no other Person and are payable without deduction for any
defense, set-off or counterclaim.
(e) No consent or authorization of, filing with, or other
act by or in respect of, any arbitrator or regulatory body or Governmental
Authority and no consent of any other Person (including any stockholder, holder
of partnership interests or creditor of Senior Creditors), is required in
connection with the execution, delivery, performance, validity or enforceability
of this Agreement.
ARTICLE III
-----------
COVENANTS
---------
Senior Creditor and Subordinate Creditors covenant and agree to the
following:
Section 3.01. Subordination. (a) Each Subordinate Creditor, for itself
and each future holder of the Subordinate Creditor Obligations, hereby agrees
that the Subordinate Creditor Obligations relating to or held by such
Subordinate Creditor are expressly "subordinate and junior in right of payment"
to all Level I Senior Creditor Obligations. Without limiting the generality of
the preceding sentence, and to further confirm the intent of the parties to this
Agreement, each Subordinate Creditor hereby subordinates the legal operation and
effect and priority of the Subordinate Creditor Loan Documents and the
Subordinate Creditor Obligations relating to or held by such Subordinate
Creditor to the legal operation and effect and priority of the Level I Senior
Creditor Loan Documents and the Level I Senior Creditor Obligations, so that the
legal operation and effect of the Level I Senior Creditor Loan Documents and the
Level I Senior Creditor Obligations shall be superior to the legal operation and
effect of the Subordinate Creditor Loan Documents and the Subordinate Creditor
Obligations.
(b) The expressions "prior payment in full," "payment in full,"
"paid in full" and any other similar terms and phrases when used in this
Agreement with respect to any of the Obligations shall mean the irrevocable
payment in full, in immediately available funds and in United States dollars (or
such other currency as may be required by the terms of the Loan Documents or as
may be otherwise satisfactory to Senior Creditor in its sole and absolute
discretion), of the Obligations.
(c) Except as otherwise provided in this Agreement, Subordinate
Creditors and Senior Creditor further agree that:
(i) all Level I Senior Creditor Obligations shall be paid
in full before any payment or distribution is made with respect to the
Subordinate Creditor Obligations, provided, however, that so long as Senior
Creditor has not given Subordinate Creditors a Payment Blockage Event Notice (or
if Senior Creditor has given a Payment Blockage Event Notice, but
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the Senior Creditor has advised the Subordinated Creditors that the Event of
Default or Default giving rise to the Payment Blockage Event Notice has been
cured by Debtors or waived by Senior Creditor), Senior Creditor consents to the
payment of Permitted Subordinated Payments to Subordinate Creditors.
(ii) any payment or distribution of any Debtor's assets,
or payments or distributions for or on account of any Subordinate Creditor
Obligations (in each case other than Permitted Subordinated Payments made in
accordance with Section 3.01(c)(i) above), whether in cash, Property or
securities, to which the Subordinate Creditors would be entitled except for the
provisions of this Agreement (including from any Collateral or security pledged
for the benefit of the Subordinate Creditor Obligations or payment on
guarantees) shall be paid or delivered by Debtors or any Receiver, trustee in
bankruptcy, disbursing agent, or other Person making such payment or
distribution, directly to Senior Creditor, to the extent necessary to pay in
full all Level I Senior Creditor Obligations, before any payment or distribution
shall be made to the Subordinate Creditors.
(d) Prior to payment in full of the Level I Senior Creditor
Obligations, Subordinate Creditors and Senior Creditor further agree that upon
the occurrence of any event or proceeding described in the definition of
"Insolvency Event" commenced by or against any Debtor, Subordinate Creditors
shall take such action, duly and promptly, as Senior Creditor may request from
time to time, (A) to collect for the account of Senior Creditor to the extent
necessary to pay in full all Level I Senior Creditor Obligations, any
Subordinate Creditor Obligations that are secured by Collateral in which Senior
Creditor holds a Lien, and (B) to file appropriate proofs of claim in respect of
such Subordinate Creditor Obligations.
(e) Subordinate Creditors and Senior Creditor further agree that
this Agreement shall be applicable both before and after the filing of any
petition by or against any Debtor under the Bankruptcy Code and all converted or
succeeding cases in respect thereof, and all references herein to any Debtor
shall be deemed to apply to a trustee for it or as debtor-in-possession. A copy
of this Agreement may be filed with any court as evidence of the respective
rights, powers, and authority of the parties hereunder.
(f) Subordinate Creditors and Senior Creditor further agree that
if any payment or distribution, whether consisting of money, Property or
securities, be collected or received by any Subordinate Creditors in respect of
the Subordinate Creditor Obligations (from any source, including Collateral or
other security or payment on guarantees), other than any Permitted Subordinated
Payments made in accordance with Section 3.01(c)(i) above (or Permitted
Subordinated Payments made prior to receipt of any Payment Blockage Event Notice
or that such payments otherwise were not made in accordance with Section
3.01(c)(i) above), Subordinate Creditors immediately shall deliver the same to
Senior Creditor, in the form received, duly endorsed to Senior Creditor, if
required, to be applied to the payment of the Level I Senior Creditor
Obligations until the Level I Senior Creditor Obligations are paid in full.
Until so delivered, such payment or distribution shall be held in trust by
Subordinate Creditors as
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Property of Senior Creditor, segregated from other funds and Property held by
Subordinate Creditors.
(g) Subordinate Creditors shall not take any Enforcement Actions
against any Debtor, or any Property of any Debtor during any Standstill Period.
After the expiration of any Standstill Period the Subordinate Creditors may take
Enforcement Actions upon compliance with Section 3.04(b) hereof. Notwithstanding
anything in this Agreement to the contrary, (i) in any action instituted by or
on behalf of any Debtor against one or more of the Subordinate Creditors or the
Senior Creditor, such Subordinate Creditors and/or Senior Creditor may exercise
all rights and defenses available to them (including, without limitation, rights
of set-off and counterclaim in any such action), and (ii) in the event that in
violating the pertinent Loan Documents any stock or a substantial part of the
Property of any Debtor is sold by or on behalf of the Senior Creditor without
payment in full of the Subordinated Obligations, then the Subordinate Creditors
shall be permitted to take any and all Enforcement Actions with respect to the
Subordinated Obligations, including, without limitation, the right to accelerate
the Subordinated Obligations and to exercise all rights and remedies available
to them against the Collateral.
(h) Upon payment in full of the Level I Senior Creditor
Obligations, Senior Creditor and Subordinate Creditors agree that the following
provisions shall apply:
(i) All payment restrictions related to the Subordinate
Creditor Obligations, except for the provisions in Section 3.04(b) below, and
all restrictions on the exercise of rights and remedies by the Subordinate
Creditor as set forth herein shall cease to apply and shall no longer be of any
further force and effect as against the Subordinate Creditors; and
(ii) Any payments made by any Debtor against the
Obligations shall be made only as follows and in the following order of
priority:
(A) First, to pay any payments missed in respect of
the Subordinate Creditor Obligations, including Permitted Subordinated Default
Rate Interest Payments, but excluding accelerated principal payments whether
missed as a result of any Standstill Period or otherwise;
(B) Second, after satisfaction of all obligations
described in clause (A) immediately above, payments shall be split equally by
the Subordinate Creditors and the Senior Creditor, until such time as the Senior
Creditor has been paid the lesser of (x) all amounts due in respect of the
Non-Loan Bank Credits, or (y) One Million Dollars ($1,000,000), in the
aggregate, in respect of the Non-Loan Bank Credits.
(C) Third, after satisfaction of all obligations
detailed in clauses (A) and (B) immediately above, payments shall be applied to
the Subordinate Creditors Obligations until such time as all of the Subordinate
Creditor Obligations (including, without limitation, all reasonable charges,
fees and expenses related thereto and all attorneys' fees, costs
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and expenses associated with collection of the same or enforcement of this
Agreement) have been paid in full.
(iii) Except as provided in paragraph (h)(ii) above, after
payment in full of the Level I Senior Creditor Obligations the payment of all
Senior Creditor Obligations shall be expressly Subordinate and Junior in Right
of Payment to all Subordinate Creditor Obligations, and the rights, powers and
privileges contained in Sections 3.01(a)(c), (e) and (f), 3.02, 3.08 and 3.09
hereof shall apply in favor of Subordinate Creditors (as though named as the
Senior Creditor therein) with respect to its Subordinate Creditor Obligations
against Senior Creditor (as though named as the Subordinate Creditor therein)
with respect to its Senior Creditor Obligations. Notwithstanding the foregoing,
Subordinate Creditors acknowledge and agree that, in the event Subordinate
Creditors do not extend a working capital line of credit to Borrowers upon the
expiration of the Working Capital Loan (as provided in the Bank Credit
Agreement), then Subordinate Creditors will subordinate the Subordinate Creditor
Obligations at that time to a new third party working capital line of credit
which does not exceed $3,500,000 and which is upon the same terms and conditions
as the Working Capital Loan in all material respects.
(iv) Except as provided in paragraph (h)(ii) above, after
payment in full of the Level I Senior Creditor Obligations, the legal operation
and effect of the Subordinate Creditors' Liens then and thereafter held in the
Collateral shall be superior to the Liens of the Senior Creditor then and
thereafter held in the Collateral, and the provisions of Section 3.10 shall
apply in favor of Subordinate Creditors (as though named as the Senior Creditor
in such section) and against Senior Creditor (as though named as the Subordinate
Creditor in such section) and with respect to its Subordinate Creditor
Obligations against Senior Creditor (as though named as a Subordinate Creditor
in such section ) and with respect to its Senior Creditor Obligations.
(v) After payment in full of the Level I Senior Creditor
Obligations except for payment of the amount payable to Senior Creditor under
paragraph (h)(ii)(B) above, no payments shall be made by any Debtors in respect
of any Senior Creditor Obligations unless and until all of the Subordinate
Creditor Obligations (including, without limitation, all reasonable charges,
fees and expenses related thereto and all attorneys' fees, costs and expenses
associated with collection of the same or enforcement of this Agreement) have
been paid in full to Subordinate Creditors.
(vi) All shares of capital stock held by Senior Creditor
under or pursuant to the Bank Pledge Agreements after payment in full of the
Level I Senior Creditor Obligations, shall be forthwith delivered to Subordinate
Creditors in order to give Subordinate Creditors first lien priority in respect
of such shares as against Senior Creditor.
Section 3.02 Waivers. Subordinate Creditors waive the
right to compel that Collateral or any other Property of any Debtor or any other
subordinate creditors first be applied to discharge of the Senior Creditor
Obligations. Subordinate Creditors expressly waive the right to require Senior
Creditor to proceed against any Debtor, any Collateral or any other Subordinate
Creditors, or to pursue any other remedy in Senior Creditor's power which
Subordinate Creditors
17
<PAGE>
cannot pursue and which would be of benefit to Subordinate Creditors,
notwithstanding that the failure of Senior Creditor to do so may thereby
prejudice Subordinate Creditors. Subordinate Creditors agree that Subordinate
Creditors shall not be discharged, exonerated or have their liability hereunder
reduced by Senior Creditor's delay in proceeding against or enforcing any remedy
against any Debtor, any Collateral or any other Subordinate Creditors; by Senior
Creditor releasing any Debtor, any Collateral or any other Subordinate Creditors
from all or any part of the Senior Creditor Obligations; or by the discharge of
any Debtor, the Collateral or any other Subordinate Creditors by an operation of
law or otherwise, with or without the intervention or omission of Senior
Creditor. Senior Creditor's vote to accept or reject any plan of reorganization
relating to any Debtor, the Collateral, or any other Subordinate Creditors, or
Senior Creditor's receipt on account of all or part of the Senior Creditor
Obligations of any cash, Property, or securities distributed in any bankruptcy,
reorganization, or insolvency case, shall not discharge, exonerate, or reduce
the liability of Subordinate Creditors hereunder.
Section 3.03. Notices. Senior Creditor and Subordinate Creditors shall
give each other notice of any event of default under the Senior Creditor Loan
Documents and the Subordinate Creditor Loan Documents, respectively, promptly
when either of them becomes aware thereof, and Senior Creditor and Subordinate
Creditors shall also give each other a copy of any notice that either of them
may give to Debtors (which copy shall be given contemporaneously with the notice
given to Debtors) regarding any breach or default under the Senior Creditor Loan
Documents or the Subordinate Creditor Loan Documents (or any indebtedness or
other obligations secured thereby.
Section 3.04. Enforcement Actions. Senior Creditor and the Subordinate
Creditors agree that in order to maximize the value of the Collateral and ensure
that such Collateral is sold in a coordinated manner, that certain Qualified
Enforcement Actions (as hereinafter defined) should be taken only after notice
to the other party. In furtherance of this, the Senior Creditor and Subordinate
Creditors agree that after the occurrence of any event of default under any of
the Loan Documents that any Enforcement Actions taken against any of the
Collateral (other than any action to accelerate or declare due any Obligations,
to demand payment of any Obligations, to exercise any right of set-off or
counterclaim, or to preserve the value of the Collateral) (each such Enforcement
Actions being called a "Qualified Enforcement Action") shall be exercised by
such party only in accordance with the provisions of this Section.
(a) Prior to the Repayment in Full of the Level I Senior Creditor
Obligations. Prior to the Repayment in Full of the Level I Senior Creditor
Obligations, the Senior Creditor will, prior to taking any Qualified Enforcement
Action(s), provide the Subordinated Creditors with written notice of the action
or actions which it proposes to take. Subordinated Creditors will then have a
period of fifteen (15) days from the date of receipt of such notice to consent
or object to the proposed Qualified Enforcement Action (such period being called
the "Consent Period"). In the event no Subordinated Creditor objects in writing
to such Qualified Enforcement Action within the Consent Period, the Senior
Creditor may, without further notice, proceed to take the proposed Qualified
Enforcement Action. In the event any Subordinated Creditor objects in writing to
such Qualified Enforcement Action, within the Consent Period and with such
18
<PAGE>
objection proposes an alternative Qualified Enforcement Action, the Senior
Creditor agrees that prior to taking such Qualified Enforcement Action it will
discuss with the Subordinated Creditors the proposed alternative Qualified
Enforcement Action. In the event the Senior Creditor and the Subordinated
Creditors are unable to agree upon a mutually agreeable course of action after
such discussion, the Senior Creditor may, and each of the Subordinated Creditors
hereby authorize the Senior Creditor to, proceed with the Qualified Enforcement
Action proposed by the Senior Creditor. The Subordinated Creditors agree that
provided such Qualified Enforcement Action constitutes a commercially reasonable
sale under the applicable Uniform Commercial Code they will promptly take such
steps as the Senior Creditor may request to effectuate such sale, including, but
not limited to, the release of each Subordinated Creditor's lien on the
Collateral. (provided that such release will not affect the Subordinate
Creditor's rights to any excess proceeds realized on the sale of the Collateral
in accordance with the priorities established in this Agreement and by
applicable law). In addition, the Subordinate Creditors agree that, in the event
the Subordinate Creditors are entitled to take Enforcement Actions prior to the
repayment in full of the Level 1 Senior Creditor Obligations as permitted in
Section 3.01(a) above, the Subordinate Creditors shall not take any Qualified
Enforcement Action(s) without complying with the same notice and consent
procedures set forth in this Section. The Senior Creditor agrees that, during
any Standstill Period, the Subordinate Creditors may give notice to the Senior
Creditor and otherwise comply with the consent and discussion procedures set
forth in this Section 3.04(a) at any time prior to a Standstill Termination
Date, but will refrain from taking any Qualified Enforcement Actions until any
Standstill Period has expired. The Subordinate Creditors agree that, if a
Consent Period extends beyond a Standstill Termination Date, they will refrain
from taking any Qualified Enforcement Action(s) until such Consent Period has
expired.
(b) After Repayment in Full of the Level I Senior Creditor
Obligations. After the repayment in full of the Level I Senior Creditor
Obligations, the Senior Creditor and the Subordinated Creditors will, prior to
taking any Qualified Enforcement Action(s), provide the other party with written
notice of the action or actions which it proposes to take (the party taking any
Qualified Enforcement Action under this Section being called, the "Liquidating
Party" and the party having the opportunity to consent being called the "Non
Liquidating Party"). The Non Liquidating Party shall have a Consent Period to
consent or object to the proposed Qualified Enforcement Action. In the event the
Non Liquidating Party does not object in writing to such Qualified Enforcement
Action within the Consent Period, the Liquidating Party may, without further
notice, proceed to take the proposed Qualified Enforcement Action. In the event
the Non Liquidating Party objects in writing to such Qualified Enforcement
Action, within the Consent Period and with such objection proposes an
alternative Qualified Enforcement Action, the Liquidating Party agrees that
prior to taking such Qualified Enforcement Action it will discuss with the Non
Liquidating Party the proposed alternative Qualified Enforcement Action. In the
event the Subordinated Creditors and the Senior Creditor are unable to agree
upon a mutually agreeable course of action after such discussion, either party
may proceed with the Qualified Enforcement Actions proposed by the Liquidating
Party. Each party agrees that provided such Qualified Enforcement Action
constitutes a commercially reasonable sale under the applicable Uniform
Commercial Code that it will promptly take such steps as the Liquidating Party
may request to effectuate such sale, including, but not limited to, the release
of the Non Liquidating
19
<PAGE>
Party's lien on the Collateral if, and only if the Liquidating Party has a
senior lien to the lien of the Non Liquidating Party at the time of such
Qualified Enforcement Action (and provided that such release will not affect the
Non-Liquidating Party's right to any excess proceeds realized on the sale of the
Collateral in accordance with the priorities established in this Agreement and
by applicable Law).
(c) General Considerations for Enforcement Actions. Subject to
the terms of this Agreement, each of the parties hereto acknowledge and agree
that the Liquidating Party shall have all of the rights and remedies of a
secured party under the applicable Uniform Commercial Code and other applicable
Laws. Accordingly, the Liquidating Party may (in addition to, but no in
limitation of any other rights set forth in the Loan Documents), in accordance
with the priorities and rights set forth in this Section, sell or redeem the
Collateral, or any part thereof, in one or more sales, at public or private
sale, conducted by any officer or agent of, or auctioneer or attorney for the
Liquidating Party, at the Liquidating Party's place of business or elsewhere,
for cash, upon credit or future delivery, and at such price or prices as the
Liquidating Party shall, in its sole discretion, determine, and the Liquidating
Party may be the purchaser of any or all of the Collateral so sold. Subject to
the provisions of subsections (a) and (b), above, any written notice of the
sale, disposition or other intended action by a Liquidating Party with respect
to the Collateral which is sent by regular mail, postage prepaid, to the other
parties at the address set forth in Section 4.02 of this Agreement, at least ten
(10) days prior to such sale, disposition or other action, shall constitute
commercially reasonable notice to each party hereunder.
Each party recognizes that the Liquidating Party may be unable to effect
a public sale of all or a part of the Collateral consisting of securities by
reason of certain prohibitions contained in the Securities Act of 1933, as
amended, and other applicable federal and state Laws. The Liquidating Party,
may, therefore, in its discretion, take such steps as it may deem appropriate to
comply with such Laws and may, for example, at any sale of the Collateral
consisting of securities restrict the prospective bidders or purchasers as to
their number, nature of business and investment intention, including, without
limitation, a requirement that the Persons making such purchases represent and
agree to the satisfaction of the Liquidating Party that such Person is
purchasing such securities for their account, for investment, and not with a
view to the distribution or resale of any thereof. Each party hereto covenants
and agrees to do or cause to be done promptly all such acts and things as the
Liquidating Party conducting such sale may reasonably request from time to time
and as may be necessary to offer and/or sell the securities or any part thereof
in a manner which is valid and binding and in conformance with all applicable
Laws.
Section 3.05. Loan Documents. Senior Creditor and Subordinate Creditors
shall provide to each other upon request copies of all Senior Creditor Loan
Documents and Subordinate Creditor Loan Documents. For purposes of determining
the relative priorities and rights by and among Senior Creditor and Subordinate
Creditors, the provisions of this Agreement shall govern in the event of any
conflict between the provisions hereof and of any Senior Creditor Loan Documents
or of any Subordinate Creditor Loan Documents.
20
<PAGE>
Section 3.06. Information. Senior Creditor and Subordinate Creditors
shall have no duty to advise each other of information known to them regarding
the financial condition of Debtors or any circumstances bearing upon the risk of
nonpayment of any indebtedness or impairment of any Lien. In the event that
Senior Creditor or Subordinate Creditors in its or their discretion undertake,
at any time or from time to time, to provide any such information to the other,
it or they shall be under no obligation (a) to provide any such information to
the other on any subsequent occasion or (b) to undertake any investigation not
part of its or their regular business routine and shall be under no obligation
to disclose any information which such party wishes to maintain confidential.
Debtors authorize and consent to the disclosure of any such information by any
party to this Agreement to any other party to this Agreement.
Section 3.07. Certain Actions. (a) If Senior Creditor or Subordinate
Creditors shall sell any participation interest in any Lien or any indebtedness
or obligation secured thereby or any other Senior Creditor Obligations or
Subordinate Creditor Obligations, such participation interest shall be subject
to this Agreement.
(b) The subordinations, agreements, and priorities
provided by this Agreement shall remain in full force and effect regardless of
whether either party hereto shall at any time seek to rescind, amend, terminate
or reform, by liquidation or otherwise, its Liens in the Collateral or its
respective agreements or Obligations with the Debtors.
Section 3.08. Expense Payments. If Senior Creditor shall commence an
Enforcement Action with respect to a Level I Senior Creditor Obligation, Senior
Creditor shall be entitled to reimbursement for its costs of collection
(including attorneys' fees) and other expense payments in such Enforcement
Action from the proceeds obtained through such Enforcement Action. Except as
expressly set forth in this Agreement with regard to the application of proceeds
of Collateral, this Agreement does not obligate Senior Creditor or Subordinate
Creditors to pay (or reimburse any other Person for) any costs of collection
(including attorneys' fees) and other expense payments.
Section 3.09. Provisions Applicable after Bankruptcy. The provisions of
this Agreement shall continue in full force and effect notwithstanding the
occurrence of any Insolvency Event. Upon any distributions to creditors of any
Debtor in a liquidation or dissolution of the Debtor, or in bankruptcy,
reorganization, insolvency, receivership, administration, or similar proceedings
relating to the Debtor or its property or in an assignment for the benefit of
creditors or any marshaling of assets and liabilities of the Debtor: (i) holders
of the Level I Senior Creditor Obligations shall be entitled to receive payment
in full of all Level I Senior Creditor Obligations (including interest after
commencement of any proceeding at the interest rate specified in the applicable
Level I Senior Creditor Loan Documents, whether or not such interest is an
allowable claim in any such proceeding (and also including all attorney's fees
and other costs incurred in any such proceedings, including attorney's fees and
costs incurred after the commencement of any case under the Bankruptcy Code))
before Subordinate Creditors shall be entitled to receive any payment of any
Subordinate Creditor Obligations.
21
<PAGE>
Section 3.10. Liens. To further confirm the intent of the parties to
this Agreement, (i) the legal operation and effect of the Subordinate Creditor's
now and hereafter held Liens in the Collateral are, and upon payment in full of
the Level I Senior Creditor Obligations shall be subordinate to the legal
operation and effect of the Senior Creditor's now and hereafter held Liens in
the Collateral, and (ii) each Subordinate Creditor hereby subordinates the legal
operation and effect and priority of all of such Subordinate Creditor's now and
hereafter held Liens in the Collateral to the legal operation and effect and
priority of the Senior Creditor's now and hereafter held Liens in the
Collateral, so that the legal operation and effect of the Senior Creditor's
Liens in the Collateral shall be superior to the legal operation and effect of
the Subordinate Creditor's Liens in the Collateral to the same extent as though
the Senior Creditor's Liens in the Collateral were created, and perfected, as
the case may be, and all Obligations secured thereby were incurred, prior to the
creation and perfection, as the case may be, of the Subordinate Creditor's Liens
in the Collateral.
Section 3.11. Further Assurances. Senior Creditor and Subordinate
Creditors shall execute and deliver, or cause to be executed and delivered, and
do or make, or cause to be done or made, upon the request of Senior Creditor or
Subordinate Creditors, any and all instruments, papers, acts or things,
supplemental, confirmatory or otherwise, as may be required for the purpose of
effecting the agreements and transactions described herein, including such
further assurances of this Agreement as may be requisite, and including
Subordination Notices, in recordable form, as applicable, to be given to Persons
who are not parties to this Agreement, or to be filed among the appropriate
public records, to give notice of and effect to the provisions of this
Agreement.
ARTICLE IV
----------
GENERAL PROVISIONS
------------------
Section 4.01. Term. The term of this Agreement shall commence with the
date of this Agreement and continue in full force and effect and be binding upon
Senior Creditor and Subordinate Creditors until all Senior Creditor Obligations
and Subordinate Creditor Obligations shall have been fully paid and satisfied.
Section 4.02. Notices. Any notice or request required or permitted by or
in connection with this Agreement shall be in writing and shall be made by
telecopy, or by hand delivery, or by overnight delivery service, or by certified
mail, return receipt requested, postage prepaid, addressed to Senior Creditor or
Subordinate Creditors, as the case may be, at the appropriate address set forth
below or to such other address as may be hereafter specified by written notice
by Senior Creditor or Subordinate Creditors, as the case may be. Notice shall be
considered given as of the earlier of the date of actual receipt, or the date of
the telecopy or hand delivery, one (1) calendar day after delivery to Federal
Express, UPS (or other nationally recognized overnight delivery service), or
three (3) calendar days after the date of mailing, independent of the date of
actual delivery or whether delivery is ever in fact made, as the case may be,
provided the giver of notice can establish that notice was given as provided
herein. Subordinate Creditors hereby irrevocably designate PPDI as the agent for
Subordinate Creditors for receiving notices
22
<PAGE>
from Senior Creditor, and PPDI hereby accepts such designation and agrees to be
the agent of Subordinate Creditors for purposes of receiving notices from Senior
Creditor relating to this Agreement. Subordinate Creditors agree that any notice
given to PPDI shall be effective notice to all Subordinate Creditors, whether or
not Subordinate Creditors other than PPDI actually receive the notice given to
PPDI.
If to Senior Creditor: First Union National Bank
Portfolio Management - 3 South
1970 Chain Bridge Road
McLean, Virginia 22102
Attn: Thomas Johnston
If to Subordinate Creditors: Pharmaceutical Product Development, Inc.
3151 Seventeenth Street Extension
Wilmington, North Carolina 28412
Attn: F.B. Davenport, Jr., Esquire
Nothing in this Section shall be construed as requiring Senior Creditor to give
any notice to Subordinate Creditors.
Section 4.03. Amendments, Waivers and Consents. This Agreement shall not
be amended, changed, waived, discharged or terminated unless such amendment,
change, waiver, discharge or termination is in writing signed by Senior Creditor
and Subordinate Creditors.
Section 4.04. Entire Agreement. This Agreement is a complete and
exclusive expression of all the terms of the matters expressed herein and all
prior agreements, statements, and representations, whether written or oral,
which relate thereto in any way are hereby superseded and shall be given no
force and effect. This Agreement shall inure to the benefit of Senior Creditor
and Subordinate Creditors and its and their successors and assigns and shall
burden the parties and their successors and assigns.
Section 4.05. Governing Law. This Agreement and all other related
instruments and documents and the rights and obligations of the parties
hereunder and thereunder shall, in all respects, be governed by, and construed
in accordance with, the laws of the Commonwealth of Virginia (excluding Virginia
conflict of laws rules).
Section 4.06. Jurisdiction; Venue. Senior Creditor and Subordinate
Creditors hereby irrevocably consent to the non-exclusive personal jurisdiction
of the courts of the Commonwealth of Virginia and, if a basis for federal
jurisdiction exists, the non-exclusive jurisdiction of the United States
District Court for the Eastern District of Virginia. Senior Creditor and
Subordinate Creditors agree that venue shall be proper in any circuit court of
the Commonwealth of Virginia or, if a basis for federal jurisdiction exists, in
any Division of the United States District Court for the Eastern District of
Virginia. Senior Creditor and Subordinate Creditors waive any right to object to
the maintenance of any suit or claim in any of the state or
23
<PAGE>
federal courts of the Commonwealth of Virginia on the basis of improper venue or
of inconvenience of forum.
Section 4.07. No Third Party Beneficiaries. This Agreement and the terms
and provisions of this Agreement are for the benefit of Senior Creditor and
Subordinate Creditors and its and their successors and assigns, and shall not in
any event benefit in any way any person not specifically a party to this
Agreement. Neither the Debtors or any other obligors, nor any other creditor,
shall be a beneficiary of this Agreement in any way. Nothing in this Agreement
shall affect, lessen or impair the Liens that Senior Creditor and Subordinate
Creditors hold in any Collateral vis a vis the Debtors or any third parties.
Senior Creditor and Subordinate Creditors expressly reserve each and every of
their Liens and their right to assert their Liens as against Debtors and any
third parties. This Agreement does not amend any Loan Documents or waive any
rights or remedies under any Loan Documents as between any party to this
Agreement and Debtors.
Section 4.08. No Agency or Partnership. Nothing in this Agreement shall
be construed as creating any agency relationship between Senior Creditor and
Subordinate Creditors, or establishing any fiduciary responsibility between them
(excepting any obligation under this Agreement for Subordinate Creditors to hold
any funds in trust for the benefit of Senior Creditor, and any obligation to act
as bailee for each other to perfect certain security interests in Collateral),
or as creating any partnership between them, and each of the foregoing are
expressly disclaimed. Without limiting the generality of the foregoing, rights
and benefits provided to Senior Creditor and Subordinate Creditors pursuant to
this Agreement are solely for the benefit of Senior Creditor and Subordinate
Creditors, respectively, and do not impose any duties upon either party for any
benefit of the other. Neither Senior Creditor nor Subordinate Creditors shall,
for example, have any duty or responsibility to the other with regard to the
manner in which either party may exercise any rights or remedies that such party
may have, or any Enforcement Actions that such party may pursue, as against any
Property of any Debtor, or as against any Debtor, or as against any guarantor or
other obligor of any Obligations.
Section 4.09. Legend. Subordinate Creditors, as to all Subordinate
Creditor Loan Documents, and Senior Creditor, as to all Senior Creditor Loan
Documents other than Level I Senior Creditor Loan Documents, shall cause such
documents to bear upon their face the following legend:
"THE INDEBTEDNESS (AND ANY SECURITY INTERESTS) EVIDENCED BY THIS INSTRUMENT IS
SUBORDINATED TO CERTAIN INDEBTEDNESS (AND SECURITY INTERESTS), AND IS SUBJECT TO
THE TERMS OF A SUBORDINATION AGREEMENT DATED AS OF MARCH 30, 1999, AMONG FIRST
UNION NATIONAL BANK, PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., APPLIED
BIOSCIENCE INTERNATIONAL, INC., AND PPD UK HOLDINGS LIMITED, AS THE SAME MAY BE
AMENDED, MODIFIED OR SUPPLEMENTED FROM TIME TO TIME."
24
<PAGE>
Section 4.10. Filing and Recording. Either party may file or record this
Agreement (or a photocopy of this Agreement) with any governmental authority to
give notice of, and to further the legal operation and effect of, this
Agreement, including any filing or recording in any public office for recording
Uniform Commercial Code financing statements and any land records office.
Debtors shall be obligated to pay any applicable out-of-pocket fees, costs,
expenses and taxes of filing or recording this Agreement and any other
Subordination Notice or Lien Notice.
Section 4.11. Miscellaneous. Any provision of this Agreement or of any
related instrument or document executed pursuant hereto which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or thereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. This Agreement may be
executed in counterparts and each shall be effective as an original, and a
telecopy of this executed Agreement shall be effective as an original. In making
proof of this Agreement, it shall not be necessary to produce more than one
counterpart of this Agreement. The parties to this Agreement hereby waive any
right to require any other party to this Agreement to marshal any security or
collateral or otherwise to compel the other party to seek recourse against or
satisfaction of any indebtedness owed to it from one source before seeking
recourse or satisfaction from another source. Senior Creditor and Subordinated
Creditors shall be protected in acting upon any notice, request, consent,
demand, statement, note or other paper or document believed by either of them to
be genuine and to have been signed by the party or parties purporting to have
signed the same. The Preliminary Statements to this Agreement, and the terms
provided and defined therein, are incorporated herein and intended to be a part
of this Agreement.
Section 4.12. ARBITRATION; WAIVER OF JURY TRIAL. Upon demand of any
party hereto, whether made before or after institution of any judicial
proceeding, any claim or controversy arising out of, or relating to this
Agreement or the Loan Documents between the parties hereto (a "Dispute") shall
be resolved by binding arbitration conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American Arbitration Association (the "AAA") and the Federal Arbitration Act.
Disputes may include, without limitation, tort claims, counterclaims, disputes
as to whether a matter is subject to arbitration, claims brought as class
actions, or claims arising from documents executed in the future. A judgment
upon the award may be entered in any court having jurisdiction. Notwithstanding
the foregoing, this arbitration provision does not apply to disputes under or
related to swap agreements.
Special Rules. All arbitration hearings shall be conducted in the city
in which the office of Senior Creditor first stated above is located. A hearing
shall begin within 90 days of demand for arbitration and all hearings shall be
concluded within 120 days of demand for arbitration. These time limitations may
not be extended unless a party shows cause for extension and then for no more
than a total of 60 days. The expedited procedures set forth in Rule 51 et seq.
of the Arbitration Rules shall be applicable to claims of less than $1,000,000.
Arbitrators shall be licensed attorneys selected from the Commercial Financial
Dispute Arbitration Panel of the
25
<PAGE>
AAA. The parties do not waive applicable Federal or state substantive law except
as provided herein.
Preservation and Limitation of Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties agree to preserve, without
diminution, certain remedies that any party may exercise before or after an
arbitration proceeding is brought. The parties shall have the right to proceed
in any court of proper jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to foreclose against any real
or personal property or other security by exercising a power of sale or under
applicable law by judicial foreclosure including a proceeding to confirm the
sale; (ii) all rights of self-help including peaceful occupation of real
property and collection of rents, set-off, and peaceful possession of personal
property; (iii) obtaining provisional or ancillary remedies including injunctive
relief, sequestration, garnishment, attachment, appointment of receiver and
filing an involuntary bankruptcy proceeding; and (iv) when applicable, a
judgment by confession of judgment. Any claim or controversy with regard to any
party's entitlement to such remedies is a Dispute.
Each party agrees that it shall not have a remedy of punitive or
exemplary damages against the other in any Dispute and hereby waive any right or
claim to punitive or exemplary damages they have now or which may arise in the
future in connection with any Dispute, whether the Dispute is resolved by
arbitration or judicially.
Waiver of Jury Trial. The parties acknowledge that by agreeing to
binding arbitration they have irrevocably waived any right they may have to a
jury trial with regard to a Dispute.
[REMAINDER OF PAGE BLANK]
26
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, Senior
Creditor and Subordinate Creditors execute this Agreement under seal as of the
day and year first above written.
WITNESS: FIRST UNION NATIONAL BANK
By: /s/ Michael Rapelyea (SEAL)
Name: Michael Rapelyea
Title: Vice President
WITNESS: APPLIED BIOSCIENCE INTERNATIONAL
INC.
Jean Wachtel By: /s/ Fred B. Davenport, Jr. (SEAL)
Name: Fred B. Davenport, Jr.
Title: Vice President
WITNESS: PPD UK HOLDINGS LIMITED
Jean Wachtel By: /s/ Fred B. Davenport, Jr. (SEAL)
Name: Fred B. Davenport, Jr.
Title: Director
27
<PAGE>
Each Debtor (other than the Guarantor) signs this Agreement under seal
at the requests of Senior Creditor and Subordinate Creditors, to acknowledge
that each Debtor consents to the terms of the foregoing Agreement and covenants
and agrees to be bound thereby for the benefit of Senior Creditor.
WITNESS: ENVIRON HOLDINGS, INC.
Guy Lewis By: /s/ Mitchell Smith (SEAL)
Name: Mitchell Smith
Title: President / COO
WITNESS: ENVIRON INTERNATIONAL CORPORATION
Guy Lewis By: /s/ Mitchell Smith (SEAL)
Name: Mitchell Smith
Title: President / COO
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Pharmaceutical Product Development Inc. Consolidated Balance Sheet and Statement
of Operations included within this Form 10-K and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 38,168
<SECURITIES> 0
<RECEIVABLES> 120,205
<ALLOWANCES> 960
<INVENTORY> 0
<CURRENT-ASSETS> 169,374
<PP&E> 95,072
<DEPRECIATION> 49,559
<TOTAL-ASSETS> 251,495
<CURRENT-LIABILITIES> 81,078
<BONDS> 0
0
0
<COMMON> 2,453
<OTHER-SE> 165,997
<TOTAL-LIABILITY-AND-EQUITY> 251,495
<SALES> 0
<TOTAL-REVENUES> 69,610
<CGS> 0
<TOTAL-COSTS> 34,861
<OTHER-EXPENSES> 25,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> 10,222
<INCOME-TAX> 3,966
<INCOME-CONTINUING> 6,256
<DISCONTINUED> (125)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,131
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
