<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 1996
REGISTRATION NO. 333-2140
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COLLABORATIVE CLINICAL RESEARCH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
OHIO 8731 34-1685364
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
20600 CHAGRIN BOULEVARD
SUITE 1050
CLEVELAND, OHIO 44122
(216) 491-9930
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFREY A. GREEN, PHARM.D., FCP
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COLLABORATIVE CLINICAL RESEARCH, INC.
20600 CHAGRIN BOULEVARD
CLEVELAND, OHIO 44122
(216) 491-9930
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
THOMAS F. MCKEE
CALFEE, HALTER & GRISWOLD
1400 MCDONALD INVESTMENT CENTER
800 SUPERIOR AVENUE
CLEVELAND, OHIO 44114
(216) 622-8200
WILLIAM J. GRANT
WILLKIE FARR & GALLAGHER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(212) 821-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
<TABLE>
==================================================================================================
<CAPTION>
<S> <C> <C>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
Common Shares, without par value..................... $29,900,000 $10,311(2)
==================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) A registration fee in the amount of $8,566 was paid upon the initial filing
of this Registration Statement.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
COLLABORATIVE CLINICAL RESEARCH, INC.
------------------------
FORM S-1
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
-------------------------------------------- ------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors
4. Use of Proceeds............................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............. Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution.................................... Risk Factors; Dilution
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered.................................. Outside Front Cover Page; Prospectus
Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel...... Not Applicable
11. Information with Respect to the
Registrant.................................. Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Results of Operations and Financial
Condition; Business; Management; Certain
Transactions; Principal Shareholders and
Management; Description of Capital Stock;
Shares Eligible for Future Sale;
Underwriting; Additional Information;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 10, 1996
PROSPECTUS
2,000,000 SHARES
LOGO COLLABORATIVE
CLINICAL RESEARCH, INC.
COMMON SHARES
All of the 2,000,000 Common Shares offered hereby are being sold by
Collaborative Clinical Research, Inc. ("Collaborative" or the "Company"). Prior
to the Offering, there has been no public market for the Common Shares of the
Company. It is currently estimated that the initial public offering price will
be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price. The
Common Shares have been approved for listing on the Nasdaq National Market under
the symbol "CCLR."
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
================================================================================================================
<CAPTION>
<S> <C> <C> <C>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------
Per Share......................................... $ $ $
- ----------------------------------------------------
Total(3).......................................... $ $ $
================================================================================================================
<FN>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $720,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional Common Shares on the same terms and conditions set forth
above, solely to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively.
See "Underwriting."
</TABLE>
------------------------
The Common Shares offered by the Underwriters are subject to prior sale,
receipt and acceptance by them and subject to the right of the Underwriters to
reject any order in whole or in part and certain other conditions. It is
expected that delivery of such shares will be made at the offices of the agent
of Vector Securities International, Inc., in New York, New York on or about
, 1996.
------------------------
Vector Securities International, Inc. McDonald & Company
Securities, Inc.
, 1996
<PAGE> 4
LOGO
COLLABORATIVE CLINICAL RESEARCH, INC.
(MAP depicting the United States, Canada
and the United Kingdom and indicating the number of affiliated sites in a
particular jurisdiction.)
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus, including information under "Risk Factors."
THE COMPANY
Collaborative Clinical Research, Inc. ("Collaborative" or the "Company")
manages a network comprised of over 400 affiliated clinical research sites
("Affiliated Sites") providing access to over 3,000 principal investigators in
the United States, Canada and the United Kingdom. In addition, through its
recent acquisition of an Affiliated Site, GFI Pharmaceutical Services, Inc.
("GFI"), the Company operates three research facilities, conducts Phase I
through Phase IV clinical research and provides clinical reference laboratory
and Institutional Review Board ("IRB") services. Since commencing operations in
1991, the Company has provided site selection and trial management services for
183 clinical trials in a variety of therapeutic areas involving over 10,000
patients and 79 sponsors (primarily pharmaceutical and biotechnology companies
and, in selected cases, contract research organizations
("CROs") -- collectively, "Sponsors"). The Company provides these Sponsors with
an innovative, time-efficient method of site selection and clinical trial
management. The Company leverages its Affiliated Site network in order to
provide rapid access to qualified investigators and patients. The Company
believes that such access is key to enabling Sponsors to reduce the length of
the product development process.
The Company has Affiliated Sites in a number of health care delivery
settings, including academic medical centers, community hospitals, outpatient
treatment centers, for-profit research sites, managed care organizations,
physician practice groups, regional research subnetworks and long-term care
facilities. The Company markets the capabilities of all Affiliated Sites to
Sponsors, thus reducing the inefficiencies associated with single-site marketing
efforts. Affiliated Sites also are exposed to a number of interventional and
non-interventional clinical research opportunities involving various therapeutic
areas, thus increasing their likelihood of success in obtaining revenue from
clinical research.
Demand for the Company's services has been driven by the significant
changes in the health care industry that have occurred in recent years. These
changes have caused pharmaceutical companies to focus on ways in which to reduce
development costs and improve profitability. For example, pharmaceutical
companies are placing increased importance on developing innovative drugs which
may generate greater market value. In addition, these companies are outsourcing
many aspects of the drug development process in order to reduce fixed costs.
Moreover, pharmaceutical companies are seeking ways in which to improve the
efficiency of the clinical research process, thereby enhancing revenue by
extending the period of the products' market exclusivity.
The Company believes that its Affiliated Site network provides a clinical
research model that is responsive to the health care industry's need to increase
the speed with which new products are brought to market. The primary objective
of the Company's Affiliated Site network is to improve the time-efficiency of
the clinical research process. By accelerating the identification and
qualification of research sites and clinical investigators, the Company provides
Sponsors with the opportunity to begin clinical research sooner, thus
potentially reducing the length of the new product development process.
The Company also believes that its Affiliated Site network offers an
attractive opportunity for health care institutions and providers. The growth of
managed care, as well as efforts by the federal and state governments and
insurers to contain increases in reimbursement rates, have imposed significant
cost containment pressures on these institutions and providers. Such pressures
have led institutions and providers to seek alternative sources of revenue. As
clinical research activities have expanded beyond traditional academic settings,
clinical research has become an increasingly attractive alternative revenue
source. However, health care providers often face significant obstacles in
initiating or expanding a clinical research program. Many non-traditional
research sites do not have established research programs, and need to make
investments in administrative staffing and marketing. Furthermore, institutions
and providers that can offer only a single research site confront significant
obstacles
3
<PAGE> 6
in marketing their services to Sponsors. In many situations, Sponsors will
require multiple sites for a clinical trial, and it is inefficient for Sponsors
to spend significant amounts of time learning about the capabilities of a single
site. The Company markets the capabilities of its Affiliated Sites to Sponsors
in order to assist individual research sites in realizing the full potential of
clinical research as an additional source of revenue.
The Company intends to expand its Affiliated Site network in the United
States, Canada and the United Kingdom, and to enter other selected European
markets. The Company believes its Affiliated Site network provides a unique
platform for expanding its services beyond clinical research. The Company has
entered into a joint venture with Pharmaceutical Marketing Services, Inc.
("PMSI") to develop and market health-economic data collection and analytical
services. In order to increase the speed, efficiency and accuracy of clinical
data collection within the Affiliated Site network, the Company has also entered
into a letter of intent to form an alliance with Integrated Systems Solutions
Corporation ("ISSC"), a wholly-owned subsidiary of IBM Corporation, to develop
and implement a network-wide, on-site electronic data collection and management
system. Additionally, the Company believes that selective acquisitions of
research organizations will play an important role in the Company's efforts to
become an integrated provider of research services. The Company plans to acquire
controlling interests in research entities that have an established reputation
and on-going business in the performance and management of clinical trials.
The Company was incorporated in Ohio on July 17, 1991. Its principal
executive offices are located at 20600 Chagrin Boulevard, Cleveland, Ohio 44122
and its telephone number is (216) 491-9930.
RISK FACTORS
Prospective investors should consider carefully the matters discussed under
the caption "Risk Factors" prior to making any investment in the Company. Each
of these risks could have adverse consequences to the Company. Among the more
significant risks confronting the Company include those associated with its
early stage of development (such as its limited operating history, lack of
profitable operations, unproven business strategy, need to manage growth and
improve systems and acquisition risks) and those associated with the nature of
its business (such as its dependence on major customers, the possibility of
termination of contracts, fluctuations in its quarterly results and the effect
of the Company's expansion strategy on its core business). In addition, the
success of the initiatives described above and elsewhere in this Prospectus
depend in large part on certain assumptions made by the Company's management
concerning trends in the clinical research market and the health care industry.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered.............................. 2,000,000 shares
Common Shares to be outstanding after the 4,917,058 shares(1)
Offering.........................................
Use of proceeds.................................... To repay indebtedness incurred in
connection with the acquisition of GFI
and borrowings under the Company's line
of credit, to provide working capital to
support the expansion of the Company's
business and to fund potential
acquisitions.
Nasdaq National Market symbol...................... CCLR
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 17,
1991
(INCEPTION) YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
TO ---------------------------------------------- ----------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(2) 1995 1996 1996(2)
------------ ------ ------ ------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ 10 $ 549 $1,423 $4,047 $10,453 $16,439 $1,920 $5,303 $5,819
Gross profit..................... 9 270 448 1,139 1,962 4,152 469 1,290 1,437
Operating expenses............... 57 520 804 1,445 2,832 5,008 653 1,192 1,418
Income (loss) from operations.... (48) (250) (356) (306) (870) (856) (184) 98 19
Net income (loss)................ (48) (245) (351) (214) (753) (1,085) (126) 56 (25)
Net income (loss) per share(3)... $(0.24) $(0.25) $(0.10) $ (0.24) $ (0.33) $(0.04) $ 0.02 $(0.01)
Shares used in the
computation(3)................. 1,039 1,388 2,163 3,083 3,249 3,087 3,077 3,243
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................................... $ 406 $ 19,857
Working capital (deficit)........................................................................... (3,672) 20,812
Total assets........................................................................................ 13,385 32,836
Accumulated deficit................................................................................. (1,555) (1,555)
Total shareholders' equity.......................................................................... 3,389 27,873
</TABLE>
- ---------------
(1) Excludes 478,075 Common Shares reserved for issuance upon the exercise of
outstanding options.
(2) Gives effect to the acquisition of GFI as if such transaction had occurred
as of January 1, 1995. See Pro Forma Consolidated Financial Data and Note 8
of Notes to Consolidated Financial Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
(4) As adjusted to give effect to the sale of 2,000,000 Common Shares by the
Company hereby (after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering) and the receipt and
application of the estimated net proceeds therefrom at an assumed initial
public offering price of $12.00 per share. See "Use of Proceeds" and
"Capitalization."
------------------------
Except as otherwise noted, all information in this Prospectus, including
financial information, share and per share data: (a) reflects the conversion of
the Series A, Series B, and Series C Preferred Shares (the "Preferred Shares")
into an aggregate of 2,182,353 Common Shares upon completion of the Offering;
(b) assumes the issuance of the number of Common Shares having a value of $2.0
million determined on the basis of the initial public offering price (166,667
Common Shares at an assumed initial public offering price of $12.00 per share)
in connection with the acquisition of GFI; (c) reflects the declaration and
issuance of additional Preferred Shares pursuant to Preferred Share dividends
through May 31, 1996 and the conversion of such Preferred Shares into an
aggregate of 18,780 Common Shares; (d) assumes the issuance of 136,000 Common
Shares issuable upon exercise of certain outstanding warrants; and (e) assumes
no exercise of the Underwriters' over-allotment option. See "Underwriting."
5
<PAGE> 8
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE COMMON SHARES OFFERED HEREBY.
LIMITED OPERATING HISTORY; LACK OF PROFITABLE OPERATIONS. The Company
commenced operations in 1991 and has a limited operating history upon which
investors may evaluate its performance. The Company has recognized losses in
each year since its inception. As of March 31, 1996, the Company had an
accumulated deficit of $1.6 million. There can be no assurance that the Company
will be profitable during future periods. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
FLUCTUATIONS IN QUARTERLY RESULTS. The Company is subject to significant
fluctuations in quarterly results caused by many factors, including the
Company's success in obtaining new contracts, the size and duration of the
clinical trials in which the Company and members of its network of Affiliated
Sites participate, the timing of Sponsor decisions to conduct new clinical
trials or cancel or delay on-going trials and other factors. As a result of the
Company's limited operating history, the Company does not have historical
financial data for a significant number of periods on which to base planned
operating expenses. Therefore, the Company's expense levels are based in part on
its expectations as to future revenue and to a certain extent are fixed. There
can be no assurance as to the Company's revenue in any given period, and it may
be unable to adjust expenses in a timely manner to compensate for any unexpected
revenue shortfall. As a result of the Company's relatively small revenue base,
any significant shortfall in revenue recognized during a particular period could
have an immediate adverse effect on its results of operations and financial
condition. There can be no assurance that the Company will be able to accurately
anticipate quarterly results. Volatility in the Company's quarterly results may
adversely affect the market price of the Common Shares. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
RISKS ASSOCIATED WITH UNPROVEN BUSINESS STRATEGIES AND EARLY STAGE OF
COMPANY'S DEVELOPMENT. The Company's efforts to establish a network of
Affiliated Sites and market the network as a method of streamlining the process
of selecting investigators and conducting clinical trials represent a
significant departure from the traditional clinical research practices of
Sponsors. The long-term viability of the Company's strategy remains unproven.
There can be no assurance that the Company's strategy will continue to gain
acceptance among Sponsors, research sites or investigators. The Company has
expanded its Affiliate Site network to include 39 Canadian and 12 United Kingdom
sites, but to date has not recognized any revenue from operations outside the
United States. In addition, the Company's efforts to expand into the health care
information services market are at an early stage, and there can be no assurance
as to the Company's ability to expand into this area in a profitable manner. In
that regard, the Company has undertaken a number of strategic initiatives
intended to expand the scope of its services. All of these initiatives are based
upon assumptions made by the Company concerning trends in the clinical research
market and the health care industry. Any of these assumptions could prove to be
incorrect, which could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, and there can be no assurance
that the Company will be successful in these efforts.
POTENTIAL LOSS OF CONTRACTS. Although the Company's contracts with
Sponsors provide that it is entitled to receive revenue earned through the date
of termination, Sponsors generally are free to terminate a clinical trial or the
Company's contract related thereto at any time. The length of a typical clinical
trial contract varies from several months to several years. Sponsors may
terminate clinical trials for several reasons, including unexpected results or
adverse patient reactions to a potential product, inadequate patient enrollment
or investigator recruitment, manufacturing problems resulting in
6
<PAGE> 9
shortages of a potential product or decisions by the Sponsor to de-emphasize or
terminate a particular trial or development efforts with respect to a particular
potential product. A Sponsor's decision to terminate a trial in which the
Company participates could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON MAJOR CUSTOMERS. The Company's primary customers are
companies in the pharmaceutical industry. The Company's business is
substantially dependent on the research and development expenditures of
companies in this industry. During each of the three years in the period ended
December 31, 1995, and the three months ended March 31, 1996, sales to companies
in the pharmaceutical industry accounted for more than 78% of the Company's
revenue. During 1994, 1995 and the three months ended March 31, 1996, sales to
two units of Merck & Co., Inc. accounted for approximately 23%, 76% and 47%,
respectively, of the Company's revenue. On a pro forma basis, after giving
effect to the GFI acquisition, sales to this customer would have represented 49%
of the Company's revenue during 1995 and 43% during the three months ended March
31, 1996. Other customers in the pharmaceutical industry have from time to time
accounted for more than 10% of the Company's annual revenue, with sales to two
additional pharmaceutical industry customers each accounting for more than 10%
of revenue during 1994 and sales to four pharmaceutical industry customers each
accounting for more than 10% of revenue during 1993. Sales to Merck & Co., Inc.
and one additional customer accounted for more than 10% of revenue for the three
months ended March 31, 1996. The extent to which the Company relies on sales to
one customer varies from period to period, depending upon, among other things,
its ability to generate new business from new and existing customers, the timing
and size of clinical trials and other factors. In light of the Company's small
revenue base, it is more dependent on major customers than many of the larger
participants in the clinical research industry. The Company's operations could
be materially and adversely affected by, among other things, any economic
downturn in the pharmaceutical or biotechnology industries, any decrease in
their research and development expenditures or a change in the regulatory
environment in which these companies operate. See "Business -- Background" and
"--Customers and Marketing."
RISKS ASSOCIATED WITH ACQUISITIONS BY THE COMPANY. Selective acquisitions
are anticipated to play an important role in the Company's efforts to become an
integrated provider of research services. GFI is the Company's first
acquisition. There can be no assurance that the Company will be able to
successfully integrate and profitably manage GFI or that it will be able to
identify, acquire, successfully integrate or profitably manage additional
acquisitions without substantial costs, delays or other problems. In addition,
there can be no assurance that companies acquired in the future will be
profitable at the time of their acquisition or that the GFI acquisition or
possible future acquisitions will achieve and/or maintain revenue and
profitability that justify the investment therein. Acquisitions also may involve
a number of special risks, including adverse short-term effects on the Company's
reported operating results, potentially dilutive issuances of equity securities,
the incurrence of debt and contingent liabilities, diversion of management's
attention, dependence on retention, hiring and training of key personnel, risks
associated with unanticipated problems or legal liabilities and amortization of
goodwill and acquired company intangible assets, some or all of which could have
a material adverse effect on the Company's business, results of operations and
financial condition.
EFFECT OF EXPANSION STRATEGY ON THE COMPANY'S CORE BUSINESS. The Company's
efforts to expand the range of its services expose it to significant risks. As
the Company expands its ability to conduct clinical research through
acquisitions and otherwise, circumstances will arise in which it will compete
for research projects with its Affiliated Sites. There can be no assurance as to
the impact of this competition on the Company's relationship with its current
Affiliated Sites or on its ability to continue to expand the Affiliated Site
network. The Company's inability to continue to expand its network of Affiliated
Sites, or the withdrawal of a significant number of Affiliated Sites or those
with expertise in certain therapeutic areas, could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, because of the rapid access to clinical investigators provided by
the Company's Affiliated Site network, CROs have from time to time engaged the
7
<PAGE> 10
Company to assist them in the site selection process. During fiscal 1993, 1994,
1995 and the three months ended March 31, 1996, services provided to CROs
represented approximately 7%, 10%, 6% and 7%, respectively, of the Company's
total revenue. There is no assurance that CROs will continue to do business with
the Company.
MANAGEMENT OF GROWTH; NEED FOR IMPROVED SYSTEMS. The Company believes that
the expansion of its business will continue to place a strain on its
operational, human and financial resources. In order to manage such expansion,
the Company must continue to improve its operating, administrative and
information systems and accurately predict its future personnel and resource
needs. In addition, expansion of foreign operations also may involve the
additional risks of assimilating differences in foreign business practices,
hiring and retaining qualified personnel and overcoming language barriers.
Failure by the Company to meet the demands of and to manage expansion of its
business and operations could have a material adverse effect on the Company's
business, results of operations and financial condition.
LIMITED OBLIGATIONS OF AFFILIATED SITES. The Company's network of
Affiliated Sites is essential to its business. The Company enters into
agreements with each Affiliated Site ("Affiliation Agreements"). The obligations
of Affiliated Sites under the Affiliation Agreements are limited. Affiliated
Sites have full discretion as to whether to participate in clinical research
opportunities presented by the Company, are free to pursue research
opportunities presented to them from sources other than the Company and may
withdraw from the network at any time. See "Business -- The Affiliated Site
Network."
DEPENDENCE ON KEY PERSONNEL. As of March 31, 1996, the Company had a total
of 216 employees, of whom eight had executive or managerial responsibilities.
The Company's growth continues to place significant demands on its management
resources. The success of the Company's business is substantially dependent on
the services of its senior management team and the services of Dr. Jeffrey A.
Green in particular. The Company has employment agreements with Dr. Green and
all but one of its executive officers; however, the loss of Dr. Green's services
or the services of other executive officers could have a material adverse effect
on the Company. See "Management."
GOVERNMENT REGULATION; POTENTIAL IMPACT OF HEALTH CARE REFORM. Demand for
the Company's services is largely a function of the regulatory requirements
associated with the approval of a new drug application imposed by the United
States Food and Drug Administration ("FDA"). These requirements are more
stringent and thus more burdensome than those imposed by many other developed
countries. In recent years, efforts have been made to streamline the drug
approval process and coordinate U.S. standards with those of other developed
countries. Changes in the level of regulation, including a relaxation in
regulatory requirements or the introduction of simplified drug approval
procedures could have a material adverse effect on the demand for the Company's
services. Several competing proposals to reform the system of health care
delivery in the United States have been considered by Congress from time to
time. None of the proposals have been adopted. The process by which the
government will pursue additional or modified proposals for national health care
reform and the precise nature of any such proposals is unclear at this time.
Some of the proposals put forth to date incorporate price controls on drugs and
limits on overall medical spending which may adversely affect expenditures by
the pharmaceutical and biotechnology industries for research and development,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. At present, it is impossible to predict the
effect of any new legislation or changes in regulatory environment on the
Company. See "Business -- Regulatory Matters."
The failure of the Company to comply with applicable regulations could
result in the termination of on-going research or the disqualification of data
for submission to regulatory authorities. Further, the issuance of a notice or
finding by the FDA to either the Company or its clients based upon a material
violation by the Company of either Good Clinical Practices or Good Laboratory
Practices
8
<PAGE> 11
could have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION. The clinical research industry is highly fragmented and is
comprised of several large, full-service CROs and many small, limited service
providers. The major competitors in the industry include the research
departments of pharmaceutical companies, CROs and other research sites. Many of
the Company's competitors have substantially greater financial and other
resources than the Company, and there can be no assurance of the Company's
ability to continue to compete effectively with these larger competitors. There
can be no assurance that these larger competitors will not develop their own
networks of Affiliated Sites, nor as to the effect of such competing networks on
the Company's operations. The Company may also face competition from other
networks of research sites in the recruitment of potential Affiliated Sites. As
the Company continues to expand the range of its clinical research services, it
will compete more directly with the core services provided by CROs. Many of
these CROs are substantially larger and have more resources than the Company.
There can be no assurance that the Company will be able to compete effectively
with these larger companies in providing clinical research services. See
"Business -- Competition."
POTENTIAL LIABILITY FROM OPERATIONS. Clinical trials involve the testing
of approved and experimental drugs on human beings. This testing carries with it
a significant risk of liability for personal injury or death to participants
resulting from an adverse reaction to, or improper administration of, the
potential product. The Company participates with Sponsors in the selection
process. The Company also contracts on behalf of its customers with physicians
who render, and itself renders, professional services including administering
the drugs being tested to participants in these trials. Consequently, the
Company may be subject to claims in the event of personal injury or death of
persons participating in clinical trials and arising from professional
malpractice of physicians with whom it has contracted and its own employees.
Although the Company is generally indemnified by its clients for such liability,
in order for such indemnification to be valid, the Company and its employees and
agents must act within the bounds of specific procedural requirements governing
the conduct of the clinical trial. Since the value of the Company's
indemnification depends on the financial viability of the indemnifying party,
there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. In addition, the
acquisition of GFI has significantly increased the Company's involvement in the
clinical research process. Although the Company's employees have been directly
involved from time to time in rendering services to patients in clinical trials,
the Company's role in the clinical trial process prior to the GFI acquisition
primarily consisted of contracting with physicians who rendered professional
services to trial participants. With the GFI acquisition, the Company's
involvement in the patient treatment process is much more significant than in
the past. Accordingly, the Company's risk of liability for malpractice has
increased. If the Company was forced to undertake the defense of, or found
financially responsible for, claims based upon the foregoing or related risks,
there could be a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Potential Liability and
Insurance."
CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the Offering, the
directors and executive officers of the Company and their affiliates
collectively will own approximately 57% of the outstanding Common Shares of the
Company. Exercise of stock options may increase such persons' percentage
ownership of the outstanding Common Shares. As a result, these shareholders will
be able to control the outcome of all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Principal Shareholders" and
"Description of Capital Stock."
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The Company has identified
specific uses for only $3.0 million of the net proceeds of the Offering. The
balance of the net proceeds will be used to provide working capital to support
the continuing expansion of the Company's business and to fund potential
acquisitions. The Company has not yet identified the specific corporate purposes
for which
9
<PAGE> 12
such proceeds will be used. The Company's management will retain complete
discretion in the application of this portion of the net proceeds. Purchasers of
Common Shares offered hereby will be entrusting their funds to the Company's
management, upon whose judgment they must depend, with limited information
concerning management's intentions as to the specific working capital
requirements and possible acquisitions to which the funds will be applied. There
can be no assurance as to the timing of the application of such proceeds or that
the application thereof will have a positive effect on the Company's future
results of operations or financial condition. See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
the Offering, there has been no public market for the Company's Common Shares,
and there can be no assurance that an active trading market will develop or be
sustained in the Common Shares. The initial public offering price of the Common
Shares will be determined by negotiations between the Company and the
Underwriters and may have no relationship to the price at which the Common
Shares will trade after completion of the Offering. See "Underwriting." The
stock market has from time to time experienced extreme price and volume
fluctuations which have been unrelated to the operating performance of
particular companies. The market price for the Common Shares may be highly
volatile depending on various factors, including but not limited to the state of
the national economy, stock market conditions, industry research reports,
actions by governmental agencies, litigation involving the Company,
announcements by the Company or its competitors and general conditions in the
clinical research industry.
ANTI-TAKEOVER PROVISIONS; CERTAIN PROVISIONS OF OHIO LAW; ARTICLES OF
INCORPORATION AND CODE OF REGULATIONS. Certain provisions of Ohio law and the
Company's Articles of Incorporation and Code of Regulations could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
The Company's Articles of Incorporation provide for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. Such
classification of the Board of Directors expands the time required to change the
composition of a majority of directors and may tend to discourage a proxy
contest or other takeover bid for the Company. The Company's Articles of
Incorporation also contain provisions requiring a supermajority vote by the
shareholders to approve certain business combination transactions that have not
received the approval of the Board of Directors. Applicable provisions of Ohio
law also restrict the ability of the Company to engage in certain business
combination transactions with owners of 10% or more of the outstanding Common
Shares. Certain provisions of Ohio law and the Company's Articles of
Incorporation allow the Company to issue preferred shares with rights senior to
those of the Common Shares without any further vote or action by the
shareholders. The issuance of preferred shares could decrease the amount of
earnings and assets available for distribution to the holders of Common Shares
or could adversely affect the rights and powers, including voting rights, of the
holders of the Common Shares. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Shares. In addition, the
Company is subject to the anti-takeover provisions of Section 1701.83 of the
Ohio General Corporation Law, which require the prior approval of a majority of
the disinterested shareholders for acquisitions of specified percentages of the
outstanding Common Shares. The application of Section 1701.83 also could have
the effect of delaying or preventing a change in control of the Company. See
"Description of Capital Stock -- Serial Preferred Shares," " -- Business
Combinations" and " -- Certain Provisions of Ohio Law."
DILUTION. The initial public offering price per share will be
substantially higher than the pro forma book value per share of the Common
Shares. Investors purchasing Common Shares in the Offering will experience
immediate and substantial dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, of the
15,000,000 authorized Common Shares, 5,069,899 Common Shares will be issued and
outstanding or reserved for issuance pursuant to the exercise of presently
exercisable stock options. Of these 5,069,899 Common Shares, the 2,000,000
Common Shares purchased in the Offering by persons who are not "affiliates" of
the Company will be freely tradeable without restriction under the Securities
Act of 1933, as amended (the
10
<PAGE> 13
"Securities Act"). The Company believes that 979,925 Common Shares may be sold
pursuant to Rule 144 under the Securities Act ("Rule 144") in compliance with
the resale volume limitations of Rule 144 beginning 90 days after the Offering.
The Company believes that 2,089,974 Common Shares are considered "restricted
securities" under the Securities Act and holders may not utilize Rule 144 until
such shares have been held for at least two years or have been registered under
the Securities Act. For a description of Rule 144, see "Shares Eligible for
Future Sale."
The 478,075 Common Shares reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 two years
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offering, the Company intends to file registration
statements on Form S-8 with respect to the 478,075 Common Shares reserved for
issuance upon exercise of outstanding options and the 208,667 Common Shares
reserved for issuance pursuant to future option grants. Upon registration, such
shares upon issuance would be freely tradeable by persons who are not
"affiliates" of the Company. In addition, "affiliates" of the Company could sell
such shares pursuant to Rule 144 under the Securities Act in compliance with the
resale volume limitations of Rule 144.
Certain shareholders of the Company who beneficially own, in the aggregate,
2,137,633 Common Shares have the right, subject to certain exceptions, to
require the Company to register their Common Shares for resale under the
Securities Act on up to two occasions on a long-form registration statement at
the Company's expense, an unlimited number of occasions on a long-form
registration statement at the shareholders' expense and an unlimited number of
occasions on a short-form registration statement at the Company's expense. These
shareholders also have a limited right to include their Common Shares in any
registration statement filed by the Company with respect to an offering of its
Common Shares (subject to certain exceptions).
The Company, its current shareholders and certain holders of options, who
beneficially own 3,041,530 Common Shares, have agreed that they will not,
directly or indirectly, without the prior written consent of the
Representatives, offer, sell, grant any option to purchase or otherwise dispose
(or announce any offer, sale, grant of any option to purchase or other
disposition) of any Common Shares, or any securities convertible into, or
exchangeable or exercisable for, Common Shares for a period of 180 days after
the date of this Prospectus.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares (including shares issued upon the exercise of the
outstanding stock options), or the perception that such sales could occur, could
adversely affect the prevailing market prices of the Common Shares. See "Shares
Eligible for Future Sale."
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Common
Shares offered hereby at an assumed initial public offering price of $12.00 per
share are estimated to be $21.6 million ($24.9 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The Company intends to use approximately $2.0 million of the net proceeds
to repay in full promissory notes issued to the former shareholders of GFI in
connection with the acquisition (the "GFI Notes") and $1.0 million currently
outstanding under the Company's line of credit. The GFI Notes bear interest at
the prime rate plus 1% (9.25% as of April 30, 1996). Borrowings under the
Company's line of credit bear interest at rates up to 1% above the bank's prime
rate. Amounts outstanding under the line of credit currently bear interest at
the bank's prime rate (8.25% as of April 30, 1996). The balance of the net
proceeds will be used to provide working capital to support the continuing
expansion of the Company's business and to fund potential acquisitions. The
Company has not yet identified the specific corporate purposes for which such
proceeds will be used. The Company's management will retain complete discretion
in the application of this portion of the net proceeds. There can be no
assurance as to the timing of the application of such proceeds or that the
application thereof will have a positive effect on the Company's future results
of operation or financial condition. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition." Although selective
acquisitions of companies in the clinical research industry and clinical
research sites are an important component of the Company's strategy, and the
Company is currently in discussion with several such candidates, no material
acquisition has become the subject of any definitive agreements or agreements in
principle. Pending use of the proceeds as described above, the net proceeds will
be invested in short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Shares.
The Company currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any dividends in the foreseeable future.
The Company's bank line of credit for $5,000,000, dated January 19, 1996,
prohibits the payment of cash dividends. See Note 3 of Notes to Consolidated
Financial Statements.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996; and the adjusted capitalization of the Company at such date giving
effect to (i) the conversion of the Preferred Shares into an aggregate of
2,182,353 Common Shares upon completion of the Offering; (ii) the issuance of
the number of Common Shares having a value of $2.0 million determined on the
basis of the initial public offering price (166,667 Common Shares at an assumed
initial public offering price of $12.00 per share) in connection with the
acquisition of GFI; (iii) the declaration and issuance of additional Preferred
Shares pursuant to Preferred Share dividends through May 31, 1996 and the
conversion of such Preferred Shares into an aggregate of 18,780 Common Shares;
(iv) the issuance of 136,000 Common Shares, issuable upon exercise of certain
outstanding warrants; and (v) the sale of 2,000,000 Common Shares by the Company
hereby and the receipt and application of the estimated net proceeds therefrom
at an assumed initial public offering price of $12.00 per share. See "Use of
Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to bank........................................................... $ 1,000 $ --
Notes and other acquisition payables to officers................................ 4,000 --
------- -----------
5,000 --
------- -----------
Shareholders' equity:
Serial Preferred Shares, without par value; 1,000,000 shares authorized; none
issued...................................................................... -- --
Series A, B, and C Convertible Preferred Shares: par value $0.001 per share;
2,860,000 shares authorized; 2,182,353 shares issued and outstanding,
actual; none issued and outstanding, as adjusted............................ 2 --
Additional paid-in capital.................................................... 4,848 --
Common Shares, without par value; 3,660,000 shares authorized; 15,000,000
shares authorized, as adjusted; 413,258 shares issued and outstanding,
actual; 4,917,058 shares issued and outstanding, as adjusted(1)............. 94 29,428
Accumulated deficit........................................................... (1,555) (1,555)
------- -----------
Total shareholders' equity.................................................. 3,389 27,873
------- -----------
Total capitalization...................................................... $ 8,389 $27,873
======= ===========
</TABLE>
- ---------------
(1) Excludes 478,075 Common Shares reserved for issuance upon the exercise of
outstanding options at a weighted average exercise price of $1.93 per share.
13
<PAGE> 16
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996 was
$519,000 or $0.18 per share. Pro forma net tangible book value per share is
equal to the Company's net tangible assets (tangible assets of the Company less
total liabilities) divided by 2,917,058 Common Shares outstanding at March 31,
1996, assuming the issuance of Common Shares in connection with the acquisition
of GFI, the declaration and issuance of Preferred Share dividends, the
conversion of all outstanding Preferred Shares into Common Shares and the
exercise of warrants to purchase Common Shares. After giving effect to the sale
of the 2,000,000 Common Shares by the Company in the Offering and the receipt of
the net proceeds therefrom, the pro forma net tangible book value of the Company
as of March 31, 1996 would have been $22.1 million or $4.50 per share. This
represents an immediate increase in pro forma net tangible book value of $4.32
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value of $7.50 per share to new investors. The following table
sets forth the per share dilution to new investors in the Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $12.00
Pro forma net tangible book value per share at March 31,
1996........................................................ $0.18
Increase per share attributable to new investors............. 4.32
------
Pro forma net tangible book value per share after the Offering.... 4.50
------
Dilution per share to new investors............................... $ 7.50
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1996,
the differences between existing shareholders and new investors with respect to
the number of Common Shares purchased from the Company, the total consideration
paid and the average price paid per share (at an assumed initial public offering
price of $12.00 per share and before deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 2,917,058 59% $ 7,826,892 25% $ 2.68
New investors................. 2,000,000 41 24,000,000 75 12.00
--------- ------- ----------- -------
Total.................... 4,917,058 100% $31,826,892 100%
======== ======= ========== =======
</TABLE>
The foregoing computations exclude options to purchase 478,075 Common
Shares at a weighted average exercise price of $1.93 per share. To the extent
that such options are exercised, there will be further dilution to new
investors. See "Management -- Director Compensation," "-- 1996 Outside Directors
Stock Option Plan," "-- 1992 Stock Incentive Plan," "-- 1996 Key Employees and
Consultants Stock Option Plan" and Note 7 of Notes to Consolidated Financial
Statements.
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company, since its inception. The selected consolidated financial data at
December 31, 1991 and for the period from inception to December 31, 1991, and at
and for each of the four years in the period ended December 31, 1995, are
derived from the financial statements of the Company which have been audited by
Ernst & Young LLP, independent auditors. The selected consolidated financial
data for the three months ended March 31, 1995 and at and for the three months
ended March 31, 1996 has been derived from unaudited consolidated financial
statements, which include all adjustments, consisting solely of normal recurring
adjustments, which management considers necessary to fairly present the
financial information set forth. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. The data should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the Consolidated Financial Statements and
related Notes thereto and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JULY 17, 1991 YEAR ENDED DECEMBER 31, MARCH 31,
(INCEPTION) TO ---------------------------------- -----------------
DECEMBER 31, 1991 1992 1993 1994 1995 1995 1996
----------------- ------ ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 10 $ 549 $1,423 $4,047 $10,453 $1,920 $5,303
Direct costs................................. 1 279 975 2,908 8,491 1,451 4,013
--- ------ ------ ------ ------- ------ ------
Gross profit................................. 9 270 448 1,139 1,962 469 1,290
Selling, general and administrative
expenses................................... 57 439 686 1,386 2,770 641 1,093
Depreciation and amortization................ -- 81 118 59 62 12 99
--- ------ ------ ------ ------- ------ ------
Income (loss) from operations................ (48) (250) (356) (306) (870) (184) 98
Other income (loss).......................... -- 5 5 92 117 58 (23)
--- ------ ------ ------ ------- ------ ------
Income (loss) before income taxes............ (48) (245) (351) (214) (753) (126) 75
Income tax expense........................... -- -- -- -- -- -- 19
--- ------ ------ ------ ------- ------ ------
Net income (loss)............................ $ (48) $ (245) $ (351) $ (214) $ (753) $ (126) $ 56
================= ====== ====== ====== ======= ====== ======
Net income (loss) per share(1)............... $(0.24) $(0.25) $(0.10) $ (0.24) $(0.04) $ 0.02
====== ====== ====== ======= ====== ======
Shares used in the computation(1)............ 1,039 1,388 2,163 3,083 3,087 3,077
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1991 1992 1993 1994 1995 MARCH 31, 1996
----- ----- ----- ------ ------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ -- $ 446 $ 207 $4,105 $3,011 $ 406
Working capital (deficit)..................................... (48) 197 (82) 3,879 2,961 (3,672)
Total assets.................................................. -- 787 651 5,523 7,025 13,385
Long-term liabilities......................................... -- 23 -- -- -- --
Accumulated deficit........................................... (48) (293) (644) (858) (1,611) (1,555)
Total shareholders' equity (deficit).......................... (48) 354 30 4,004 3,323 3,389
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net income (loss) per share.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
GENERAL
The Company provides clinical research services to Sponsors of clinical
research (primarily pharmaceutical and biotechnology companies and, in selected
cases, CROs) through its network of over 400 Affiliated Sites. Revenue is
derived principally from the identification, placement and management of
clinical trial programs and health-economic data evaluations within the
Company's network of Affiliated Sites. During the fourth quarter of 1995, the
Company expanded its services to include regulatory affairs, monitoring and data
management for clinical trials. The Company continues to expand its Affiliated
Site network in the United States and Canada and has begun to enter selected
European markets including the recent addition of 12 Affiliated Sites in the
United Kingdom.
Effective January 31, 1996, the Company acquired GFI. This acquisition has
been accounted for under the purchase method, and GFI's results have been
consolidated with those of the Company for periods subsequent to the date of the
acquisition. The purchase price for the GFI acquisition was $6.0 million, and
included $2.0 million in cash, $2.0 million in notes payable and the number of
Common Shares having a value equal to $2.0 million, determined on the basis of
the initial public offering price (166,667 Common Shares at an assumed initial
public offering price of $12.00 per share). After allocating the purchase price
to the market value of the net assets acquired, the Company recorded
approximately $5.8 million in goodwill in connection with the acquisition, which
is being amortized using the straight-line method over a period of 20 years.
The Company's clinical research service contracts generally have terms
ranging from several months to several years. A portion of the contract fee is
generally payable upon execution of the contract, with the balance payable in
installments over the life of the contract. Revenue and related direct costs are
recognized as specific contract terms are fulfilled under the percentage of
completion method utilizing units of delivery. The Company's contracts are
broken down into discrete units of deliverable services for which a fixed fee
for each unit is established. Pass-through costs that are paid directly by the
Company's Sponsors, and for which the Company does not bear the risk of economic
loss, are excluded from revenue. These costs can include investigator meeting
fees, IRB fees and travel costs. The termination of a contract results in no
material adjustments to revenue or direct costs previously recognized, and the
Company is entitled to payment for all work performed through the date of notice
of termination and all costs associated with termination of a study.
16
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of revenue and the percentage
change in such items as compared to prior periods:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
--------------------------------------------- PERCENTAGE CHANGE
THREE MONTHS -----------------------------
ENDED THREE
YEAR ENDED DECEMBER 31, MARCH 31, 1993 1994 MONTHS
------------------------- --------------- TO TO 1995 TO
1993 1994 1995 1995 1996 1994 1995 1996
----- ----- ----- ----- ----- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0% 184.4% 158.3% 176.2%
Direct costs.................... 68.5 71.9 81.2 75.6 75.7 198.3 192.0 176.5
Gross profit.................... 31.5 28.1 18.8 24.4 24.3 154.1 72.3 175.2
Selling, general and
administrative expenses....... 48.2 34.3 26.5 33.4 20.6 101.9 99.8 70.3
Depreciation and amortization... 8.3 1.4 0.6 0.6 1.9 (50.2) 4.9 *
Income (loss) from operations... (25.0) (7.6) (8.3) (9.6) 1.8 14.0 (184.0) 152.9
Other income (expense).......... 0.3 2.3 1.1 3.0 (0.4) * 27.0 (139.3)
Income (loss) before income
taxes......................... (24.7) (5.3) (7.2) (6.6) 1.4 39.0 (251.6) (159.2)
Income tax expense.............. -- -- -- -- (0.3) -- -- *
Net income (loss)............... (24.7) (5.3) (7.2) (6.6) 1.1 39.0 (251.6) 144.4
</TABLE>
- ---------------
* Not meaningful.
Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
Revenue for the three months ended March 31, 1996 increased 176.2% to $5.3
million as compared to $1.9 million in the three months ended March 31, 1995. Of
the $3.4 million increase, $1.0 million was due to the acquisition of GFI and
$2.4 million was due to growth in the number and size of Collaborative's ongoing
and new clinical trials. Approximately $700,000 of the $2.4 million increase was
derived from an ongoing 300 site multi-year clinical research project that began
in December 1994.
Direct costs include compensation and related fringe benefits for
non-administrative employees and other expenses directly related to contracts,
which are generally subcontracted to the Affiliated Sites and other vendors,
such as investigator payments. These costs increased by $2.5 million, or 176.5%,
from $1.5 million to $4.0 million for the three months ended March 31, 1995 and
1996, respectively. Of the $2.5 million increase, $500,000 was due to the
acquisition of GFI and $2.0 million was due to growth in number and size of
Collaborative's ongoing and new clinical trials. Direct costs for
Collaborative's ongoing and new clinical trials increased from 75.6% to 75.7% as
a percentage of revenue for the three months ended March 31, 1995 and 1996,
respectively. This reflects the continuing effects of the Company's decision
during the first half of 1994 to reduce fees for certain services and to absorb
certain administrative contract costs as a means to capture additional market
share. Because the Company's contracts range from several months to several
years, the effects of this pricing decision continued to have an impact on the
results of operations for the three months ended March 31, 1996. During the
second half of 1995, the Company began to implement changes in its pricing
practices intended to increase prices for certain services and include charges
for certain administrative contract costs that had previously been absorbed.
GFI's operations have historically experienced lower direct costs as a
percentage of revenue as GFI has been able to leverage fixed personnel and other
direct costs. During the three months ended March 31, 1996, Collaborative's
higher direct costs as a percentage of revenue were offset by GFI's lower direct
costs. As a result, consolidated direct costs were approximately 76.0% of
revenue for each of the three month periods ended March 31, 1995 and 1996.
Selling, general and administrative expenses include all administrative
personnel costs, business and Affiliated Site development costs, and all other
expenses not directly chargeable to a specific contract. Selling, general and
administrative costs for the three months ended March 31, 1996 increased
17
<PAGE> 20
70.3% to $1.1 million as compared to $641,000 during the three months ended
March 31, 1995. Of the $451,000 increase, $322,000 was due to the acquisition of
GFI, and the remainder was due to the Company's internal growth. Selling,
general and administrative expenses as a percentage of revenue decreased from
33.4% to 20.6% for the three months ended March 31, 1995 and 1996, respectively.
The decrease in selling, general and administrative expenses as a percentage of
revenue reflects improved absorption of fixed costs resulting from the increase
in the Company's revenue.
Depreciation and amortization expense increased from $12,000 in the three
months ended March 31, 1995 to $99,000 during the three months ended March 31,
1996. Of the $87,000 increase, $28,000 resulted from the acquisition of GFI's
assets, $48,000 resulted from the amortization of goodwill due to the GFI
acquisition and $11,000 resulted from the Company's purchase of additional
computer equipment and leasehold improvements during the period.
Other income (expense) decreased $81,000 from $58,000 in the three months
ended March 31, 1995 to ($23,000) in the three months ended March 31, 1996. This
was the result of a $40,000 decrease in interest income caused by a reduction in
cash and cash equivalents required for the GFI acquisition and a $36,000
increase in interest expense due to the issuance of notes payable to the former
shareholders of GFI, and borrowings under the Company's line of credit. The
Company also recorded a $4,500 loss as its share of Health Research Innovations,
L.L.C. ("HRI's") loss for the three months ended March 31, 1996. HRI, formed
through the Company's joint venture with PMSI, contracts with the Company to use
its Affiliated Site network for the collection of outcomes assessment,
health-economic and disease management data. For financial reporting purposes,
the Company records its share of the net income or loss from HRI using the
equity method. See "Business -- Business Strategy."
The Company's effective tax rate for 1996 is estimated to be 25% of pre-tax
income, after giving effect to net operating loss carryforwards ("NOLs") of $1.4
million for federal income tax purposes. This effective tax rate is reflected in
the Company's Consolidated Statement of Operations and in the Pro Forma
Consolidated Statement of Operations for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Revenue increased by $6.4 million, or 158.3%, from $4.0 million in 1995.
Approximately $5.6 million of the increase resulted from revenue derived from a
300-site multi-year clinical research project which began in December 1994. The
balance of the increase reflects revenue derived from other new projects
obtained through the Company's increased business development efforts.
Direct costs increased by $5.6 million, or 192.0%, from $2.9 million in
1994 to $8.5 million in 1995. Direct costs increased as a percentage of revenue
from 71.9% in 1994 to 81.2% in 1995. The increase in direct costs as a
percentage of revenue reflects the continuing effects of the Company's decision
during the first half of 1994 to reduce fees for certain services and to absorb
certain administrative contract costs as a means of capturing additional market
share. Because the Company's contracts range from several months to several
years, the effects of the pricing decision in 1994 continued to have an impact
on the results of operations for 1995. During the second half of 1995, the
Company began to implement changes in its pricing practices intended to increase
prices for certain services and include charges for certain administrative
contract costs that had previously been absorbed.
Selling, general and administrative expenses increased by $1.4 million, or
99.8%, to $2.8 million in 1995, but decreased as a percentage of revenue from
34.3% in 1994 to 26.5% in 1995. The majority of the increase in these expenses
resulted from additions to personnel and increases in costs associated with
business and Affiliated Site development. In 1995, legal expenses increased by
$250,000 due to costs incurred in defense and settlement of certain employment
litigation. The decrease in selling, general and administrative expenses as a
percentage of revenue reflects improved absorption of fixed costs resulting from
the increase in the Company's revenue.
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<PAGE> 21
Depreciation and amortization expense increased by 4.9% from $59,000 in
1994 to $62,000 in 1995 as a result of purchases of additional computer
equipment and leasehold improvements during the year.
Other income (expense) increased from $92,000 in 1994 to $117,000 in 1995.
This increase was caused by a higher level of interest income, offset by the
Company's share of losses incurred by HRI for the six months ended December 31,
1995. The Company's share of HRI's loss during 1995 was $105,000.
At December 31, 1995, the Company had cumulative NOLs of $1.4 million for
federal income tax purposes. These NOLs expire in the years 2006 through 2010.
The NOLs are sufficient to absorb GFI's 1995 pre-tax net income such that no
income tax expense is reported in the Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1995.
Year Ended December 31, 1994 Compared with Year Ended December 31, 1993
Revenue increased by $2.6 million, or 184.4%, from $1.4 million in 1993 to
$4.0 million in 1994. This increase resulted primarily from an increase in the
number and size of projects under contract. Of the increase, $320,000, or 22%,
was the result of revenue earned through an alliance with a provider of home
infusion therapy, under the terms of which the Company received fees for
providing access to its network of Affiliated Sites.
Direct costs increased by $1.9 million, or 198.3%, from $975,000 in 1993 to
$2.9 million in 1994. Direct costs increased as a percentage of revenue from
68.5% in 1993 to 71.9% in 1994. The increase resulted from the Company's
decision during the first half of 1994 to reduce fees for certain services and
to absorb some administrative contract costs in order to capture market share.
Selling, general and administrative expenses increased by $700,000, or
101.9%, from $690,000 in 1993 to $1.4 million in 1994, but decreased as a
percentage of revenue from 48.2% in 1993 to 34.3% in 1994. The increase in
selling, general and administrative expenses was the result of increased
personnel, administrative, advertising and Affiliate Site development costs
associated with the continued growth of the Company. The decrease in selling,
general and administrative expenses as a percentage of revenue reflects improved
absorption of fixed costs resulting from the increase in the Company's revenue.
Depreciation and amortization decreased by 50.2%, falling to $59,000 in
1994 from $118,000 in 1993. This decrease resulted from a 75% decrease in
amortization expense caused by start-up costs being fully amortized during the
first quarter of 1994 and was partially offset by a 25% increase in depreciation
expense, due to increased capital expenditures.
Other income (expense) increased from $5,000 in 1993 to $92,000 in 1994.
The increase resulted from increased interest income associated with the funding
received in the Company's July 1994 financing. See "Certain Transactions --
Financing Arrangements."
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<PAGE> 22
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly statement of
operations data for the quarters indicated below:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MAR-31 JUN-30 SEP-30 DEC-31 MAR-31 JUN-30 SEP-30 DEC-31 MAR-31
1994 1994 1994 1994 1995 1995 1995 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................................ $ 742 $1,105 $ 904 $1,296 $1,920 $2,116 $2,751 $3,666 $5,303
Direct costs................................... 453 839 658 958 1,451 1,758 2,292 2,990 4,013
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................................... 289 266 246 338 469 358 459 676 1,290
Selling, general and administrative expenses... 262 294 369 461 641 681 809 639 1,093
Depreciation and amortization.................. 30 9 9 11 12 15 17 18 99
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations.................. (3) (37) (132) (134) (184) (338) (367) 19 98
Other income (expense)......................... -- -- 41 51 58 51 (8) 16 (23)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes.............. (3) (37) (91) (83) (126) (287) (375) 35 75
Income tax expense............................. -- -- -- -- -- -- -- -- 19
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............................. $ (3) $ (37) $ (91) $ (83) $ (126) $ (287) $ (375) $ 35 $ 56
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Company's quarterly results are subject to fluctuations. Quarterly
results can fluctuate as a result of a number of factors, including the
Company's success in attracting new business, the size and duration of the
clinical trials in which the Company and members of its network of Affiliated
Sites participate, the timing of Sponsors' decisions to conduct new clinical
trials or cancellation or delays of on-going trials, acquisitions and other
factors, many of which are beyond the Company's control. See "Risk Factors --
Fluctuations in Quarterly Results."
SUMMARY OF GFI RESULTS
GFI had contract revenue of approximately $6.0 million and net income of
approximately $248,000 during 1995. Although GFI provides clinical trial
management services, a majority of its revenue is derived from the performance
of clinical research. Over the past two years, GFI's revenue has increased from
$4.2 million to $6.0 million, while its gross margin percentage has increased
from 33% to 37%. GFI's margin increase is due to the leveraging of fixed
personnel costs through the performance of more clinical trials, as well as the
performance of higher margin clinical monitoring work during 1995. GFI's
operating expenses have increased as a percentage of revenue from 29% in 1993 to
32% in 1995 due to the expansion of its Phase I facilities and increases in
administrative personnel. GFI's pre-tax net income has remained constant at
approximately 4% of revenue for each of the three years ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company commenced operations in 1991. Since that time, the Company's
principal sources of cash have been cash flow from operations and approximately
$5.0 million in proceeds from three private offerings of equity securities. The
Company's most recent financing was completed in July 1994, and resulted in
proceeds of approximately $4.2 million. See "Certain Transactions -- Financing
Arrangements."
Cash and cash equivalents decreased $751,000 during the three months ended
March 31, 1996. This resulted from $230,000, $391,000, and $129,000 used in
operating, investing and financing activities, respectively. Cash used in
operating activities resulted primarily from cash used to fund working capital
needs. Cash used by investing activities resulted from the approximately $2.0
million used for the purchase of GFI and $252,000 used to purchase property and
equipment, offset by $1.9 million provided by the maturity of short-term
investments. Net uses of cash for financing activities reflect
20
<PAGE> 23
borrowings of $1.0 million on the Company's line of credit, offset by $1.1
million used to repay and terminate GFI's line of credit on January 31, 1996 in
connection with the GFI acquisition.
Accounts receivable, net of allowance for doubtful accounts, increased from
$2.9 million at December 31, 1995 to $5.0 million at March 31, 1996, due to
revenue growth and the acquisition of GFI. The number of days outstanding in
accounts receivable (net of unearned revenue) increased from 52 days at December
31, 1995 to 54 days at March 31, 1996. Deferred revenue increased from $559,000
at December 31, 1995 to $1.0 million at March 31, 1996. Fluctuations in deferred
revenue are caused by the timing and amount of advance payments on contracts
received from Sponsors.
Cash and cash equivalents increased $40,000 during the year ended December
31, 1995, as a result of $893,000 provided by investing activities, offset by
$853,000 used in operating activities. Cash provided by investing activities
reflects the proceeds received at maturity of certain U.S. government securities
held as investments. Cash used in operating activities during 1995 primarily
reflects the funding of the operating loss and working capital requirements.
Accounts receivable, net of allowance for doubtful accounts, increased from
$1.2 million at December 31, 1994 to $2.9 million at December 31, 1995, due to
revenue growth. The number of days outstanding in accounts receivable (net of
unearned revenue) increased from 33 days at December 31, 1994 to 52 days at
December 31, 1995. Deferred revenue decreased from $622,000 at December 31, 1994
to $559,000 at December 31, 1995. Fluctuations in deferred revenue are caused by
the timing and amount of advance payments on contracts received from Sponsors.
The Company's contracts with Sponsors generally require an advance payment at
the time a contract is signed.
GFI's primary sources of cash have been cash flows from operations and
borrowings under its line of credit. To the extent that GFI's cash flows from
operations are insufficient to support its cash needs, the Company will use its
available cash resources to provide the funding required.
Total expenditures by the Company for property and equipment were $50,000,
$65,000, $242,000 and $250,000 in 1993, 1994, 1995, and for the three months
ended March 31, 1996, respectively. Computer equipment and leasehold
improvements account for a significant portion of the expenditures. GFI's
property and equipment expenditures were $90,000, $157,000 and $279,000 for each
of the three years ended December 31, 1993, 1994 and 1995, respectively. GFI's
expenditures are generally for computer, medical and laboratory equipment. The
Company's anticipated capital expenditures for the remainder of 1996 are
$800,000 and include the purchase of laboratory equipment for GFI.
The Company's principal cash needs on both a short and long-term basis are
for the funding of its operations and capital expenditure requirements. In
addition, the Company is required under the terms of its joint venture agreement
with PMSI to fund 50% of HRI's operating requirements and capital expenditures.
The Company expects to continue expanding its operations through internal
growth, strategic acquisitions, joint ventures and alliances. The Company
expects such activities will be funded from existing cash and cash equivalents,
cash flow from operations, the net proceeds from the Offering and borrowings
under its line of credit. A portion of the proceeds from the Offering will be
used to repay approximately $2.0 million in indebtedness incurred in connection
with the GFI acquisition (comprised of notes payable to the former shareholders
of GFI) and $1.0 million currently outstanding under the Company's line of
credit. As part of ISSC's planned technology development alliance with the
Company, ISSC will fund the development of the on-site data collection system.
The Company has a line of credit with a commercial bank providing a maximum
credit facility of $5.0 million. Borrowings under the line of credit bear
interest at rates up to 1% above the bank's prime rate. Amounts outstanding
under the line of credit currently bear interest at the bank's prime rate (8.25%
as of April 30, 1996). Amounts outstanding under the line of credit are
collateralized by substantially all of the Company's assets and are payable on
demand. At March 31, 1996, $1.0 million in borrowings were outstanding under the
line of credit. The line of credit is subject to renewal at June 30, 1996.
The Company believes that cash generated from operations, amounts available
under its line of credit and the net proceeds of the Offering will be sufficient
to fund its working capital and capital
21
<PAGE> 24
expenditure requirements for the foreseeable future. However, selective
acquisitions of research organizations are anticipated to play an important role
in the Company's efforts to become an integrated provider of research services.
Although the Company does not have any definitive agreements or agreements in
principle with respect to any potential acquisition, it is engaged in
preliminary discussions with several potential acquisition candidates. To the
extent that the Company is successful in its efforts to acquire additional
research organizations, it may require additional capital. There can be no
assurance as to the Company's ability to obtain additional financing.
INFLATION
To date the Company believes the effects of inflation have not had a
material adverse effect on its results of operations or financial condition. The
Company's contracts fix the revenue and costs for each unit of service or work
to be completed, thereby minimizing the impact of inflation on all ongoing
contracts.
22
<PAGE> 25
BUSINESS
GENERAL
The Company manages a network comprised of over 400 Affiliated Sites
providing access to over 3,000 principal investigators in the United States,
Canada and the United Kingdom. In addition, through its recent acquisition of
GFI, the Company operates three research facilities, conducts Phase I through
Phase IV clinical research and provides clinical reference laboratory and IRB
services. Since commencing operations in 1991, the Company has provided site
selection and trial management services for 183 clinical trials in a variety of
therapeutic areas involving over 10,000 patients and 79 Sponsors. The Company
provides these Sponsors with an innovative, time-efficient method of site
selection and clinical trial management. The Company leverages its Affiliated
Site network in order to provide rapid access to qualified investigators and
patients. The Company believes that such access is key to enabling Sponsors to
reduce the length of the product development process.
The Company intends to expand its Affiliated Site network in the United
States, Canada and the United Kingdom, and to enter other selected European
markets. The Company believes its Affiliated Site network provides a unique
platform for expanding its services beyond clinical research. The Company has
entered into a joint venture with PMSI to develop and market health-economic
data collection and analytical services. In order to increase the speed,
efficiency and accuracy of clinical data collection within the Affilated Site
network, the Company has also entered into a letter of intent to form an
alliance with ISSC, a wholly-owned subsidiary of IBM Corporation, to develop and
implement a network-wide, on-site electronic data collection and management
system. Additionally, the Company believes that selective acquisitions of
research organizations will play an important role in the Company's efforts to
become an integrated provider of research services. The Company plans to acquire
controlling interests in research entities that have an established reputation
and on-going business in the performance and management of clinical trials.
BACKGROUND
The pharmaceutical and health care provider industries are undergoing
significant changes, including cost containment efforts that are exerting
pressure on both the price and utilization of drugs and other medical products
and services. These cost containment pressures have led pharmaceutical companies
to place increased importance on developing innovative drugs and bringing them
to market faster. At the same time, these pressures have led hospitals,
physicians and other health care providers to seek alternative sources of
revenue.
Drug Development Industry Trends. Although new drug development has always
been a lengthy and expensive process, in the past, pharmaceutical manufacturers
generally were able to realize an attractive return on investment after a new
drug received marketing approval from the FDA. In recent years, several factors
have combined to make participants in the pharmaceutical industry increasingly
cost conscious. During the 1990s, the number of drugs losing patent protection
has accelerated, which has increased pressure on pharmaceutical companies to
introduce innovative new drugs. Managed care companies are exerting pressure on
the price and utilization of high-cost medicines and changing drug prescription
and distribution patterns through techniques such as therapeutic substitution
and the use of pharmacy benefit managers. This phenomenon has been most apparent
in the context of multiple source drugs, which have been subjected to
significant price erosion and a declining growth rate in the marketplace. As a
result, participants in the pharmaceutical and biotechnology industries have
increasingly focused product development expenditures on innovative drugs to
treat chronic ailments or complex disease states.
The development and approval process for new drugs is becoming increasingly
complex. The size and complexity of the typical new drug application ("NDA")
have grown significantly over the past decade, with the average NDA filing made
during 1988 to 1992 consisting of more than 90,000 pages, as compared to the
approximately 38,000 pages contained in filings made during 1977 to 1980.
Concerns about the safety of previously approved drugs and the continuing growth
in scientific,
23
<PAGE> 26
medical and pharmacological knowledge have combined to increase significantly
the amount and sophistication of data required to be included in the NDA. As in
the past, Sponsors can generally anticipate FDA approval if they are able to
document a new drug's safety and short-term efficacy. However, as the number of
FDA-approved drugs within a specific therapeutic category grows, there is
increasing marketplace pressure on Sponsors developing similar therapeutic
entities to demonstrate superior results or incremental benefits. This has led
Sponsors to pursue not only direct pharmacological proof of effectiveness, but
also evidence of long-term benefit, such as the reduction of mortality in a
given disease state. These more complex trials generally take longer to
accomplish, increasing the cost of the drug development process.
While the development of many drugs has been affected by the increasingly
stringent regulatory environment, the pharmaceutical industry's emphasis on the
development of innovative drugs to treat chronic conditions or complex disease
states has also significantly increased costs. Efforts to therapeutically impact
the management of more chronic, complex or virulent diseases, such as
Alzheimer's or AIDS, present significantly greater challenges to researchers
than other more readily treatable ailments. The efficacy of drugs developed to
treat these types of diseases is more difficult to demonstrate, even with large
clinical trials. Thus, industry participants are confronted with the need to
make higher expenditures in the drug development process and with the potential
for longer development time frames in bringing innovative drugs to market.
Enhanced speed and efficiency of the development process can positively affect
the Sponsor's profitability.
In order to reduce development costs and enhance revenue by extending the
period during which the cost of proprietary new products can be recovered,
industry participants have increasingly sought to reduce the fixed costs
associated with drug development programs and enhance the efficiency of the drug
development process. Outsourcing of many aspects of the drug development process
in order to reduce the fixed component of these costs is a direct result of this
effort. Another component, and one which the Company believes will become
increasingly important, is the streamlining of the clinical research process in
order to reduce not only the cost of product development, but also the length of
time required to complete clinical trials and to receive FDA approval.
In recent years, the demand for health care information services has grown
significantly. The desire to contain health care costs has resulted in demand by
many participants in the market for pharmacoeconomic, outcomes assessment and
disease management data. Pharmacoeconomic data are used to assess the cost
effectiveness of various alternatives in treating a specific disease.
Pharmacoeconomic assessments take into account not only the purchase price of a
particular drug, but also the other services necessary for its proper clinical
use. Outcomes and disease management data are intended to enable better
measurement of the health care system's approach to a given disease by assessing
the costs incurred and the overall efficiency with which the disease is managed
in relation to the treatment options available.
Health care information is particularly valuable to the pharmaceutical
industry in setting research and development priorities. Such data can provide
important information concerning the potential market for a new compound, and,
in light of the increasing attention by payors to the cost of new products, may
assume increasing importance in the product development process. In addition,
because managed care presents a very different health care delivery model than
traditional environments, health care information concerning the performance of
new compounds in the managed care environment will become more important in the
future for pharmaceutical companies to gain access to managed care formularies.
Health Care Provider Trends. Health care providers also have seen
significant changes in the market for their services in recent years. The growth
of managed care, as well as efforts by the government and insurers to contain
increases in reimbursement rates, have imposed significant cost containment
pressures on institutions and providers. This has led to a desire on the part of
institutions and providers to seek new sources of revenue. As clinical research
opportunities have expanded beyond academic settings into non-traditional
research sites such as private practice groups, managed care
24
<PAGE> 27
organizations and for-profit research corporations, clinical research has become
an increasingly important alternative revenue source to these institutions and
providers. Revenue provided by clinical research usually exceeds the per diem
rate paid by traditional third party payors and may be received more rapidly
than payments from traditional sources. Clinical research also has the potential
to transform a nonpaying, uninsured patient into a revenue-generating patient,
via clinical trial enrollment. In addition, clinical research can serve as an
important marketing tool by providing patients with the most advanced therapies
available.
While clinical research offers considerable benefits to health care
providers, they often face significant obstacles in initiating or expanding a
clinical research program. Many non-traditional sites do not have established
research programs and need to make investments in administrative staffing and
marketing in order to perform clinical research. An institution which can offer
only a single research site confronts difficulty in marketing its services to
Sponsors. In most situations, Sponsors will require multiple sites for a
clinical trial, and it is inefficient for Sponsors to spend significant amounts
of time learning about the capabilities of a single site. The cost of necessary
investments and the difficulty in effectively marketing their services to
Sponsors reduces the ability of many individual research sites to realize the
full potential of clinical research as an additional source of revenue.
BUSINESS STRATEGY
The Company's strategy is to capitalize on opportunities created by the
needs of pharmaceutical companies and health care providers to respond
effectively to cost containment trends. In implementing its strategy, the
Company has identified the following areas of emphasis:
Utilization of the Affiliated Site Network. The Company believes that its
Affiliated Site network provides a clinical research model that is responsive to
pharmaceutical companies' need to increase the speed with which new products are
brought to market. The primary objective of the Company's Affiliated Site
network is to improve the time-efficiency of the clinical research process. By
reducing the time required for research site and investigator selection, the
Company provides Sponsors with the opportunity to begin clinical research sooner
and thereby reduce the length of the new drug approval process. The Affiliated
Site network also increases the attractiveness of clinical research as an
alternative source of revenue to health care providers. The Company markets the
capabilities of all Affiliated Sites, thus reducing the inefficiencies
associated with single-site marketing efforts. Affiliated Sites are provided
with a number of clinical research opportunities involving a wide variety of
therapeutic areas.
Targeted Expansion of the Affiliated Site Network. Expanding the Affiliated
Site network is a central component of the Company's strategy. In targeting
potential additions to the Affiliated Site network, the Company focuses on those
research sites that have areas of therapeutic expertise corresponding with
Sponsors' drug development programs. The Company seeks out both experienced
research sites and health care providers that historically have not participated
in clinical research. Such providers include managed care companies and
companies providing alternate site medical services, such as home and long-term
care. The Company believes that the Affiliated Site network provides a research
model that is adaptable to markets outside the United States. In response to the
growing demand for research site capacity in foreign countries, the Company
intends to expand the number of its Affiliated Sites in Canada and the United
Kingdom and enter other selected European markets.
Development of On-Site, Electronic Data Collection and Management System.
Through a proposed technology development alliance with ISSC, a wholly-owned
subsidiary of IBM, the Company plans to develop a network-wide on-site,
electronic data collection and management system to enable it to improve the
process of collecting clinical research and health care data. Currently, most
clinical research data is gathered through physical monitoring visits to each
individual research site. During these visits, each case report form ("CRF") is
reviewed by the Sponsor or its representative. Monitoring visits may last
several days, and numerous corrections to CRFs are frequently required before
they are acceptable to the Sponsor. Since these visits are made only
periodically, several weeks or even
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<PAGE> 28
months of data must be reviewed during each monitoring visit. This results in a
significant delay between the time of patient-investigator interaction and the
time that data is transferred into the Sponsor's database. Delays in data
transfer not only lengthen the trial, but can also raise significant quality
control issues, since errors may not be detected until long after the
interaction between the patient and the investigator.
Sponsors of clinical research typically work intermittently with different
research sites on each project and need to train different sites each time a new
clinical trial is initiated. The Company typically works with its Affiliated
Sites on a regular basis, and believes that this will enable Affiliated Site
personnel to develop a familiarity with the electronic system over a period of
time. In addition, proprietary systems developed by each Sponsor could result in
research personnel needing to be trained in multiple systems. Space constraints
at research sites also make it difficult for the research site to house multiple
Sponsor systems.
The Company believes that implementation of an effective on-site system
will provide important benefits to Sponsors. For example, because an on-site
data collection system will substantially increase the speed with which data is
provided to Sponsors, it will permit corrections to erroneous information to be
made much more quickly, thus improving quality control. Increasing the accuracy
and timeliness of data collection and correction could enhance the time
efficiency of clinical research and enable Sponsors to bring drugs to market
faster. The Company believes that this approach to on-site data collection could
provide a competitive advantage in the market place.
Expansion of Clinical Research Services. The Company believes that
expanding its range of clinical research services presents significant growth
opportunities, and becoming a fully integrated provider of clinical research
services is one component of its business strategy. The Company has expanded its
range of clinical research services to include the performance of clinical
research, protocol design, clinical reference laboratory services, IRB services
and regulatory affairs services. The Company believes that its ability to
provide protocol design services and conduct Phase I clinical research will
provide it with access to Sponsors at an earlier stage in the clinical trial
process and enable it to increase the number of clinical trials in which it
participates. The Company also believes that earlier access to Sponsors of
clinical research will provide opportunities for the Company to market
regulatory affairs services to Sponsors.
Acquisition Initiative. Selective acquisitions of research organizations
are anticipated to play an important role in the Company's efforts to become an
integrated provider of research services. The Company recently completed its
first acquisition, and intends to seek potential acquisition candidates that,
like GFI, enhance the Company's ability to perform clinical research or provide
additional services. The Company's acquisition strategy is based on acquiring
controlling interests in research entities that have an established reputation
and on-going business in the performance and management of clinical trials.
Development of Health Care Information Services Capabilities. The Company
believes that its network of Affiliated Sites provides it with the ability to
access pharmacoeconomic, outcomes assessment and disease management data in a
cost-effective manner. Each Affiliated Site can access investigators and their
patients to collect this information on a fee for service basis without any need
for additional infrastructure. In order to capitalize on this capability, the
Company has formed HRI, an entity that it owns equally with PMSI. Through HRI,
the Company and PMSI market their health care data collection and analysis
capabilities to the health care industry. HRI will offer custom studies,
designed and owned by the Sponsors who will pay HRI for its data collection and
reporting. HRI also offers protocols and collection tools of its own design, in
order to develop a syndicated database that it anticipates marketing to the
pharmaceutical industry, insurers and the federal government. The Company is
HRI's exclusive subcontractor for the collection of this data and PMSI is its
exclusive subcontractor for data analysis and study design.
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Each of the various strategic initiatives undertaken by the Company
summarized above involves significant risks. In particular, the success of each
initiative depends in large part on certain assumptions made by the Company's
management concerning trends in the clinical research market and the
pharmaceutical industry. There can be no assurance that any of these strategic
initiatives will be successful or even that the Company's efforts to pursue
these initiatives will not have a material adverse effect on its results of
operations or financial condition. Moreover, there can be no assurance that the
Company will be successful in its expansion and development initiatives. See
"Risk Factors -- Unproven Business Strategies; Early Developmental Stage,"
"-- Risk of Acquisitions" and "-- Effect of Expansion Strategy on the Company's
Core Business."
THE AFFILIATED SITE NETWORK
Since commencing operations in 1991, the Company has developed a network of
more than 400 Affiliated Sites and today provides Sponsors with rapid access to
over 3,000 principal investigators in a wide variety of therapeutic areas.
Affiliated Sites range from group practices with individual investigators to
integrated health care delivery systems with hundreds of investigators, and
include academic medical centers, community hospitals, outpatient treatment
centers, research centers, managed care organizations and physician practice
groups. Regardless of its size, each member of the network is considered a
single "Affiliated Site." The Company's Affiliated Site network provides
Sponsors with access to over 235 group and private practices, 73 community
hospitals, 47 research centers, 36 academic medical centers and 10 group and
staff model managed care organizations. Additionally, the network's principal
investigator population includes investigators experienced in infectious disease
and HIV/AIDS, orthopedics, cardiology, hematology/oncology and many other
medical specialties. Each Affiliated Site is a party to an Affiliation Agreement
with the Company, under the terms of which each Affiliated Site agrees not to
pursue any opportunities for clinical research initially presented by the
Company directly with the Sponsor of such clinical research program, and also
agrees not to affiliate with another research network during the period of its
affiliation with the Company and for a specified period thereafter. Members of
the Affiliated Site network remain free to solicit and accept clinical research
opportunities presented to them from sources other than the Company. At the
request of Sponsors, the Company will also use research sites outside of its
Affiliated Site network. Sponsors may request that the Company use research
sites outside the Affiliated Site network in the case of large, multi-site
trials or in order to include in the trial investigators of national standing in
a particular therapeutic area or those with whom the Sponsor has worked in the
past.
At each Affiliated Site, the Company identifies a single contact person
("Clinical Liaison") through whom all communications regarding investigational
opportunities are channeled. The Clinical Liaison facilitates the site selection
process by increasing responsiveness to investigational opportunities and
facilitates the timely completion of the IRB approval process for new research
projects. In selecting a Clinical Liaison, the Company seeks to identify an
employee of the Affiliated Site who understands the institution's decision
making processes and is aware of the relative strengths and weaknesses of the
institution's research program. Because the Clinical Liaison must have a working
knowledge of the clinical research process, professionals currently serving in
the Clinical Liaison role include nurses, physicians and pharmacists.
The Company regularly updates its demographic database on each Affiliated
Site including collecting information concerning areas of therapeutic
specialization, research capabilities, prices for various medical services and
demographic information concerning patient disease profiles. Information
generated during this process is kept on-line at the Company's headquarters for
use by the Company's operations and sales and marketing personnel in discussing
clinical research opportunities with potential Sponsors. In addition, this
database is updated each time the Company receives responses from its Affiliated
Sites to a clinical research opportunity.
In seeking additions to its network of Affiliated Sites, the Company
targets research sites with expertise in therapeutic areas corresponding to
Sponsors' drug development programs. The Company
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reviews information concerning compounds undergoing pre-clinical development and
testing and other publicly available information concerning pharmaceutical
research and development activities.
The Company also targets research sites in a wide variety of health care
delivery settings. In 1994, the Company began an initiative to increase the
participation of managed care organizations in the network. Historically,
managed care organizations have not been significant participants in the
clinical research process. The Company believes that this is the result of
several factors, including the widespread absence of research staffs and a
reluctance on the part of these health care providers to enter into business
relationships directly with pharmaceutical manufacturers. The Company believes
that this reluctance reflects managed care organizations' concern that
involvement in research funded by pharmaceutical manufacturers will result in
pressure to include the compound under study in their formularies subsequent to
its approval. However, as managed care continues to grow as a force in the
health care industry, pharmaceutical manufacturers will increasingly need access
to managed care organizations in order to conduct clinical trials. Since the
Company began this initiative, 10 group and staff model managed care
organizations with approximately four million covered lives have joined its
network of Affiliated Sites.
SERVICES
The Company's core business is the provision of site selection and
management services for clinical trial programs. The Company also performs
clinical research and provides clinical reference laboratory and IRB services.
It has performed services in many therapeutic areas. The Company assists
Sponsors in the identification and recruitment of investigators, initiation of
sites, collection and interpretation of data and trial results and report
preparation. Trials for which the Company has provided site selection and trial
management services range in size from single site trials involving fewer than
ten patients to a 300 site trial involving 3,000 patients. As of March 31, 1996,
the Company was managing 126 clinical trials involving approximately 390
research sites (including 158 Affiliated Sites).
Site Selection Services. The Company's site selection services consist of
the identification and recruitment of research sites and investigators to
participate in a clinical trial on behalf of a Sponsor. Certain site selection
services, such as the preparation of a survey abstract to determine the
potential interest of research sites in a particular trial, may be utilized by
Sponsors prior to their determination to initiate a clinical trial. Typically,
Sponsors and CROs recruit investigators and research sites for each new trial
through mass mailings or individual telephone calls and solicit information from
each proposed research site regarding patient volumes and research costs. That
process is repeated with different investigators and research sites for each new
trial and may take several weeks or even months to complete. In contrast, the
Company rapidly identifies interested research sites and investigators by
accessing its network of Affiliated Sites. When the Company is contacted about a
specific study, an informational abstract concerning the study is promptly sent
to each Affiliated Site's Clinical Liaison. Each Affiliated Site has one week in
which to indicate its interest in participating in the trial. The Company
consolidates and prioritizes the Affiliated Site and investigator information
and submits that information to the Sponsor for evaluation. At the Sponsor's
request, the Company will also draw on its database to provide patient volume,
cost or demographic information concerning each interested Affiliated Site. As a
result of the Company's on-going relationship with its Affiliated Sites and
experience in contracting with them on prior projects, it is also able to
present the Sponsor with a budget proposal for the trial at the time that
interested Affiliated Sites are identified.
Clinical Trial Management Services. The Company provides a variety of
clinical trial management services, including pre-study and research site
activation services, patient tracking services, data management services and
project management. These include investigator meetings, coordination of the IRB
approval process and other procedures that must be performed prior to enrollment
of patients in a study, assistance in patient enrollment, on-going data
collection services and adverse events reporting services. Each of the Company's
Affiliated Sites provides it with timely information concerning patient
enrollment, the status of each individual patient and the progression of the
study. This
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information is assimilated by the Company and provided to Sponsors. In a typical
research project, this information is gathered through monitoring visits or
telephone calls to each individual research site. By standardizing this
information, the Company makes the gathering of data more efficient and
cost-effective.
Clinical Research Facilities. The Company performs research directly and
provides certain other clinical research services to its customers. Through its
GFI subsidiary, the Company operates three research sites for conducting Phase
II through Phase IV research (one facility also includes a 100-bed Phase I
clinical research unit), a clinical reference laboratory and owns an independent
IRB. Phase I clinical research is substantially more specialized and limited
than other phases of the research process because hospital or clinic beds must
be available for extended stays in a sequestered environment. The GFI facility
provides the Company with the ability to substantially increase its historical
participation in Phase I research. GFI also provides the Company with the
capability to provide centralized analytical laboratory services, customized
laboratory report design, specimen archival and management on behalf of a study
Sponsor and IRB services in connection with clinical trials. The Company's GFI
subsidiary has conducted 316 clinical trials, 135 of which were Phase I clinical
trials, and has enrolled over 13,500 patients (including 36 clinical trials that
were ongoing at GFI at the time of its acquisition by the Company).
Drug Development and Consulting Services. As part of its continuing effort
to expand the services that it provides, the Company has assembled a group of
prominent, independent physicians and scientists in a wide variety of
therapeutic specialties to assist Sponsors in developing clinical research
programs. These physicians and scientists provide the Company with an
opportunity to place a portion of the studies for which they provide protocol
design services at Affiliated Sites. The Company believes that its ability to
provide Phase I services will enable it to become involved with Sponsors earlier
in the research process and will be of significant assistance in its efforts to
market its protocol development services. The Company also believes that the
earlier access to Sponsors of clinical research provided by GFI's Phase I
capabilities provides opportunities to expand the Company's services. In order
to capitalize on this opportunity, the Company has added personnel with clinical
development capabilities, including data management/statistics and regulatory
affairs. Regulatory affairs services include regulatory strategy design,
document preparation, consultation and liaison with various regulatory agencies,
including the FDA.
CUSTOMERS AND MARKETING
The Company has provided its services to many of the leading pharmaceutical
companies, biotechnology companies and CROs. The Company's business development
strategy focuses on marketing the capabilities of its core Affiliated Site
network combined with efforts to develop and market additional services often
required by Sponsors. The Company believes that its key strength and major
differentiating factor is its ability to provide rapid access to highly
qualified clinical investigators across various therapeutic-disease areas in
multiple health care delivery settings.
The Company's business development staff consists of five people located in
the Philadelphia metropolitan area and New England. All of the Company's
business development staff have scientific or medical backgrounds. The Company
employs a variety of promotional activities including journal advertisements,
direct mail and participation at scientific and medical meetings to promote its
services to the pharmaceutical industry.
During each of the three years in the period ended December 31, 1995 and
the three months ended March 31, 1996, sales to companies in the pharmaceutical
industry accounted for more than 78% of the Company's revenue. During 1994, 1995
and the three months ended March 31, 1996, sales to two units of Merck & Co.,
Inc. accounted for approximately 23%, 76% and 47%, respectively, of the
Company's revenue. On a pro forma basis, after giving effect to the GFI
acquisition, sales to this customer would have represented 49% of the Company's
revenue during 1995 and 43% during the three months ended March 31, 1996. Other
customers in the pharmaceutical industry have from time to time accounted for
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more than 10% of the Company's annual revenue, with sales to two additional
pharmaceutical industry customers each accounting for more than 10% of revenue
during 1994 and sales to four pharmaceutical industry customers each accounting
for more than 10% of revenue during 1993. Sales to Merck & Co., Inc. and one
additional pharmaceutical industry customer accounted for more than 10% of
revenue for the three months ended March 31, 1996. The extent to which the
Company relies on sales to one customer varies from period to period, depending
upon, among other things, its ability to generate new business from new and
existing customers, the timing and size of clinical trials and other factors. As
a result of increasing consolidation in the pharmaceutical industry and the
relatively small number of major participants in the biotechnology industry, it
is not unusual for CROs and others involved in the placement and administration
of clinical trials to derive more than 10% of their revenue from a single
customer. However, in light of the Company's small revenue base, it is more
dependent on major customers than many of the larger participants in the
clinical research industry. The Company's operations could be materially and
adversely affected by, among other things, any economic downturn in the
pharmaceutical or biotechnology industries, any decrease in their research and
development expenditures or a change in the regulatory environment in which
these companies operate.
CONTRACTING AND BACKLOG
The Company's contracts provide a fixed price for each component, or
service, which depends on such things as the number of research sites selected,
patients enrolled and other services required by the Sponsor. Generally, the
Company's contracts range in duration from several months to several years.
Revenue is earned over the life of the contract as various services are
performed under the percentage of completion method utilizing units of delivery.
All costs associated with contract revenue are recognized as incurred. Contracts
require a portion of the fee to be paid at the time the trial is initiated, with
the balance payable over the life of the contract when pre-determined payment
milestones are satisfied. The Company does not bear the risk of cost overruns.
The Company's contracts generally may be terminated by the Sponsor with or
without cause. In the event of termination, the Company is entitled to payment
for all sums owed for work performed through the date of notice of termination
and all costs associated with termination of the study. Clinical trials may be
terminated for several reasons, including unexpected results or adverse patient
reactions to the drug, inadequate patient enrollment or investigator
recruitment, manufacturing problems resulting in shortages of the drug or
decisions by the Sponsor to deemphasize or terminate a particular trial or
development efforts on a particular drug. Depending on the size of the trial in
question, a Sponsor's decision to terminate a trial in which the Company
participates could have a materially adverse effect on the Company's backlog,
future revenue and profitability.
Backlog consists of anticipated revenue from letters of intent and signed
contracts that have not been completed. Once work under a letter of intent or
contract commences, revenue is recognized over the life of the contract. In
certain cases, the Company will work on a project prior to finalizing a letter
of intent or contract. Backlog excludes anticipated revenue for projects for
which the Company has commenced work but for which a definitive letter of intent
or contract has not been executed.
The Company believes that its backlog as of any date is not necessarily a
meaningful predictor of future results. Contracts included in backlog are
subject to termination or delay at any time, as a result of a number of factors.
There can be no assurance that the Company will be able to realize revenue
included in backlog or as to the amount of backlog orders that may be filled
within the current fiscal year. Delayed contracts remain in the Company's
backlog pending determination of whether to continue, modify or cancel the
contract. As of December 31, 1994 and 1995, the Company's backlog was $14.3
million and $21.8 million, respectively. On a pro forma basis, after giving
effect to the acquisition of GFI, the Company's backlog on December 31, 1995
would have been $24.0 million. As of March 31, 1995 and 1996, the Company's
backlog was $14.0 million and $21.8 million, respectively.
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COMPETITION
The clinical research industry is highly fragmented and comprised of
several large, full-service CROs and many small, limited service providers. The
major competitors in the industry include the research departments of
pharmaceutical companies, CROs and other research sites. The Company competes in
this market on the basis of its ability to provide rapid access to high-quality
clinical investigators within its network of Affiliated Sites in a
time-efficient manner and to provide its customers with a high level of service
throughout the trial process. Many of the Company's competitors have
substantially greater financial and other resources than the Company, and there
can be no assurance of the Company's ability to continue to compete effectively
with these larger competitors. The Company believes that its network of
Affiliated Sites provides it with a significant competitive advantage in
obtaining new business from Sponsors of clinical trials. To the extent the
Company's approach to the selection and conduct of clinical trials continues to
gain acceptance in the market, there can be no assurance that these larger
competitors will not develop their own networks of research sites, nor as to the
effect of such competing networks on the Company's operations. The Company may
also face competition from other networks of research sites in the recruitment
of potential Affiliated Sites.
As the Company continues to expand the range of its clinical research
services, it will compete more directly with the core services provided by CROs.
Many of these CROs are substantially larger and have more resources than the
Company. There can be no assurance that the Company will be able to compete
effectively with these larger companies in providing clinical research services.
REGULATORY MATTERS
Government Regulation. The clinical investigation of new pharmaceutical and
biotechnology products is highly regulated. The purpose of these regulations is
to assure that only those products proven to be safe and effective are made
available to the public. The FDA has promulgated regulations and guidelines
pertaining to applications to initiate trials of new compounds, approval and
conduct of studies, report and record retention, informed consent, applications
for approval of new compounds and post-marketing requirements. Under FDA
regulations, companies providing clinical research services that assume the
obligations of a drug Sponsor are required to comply with applicable FDA
regulations and are subject to regulatory action for failure to comply with such
regulations. The historical trend has been toward increased regulation by the
FDA; however, recent initiatives have been undertaken by the FDA to streamline
the agency's internal review processes.
The services provided by the Company are ultimately subject to FDA
regulation and, to the extent that the Company expands its services outside the
United States, appropriate regulatory authorities in other countries. The level
of regulation in other countries is generally less comprehensive than that
present in the United States. Depending on the nature of services that it
provides with respect to a particular research trial, the Company may be
required to comply with FDA regulations governing such activities as selecting
investigators, obtaining documentation from investigators, verifying that
patient informed consent is obtained, monitoring the validity and accuracy of
data, verifying drug accountability and instructing investigators to maintain
records and reports. The Company must also maintain records for each study for
specified periods for inspection by the study Sponsor and the FDA. If FDA audits
indicate that the Company has failed to adequately comply with federal
regulations and guidelines, it could have a material adverse effect on the
Company. In addition, the failure of the Company to comply with applicable
regulations could result in termination of on-going research or the
disqualification of data, either of which could also have a material adverse
effect on the Company's results of operations, financial condition and
reputation.
The Drug Development and Approval Process. All drugs proposed to be
marketed in the United States must undergo an extensive development and approval
process. Pre-clinical testing is the first stage in this process. During the
pre-clinical stage, a new compound is tested in vitro and in animals over a one
to three year period in order to obtain information concerning the basic
biological activity and safety of
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the drug. If the results of pre-clinical studies are satisfactory, the Sponsor
files an Investigational New Drug Application ("IND") with the FDA before
beginning human testing. In order to receive IND status, the Sponsor must
provide the FDA with manufacturing data, preclinical test results, information
concerning the uses of the drug in other countries or in the United States for
other purposes and a plan for conducting clinical trials. The design of each
clinical trial, or its "protocol," is an essential component of the drug
development effort. Each protocol must correctly anticipate the nature of the
data and results that the FDA will require before approving the drug.
In the absence of any comments from the FDA on the IND, a Sponsor may begin
clinical trials on human subjects 30 days after the IND is filed. Clinical
trials often represent the most expensive and time consuming part of the drug
development process. The trial process usually starts on a small scale with
trials intended to assess safety, and then expands to larger trials in order to
test a compound's efficacy. There are four phases of clinical testing, with
multiple trials generally conducted within each phase.
Phase I testing typically consists of specialized studies designed to
acquire safety and dosing information on a new compound. In these studies,
the drug is tested on approximately 20 to 80 individuals and data is
gathered concerning toxicity, absorption, metabolism and other
pharmacological actions. Each individual study lasts from a period of days
to several weeks, and the phase itself typically lasts from six months to
one year.
Phase II testing typically consists of studies in approximately 100 to
200 patients who suffer from the targeted disease or condition. Phase II
trials focus on obtaining information on the drug's effectiveness and
dose-response relationship. Because these trials gather early evidence of a
compound's efficacy, their results are often pivotal to a Sponsor's
decision concerning whether to proceed to larger trials. These trials
typically last one to two years.
Phase III testing typically consists of large, multicenter trials
involving hundreds to thousands of patients. Phase III trials are intended
to collect efficacy and safety information on a large scale. The collection
of such data is most critical in Phase III, because the data developed
during these trials will have a significant influence on the labeling
aspects of the new drug. At least one Phase III trial performed within the
United States is required of any compound before it will be approved by the
FDA. These trials typically last two to three years.
Phase IV studies are frequently required by the FDA as a condition to
granting marketing approval. The FDA will often require Sponsors, after a
drug is approved for marketing, to conduct additional clinical trials to
monitor long-term risks and benefits, alternative dosage levels or evaluate
safety and efficacy in targeted patient populations. These studies are
usually less data intensive than those conducted in other phases of
clinical research, but may involve hundreds to thousands of patients and
can last for several years.
After a new compound has successfully completed the first three phases of
the clinical trial process, an NDA is submitted to the FDA. The NDA is a
comprehensive filing that includes the results of all pre-clinical and clinical
studies, with the majority of its clinical data derived from Phase II and Phase
III trials. In addition, the NDA contains information about the drug's
composition and the Sponsor's plans for producing, packaging and labeling the
product. The FDA's review process for an NDA can take anywhere from a few
months, for drugs related to life threatening conditions, to many years, with
the average review lasting more than two and one-half years. Drugs that
successfully complete this review may be marketed in the United States, subject
to such conditions as the FDA may specify. As a result of increasing public
pressure to allow new drugs to reach the market more quickly, the FDA has
increased its reliance on Phase IV studies. In some instances, the FDA has
granted conditional approval to potentially lifesaving drugs or those for
previously untreatable conditions in order to permit marketing while Phase IV
studies are conducted.
The pre-clinical and clinical testing and approval processes for
biotechnology products are substantially similar to those applicable to drugs,
except that the results of clinical trials are submitted in
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the form of a Product License Application rather than an NDA. In many cases,
medical device products are also subject to extensive pre-clinical and clinical
testing requirements.
POTENTIAL LIABILITY AND INSURANCE
Clinical trials involve the testing of approved and non-approved drugs on
human beings. This testing carries with it a significant risk of liability for
personal injury or death to participants resulting from an adverse reaction to,
or improper administration of, the trial drug. Many of these participants are
seriously ill and are at great risk of further illness or death as a result of
factors other than their participation in the trial. The Company participates
with Sponsors in the site selection process, and contracts on behalf of its
customers with physicians who render professional services, including
administering the drugs being tested, to participants in these trials. Company
personnel also render professional services to participants in trials.
Consequently, the Company may be subject to claims in the event of personal
injury or death of persons participating in clinical trials and arising from
professional malpractice of physicians with whom it has contracted and its own
employees. To date, the Company has not received any claims resulting from
either the testing of new drugs or professional malpractice.
The acquisition of GFI has significantly increased the Company's
involvement in the clinical research process. Although the Company's employees
have been involved from time to time in the treatment of patients in clinical
trials, the Company's role in the clinical trial process prior to the GFI
acquisition consisted primarily of contracting with physicians who rendered
professional services to trial participants. With the GFI acquisition, the
Company's involvement in the patient treatment process is much more significant
than in the past. Accordingly, the Company's risk of liability for malpractice
has increased.
The Company believes that risk of liability associated with clinical trials
is mitigated by various regulatory requirements, including the role of
institutional review boards and the need to obtain informed consent. The FDA
requires each human clinical trial to be reviewed and approved by the IRB at
each research site. An IRB is an independent committee that includes medical and
non-medical personnel and is obligated to protect the interests of patients
enrolled in the trial. After the trial begins, the IRB monitors the protocol and
the measures designed to protect patients, such as the requirement to obtain
informed consent. In addition, regulations governing the conduct of clinical
trials and the protection of human subjects place responsibility for proper
study conduct and subject protection directly on the principal investigator at
each location where a study is performed. Through its acquisition of GFI, the
Company has assumed the duties and liabilities of a principal investigator. All
principal investigators performing studies for GFI are required to carry their
own malpractice insurance.
In order to reduce its exposure to liability, the Company generally obtains
indemnification from its clients and, in some cases, from investigators and
Affiliated Sites contracted by the Company on behalf of its clients. The
Company's agreements with its Affiliated Sites obligate it to pursue contracts
solely with Sponsors that provide indemnification for adverse outcomes which may
occur in an enrolled subject and that allow such indemnification rights to pass
through to the Affiliated Sites and investigators. These indemnity rights do not
protect the Company against certain of its own actions, such as those involving
negligence or misconduct. Furthermore, these indemnities are contractual
arrangements that are subject to negotiation with individual Sponsors, and the
terms and scope of such indemnities vary from Sponsor to Sponsor and from trial
to trial. In order for such indemnification to be valid, the Company and its
employees and agents must act within the bounds of specific procedural
requirements governing the conduct of the clinical trial. Since the value of the
Company's indemnification depends on the financial viability of the indemnifying
party, there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. The financial position
of the Company could be materially adversely affected if the Company was forced
to undertake the defense of, or found financially responsible for, claims based
upon the foregoing or related risks.
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The Company currently maintains an errors and omissions professional
liability insurance policy in amounts it believes to be sufficient. However,
there can be no assurance that this coverage will be adequate, or that insurance
coverage will continue to be available to the Company.
PATENTS AND TRADEMARKS
The Company has registered a service mark incorporating the Collaborative
Clinical Research logo and is in the process of registering the "DataTRAK"
trademark. Through its GFI subsidiary, the Company has two registered
servicemarks. The Company does not own any patents. The Company believes that
its ability to attract and retain highly-skilled employees and manage the growth
of its business are more important to its performance than any intellectual
property rights that it has developed to date. However, it is possible that
software and other intellectual property developed during the course of the
Company's joint venture with PMSI and its proposed technology development
alliance with ISSC, a wholly-owned subsidiary of IBM, may become important to
its business in the future.
EMPLOYEES
As of March 31, 1996, the Company had 216 full-time employees, of whom
eight had executive or managerial responsibilities. None of the Company's
employees are represented by a union. The Company considers relations with its
employees to be good.
The Company's growth continues to place significant demands on its
management resources. The success of the Company's business is substantially
dependent on the services of its senior management team, and the services of Dr.
Jeffrey A. Green in particular. The Company has employment agreements with Dr.
Green and all but one of its executive officers; however, the loss of Dr.
Green's services or the services of its other executive officers could have a
material adverse effect on the Company. To address these risks, the Company
must, among other things, continue to attract, retain and motivate qualified
personnel. While the Company has not experienced significant problems in
attracting or retaining qualified personnel, there can be no assurance that the
Company will be successful in addressing such risks.
PROPERTIES
The Company presently maintains its executive offices in approximately
6,000 square feet of space in Cleveland, Ohio pursuant to a sublease with an
unaffiliated third party. The sublease expires in November 1998. The Company
leases approximately 2,700 square feet of office space in Mt. Laurel, New
Jersey, which houses both its business development staff and the executive
offices of HRI. The Company also leases 1,500 square feet of office space in
Gaithersburg, Maryland for its regulatory affairs and data management
operations. The Company's GFI subsidiary leases 32,000 square feet of office and
medical space in Evansville, Indiana. This facility houses GFI's executive
offices and a 100-bed in-patient Phase I research facility. GFI also leases 930
square feet of medical space in Milwaukee, Wisconsin, which is used to conduct
clinical trials on an out-patient basis. With the exception of its GFI
subsidiary's facilities, the Company considers its facilities to be sufficient
for its current and anticipated operations. The Company may have to lease
additional space to accommodate the Company's plans to expand GFI's operations
and services.
LEGAL PROCEEDINGS
From time to time, the Company is a party to various lawsuits arising in
the ordinary course of business. The Company does not believe that the outcome
of such litigation will have a material adverse effect on its results of
operations or financial condition.
On December 5, 1995, a former employee of the Company filed a charge
against the Company with the Ohio Civil Rights Commission (the "OCRC") alleging
that the employee's employment was terminated due to age. On March 13, 1996, the
Company filed a statement of position denying the
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allegations in the charge. The OCRC is in the process of investigating this
matter. The Company believes that the charge is without merit and does not
believe that this matter will have a material adverse effect on the Company's
business, results of operations or financial condition.
In January 1996, a charge was filed with the OCRC alleging that the Company
had failed to hire a job applicant on the basis of race. The Company believes
that the charge was without merit, and on April 18, 1996, the OCRC advised the
Company that the applicant's charge had been voluntarily withdrawn. The
applicant has the right to file a private civil action against the Company with
respect to this matter. To date, no such action has been filed.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning directors and
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Dr. Jeffrey A. Green............. 40 President, Chief Executive Officer and Director
Debra S. Adamson................. 43 Vice President
Terry C. Black................... 38 Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
Dr. Richard J. Kasmer............ 38 Vice President of Clinical Operations and Secretary
Dr. Steven E. Linberg............ 45 Vice President for Clinical Program Development
Nathan F. Messinger.............. 41 Vice President of Business Development
Dr. William H. Stigelman, Jr..... 51 Vice President of Affiliated Site Relations
Dr. Mary L. Westrick............. 40 Vice President
Timothy G. Biro (1).............. 42 Director
Seth B. Harris (1)............... 56 Director
Alan Mendelson (2)............... 48 Director
Dr. Robert M. Stote (1).......... 56 Director
James A. Terwoord (2)............ 49 Director
Dr. Alan G. Walton (2)........... 60 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JEFFREY A. GREEN, PHARM.D., FCP, is the Company's founder and has served as
its President and Chief Executive Officer since March 1992. From 1984 to 1992,
Dr. Green served as an Assistant Professor of Medicine and Radiology at Case
Western Reserve University, Cleveland, Ohio. During his tenure at Case Western
Reserve University, Dr. Green established and directed the Cardiovascular
Clinical Pharmacology Research Program at University Hospitals of Cleveland. In
addition, Dr. Green was an established investigator in clinical cardiology and
PET scanning, and was responsible for directing over 90 individual
investigations during his tenure. Dr. Green has authored over 90 publications
and has been an invited speaker at more than 125 national meetings. He was the
recipient of the McKeen Cattell Distinguished Achievement Award from the
American College of Clinical Pharmacology in 1988.
DEBRA S. ADAMSON, M.S., is a founder of GFI and has served as GFI's
Executive Director, Clinical Services since 1987. Ms. Adamson is responsible for
directing clinical operations, which includes marketing, development of the
Women's Health Care Center and daily research activities. Ms. Adamson is also a
co-founder of the Ohio Valley IRB. Previously, Ms. Adamson served as Senior
Scientist of United States Pharmaceutical Group Clinical Studies at
Bristol-Myers Squibb where she was responsible for overall trial design and
implementation for central nervous system compounds.
TERRY C. BLACK has served as the Company's Vice President of Finance and
Chief Financial Officer since June 1994 and has served as the Treasurer and
Assistant Secretary since January 1996. Prior to joining the Company, Mr. Black
served as Acting Chief Financial Officer and Analyst for Action Auto Rental,
Inc., a Cleveland, Ohio based insurance replacement automobile rental company,
from March 1992 to October 1992 and as its Chief Financial Officer from October
1992 to January 1994. Before joining Action Auto Rental, Mr. Black served in a
variety of financial and accounting positions within
36
<PAGE> 39
the insurance replacement rental car industry, including Treasurer and
co-founder of Network Car Rental, Inc. and Treasurer and Controller of Agency
Rent-A-Car. In 1993, Action Auto Rental filed for protection from its creditors
under Chapter 11 of the United States Bankruptcy Code and was subsequently
liquidated.
RICHARD J. KASMER, PHARM.D., J.D., has served as the Company's Vice
President of Clinical Operations and Secretary since 1992. Dr. Kasmer is
responsible for the management of all aspects of interventional and
noninterventional clinical trials. In addition, Dr. Kasmer is actively involved
in operational systems development, trial budgetary issues, contractual
management and the integration of acquisitions or joint ventures into the
Company's operations. Prior to joining the Company, Dr. Kasmer was employed by
the VA Medical Center in Cleveland, Ohio for eight years and is an established
investigator with over 15 years of experience in Phase I through Phase IV trials
and has participated in over 80 individual investigations.
STEVEN E. LINBERG, PH.D., has served as the Company's Vice President for
Clinical Program Development since December 1995. Dr. Linberg is responsible for
the strategic planning of drug and biologics development programs and
applications for the introduction of investigational agents into humans. Dr.
Linberg is also responsible for the filing of marketing applications with the
U.S. Food and Drug Administration and the defense of such applications. In
connection with these responsibilities, Dr. Linberg oversees the Company's
internal divisions of Clinical Research, Regulatory Affairs and Data
Management/Information Systems and Statistics. From 1992 to 1995, Dr. Linberg
was the founder and President of Linberg Research, Inc. In 1992, Dr. Linberg was
the Director of Clinical Research with Univax Biologics, Inc., and from 1986 to
1992, was the Director of Clinical Research for Boehringer Mannheim
Pharmaceuticals.
NATHAN F. MESSINGER has served as the Company's Vice President of Business
Development since August 1993. Mr. Messinger is responsible for strategic and
business development as well as marketing and sales programs. In addition, Mr.
Messinger is responsible for the ongoing development of strategic alliances and
joint ventures within the pharmaceutical, biotechnology and health-economics
industries. From 1992 to 1993, Mr. Messinger served as Director, Business
Development for the Caremark Division of Baxter Healthcare Corporation and has
held senior marketing, strategic planning and general management positions with
companies such as New Brunswick Scientific Company, The Langer Biomechanics
Group and Dynatech Laboratories, Inc.
WILLIAM H. STIGELMAN, JR., M.S., PHARM.D., has served as the Company's Vice
President of Affiliated Site Relations since December 1992. Dr. Stigelman is
responsible for worldwide Affiliated Site development, and the development and
implementation of standard operating procedures and quality control procedures
for the Affiliated Site network. Prior to joining the Company, Dr. Stigelman
served in a variety of positions during his 23-year career in the United States
Air Force. Dr. Stigelman served as director of pharmacy at three Air Force
medical centers and as a director of a clinical research facility. As Chief of
Clinical Investigations at the Air Force Surgeon General's Office, Dr. Stigelman
directed an Air Force wide research program involving more than 1,000 protocols
and annual budgets exceeding $8.0 million.
MARY L. WESTRICK, PH.D., is a founder of GFI and has served as GFI's
Executive Director, Administrative Services since 1987. Dr. Westrick is
responsible for administrative operations, including contract negotiations,
financial functions, analytical laboratory services and quality assurance. Dr.
Westrick is also a co-founder of the Ohio Valley IRB. Previously, Dr. Westrick
held the position of Research Scientist in the Department of Metabolism and
Pharmacokinetics at Bristol-Myers Squibb. In that capacity, she was responsible
for pre-clinical research and trial design and implementation of Phase I studies
and Phase II and Phase III clinical support for central nervous system
compounds.
TIMOTHY G. BIRO has served as a Director of the Company since 1992. Mr.
Biro is a general partner of Brantley Venture Partners II, L.P. ("Brantley") and
Brantley Venture Partners III, L.P. Prior to joining Brantley Venture Partners
in 1991, Mr. Biro was Superintendent of Pharmaceutical Manufacturing at Merck &
Co., Inc. Mr. Biro has a B.S. Degree in Microbiology from Pennsylvania State
University
37
<PAGE> 40
and in Pharmacy from Temple University and an MBA from The Wharton School of
Business at the University of Pennsylvania. He is a Director of OXIS
International, Inc., a developer of pharmaceuticals to treat diseases of
oxidative stress, as well as several privately held companies.
SETH B. HARRIS has served as a Director of the Company since 1992. Since
1993, Mr. Harris has been the Chairman of Freider the Source, a distributor of
consumer products. Mr. Harris is the Retired Chairman of the Board and President
of Harris Wholesale, Inc., a wholesale pharmaceutical distribution company. He
is a Director of Bindley Western Industries, Inc., one of the largest
distributors of pharmaceuticals in the United States.
ALAN MENDELSON has served as a Director of the Company since 1994. Mr.
Mendelson is a founding general partner of Axiom Venture Partners ("Axiom"), a
$57.0 million Hartford-based fund which specializes in medical/health care and
communications companies and which was formed in 1994. Prior to founding Axiom,
Mr. Mendelson had a 24-year career at Aetna Life & Casualty in Hartford where,
for the last ten years, he was responsible for building its $135.0 million
venture portfolio. Mr. Mendelson also presently serves on the Board of Virus
Research Institute and is also on the Advisory Boards of Connecticut Seed
Ventures, Battery Ventures and Syncom II, venture funds with almost $200.0
million under management. Mr. Mendelson is a Phi Beta Kappa graduate of Trinity
College (Hartford) and has a law degree from the University of Connecticut.
ROBERT M. STOTE, M.D., has served as a Director of the Company since 1993.
Dr. Stote has served as the Senior Vice President and Chief Science Officer and
a Director of Bentley Pharmaceuticals, Inc., a pharmaceutical company, since
1992. Prior to that time, Dr. Stote was employed for 20 years by SmithKline
Beecham Corporation, serving as Senior Vice President and Medical Director,
Worldwide Medical Affairs, from 1989 to 1992 and Vice President - Clinical
Pharmacology - Worldwide from 1987 to 1989. Dr. Stote was Chief of Nephrology at
Presbyterian Medical Center in Philadelphia from 1972 to 1989 and served as
Clinical Professor of Medicine at the University of Pennsylvania.
JAMES A. TERWOORD has served as a Director of the Company since 1992. Mr.
Terwoord has been the President and Chief Executive Officer of Hudson Business
Forms, Inc., a manufacturer of business forms and distributor of computer
supplies, since 1993. Mr. Terwoord served as Executive Vice President and
Treasurer and as a Director of Action Auto Rental, Inc. from 1984 to 1992. In
1993, Action Auto Rental filed for protection from its creditors under Chapter
11 of the United States Bankruptcy Code and was subsequently liquidated.
ALAN G. WALTON, PH.D., has served as a Director of the Company since 1994.
Since 1987, Dr. Walton has served as a General Partner of Oxford Partners III,
Limited Partnership and Oxford Partners III-A, Limited Partnership, the General
Partners of Oxford Venture Fund III, Limited Partnership and Oxford Venture Fund
III-A Limited Partnership. Since 1992, Dr. Walton has been a General Partner of
OBP Management L.P., the General Partner of Oxford Bioscience Partners, L.P. and
Oxford BioScience (Adjunct), L.P. Dr. Walton has also been a General Partner of
OBP Management (Bermuda) Limited Partnership, the General Partner of Oxford
BioScience Partners (Bermuda), Limited Partnership. Prior to joining Oxford, Dr.
Walton was the President of University Genetics, Co., a publicly traded
biotechnology company and, until 1981, was Professor of Macromolecular Science
and Director of the Laboratory for Biological Macromolecules at Case Western
Reserve University. Dr. Walton is the author of numerous publications and serves
as a Director of Human Genome Sciences, Inc.
TERMS OF DIRECTORS
The number of Directors is currently fixed at seven. The Board of Directors
is divided into three classes. The Directors serve staggered terms of three
years, with the members of one class being elected in any year, as follows: (i)
Messrs. Mendelson and Terwoord have been designated as Class I Directors and
will serve until the 1997 annual meeting; (ii) Dr. Walton and Mr. Harris have
been designated as Class II Directors and will serve until the 1998 annual
meeting; and (iii) Mr. Biro, and Drs. Stote and Green have been designated as
Class III Directors and will serve until the 1999 annual meeting.
38
<PAGE> 41
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee. The Compensation Committee has the authority
to administer the Company's stock option plans, including the selection of
optionees and the timing of option grants; and review and monitor key employee
compensation and benefits policies and administer the Company's management
compensation plans.
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees, the accounting principles used by the Company in
financial reporting, internal financial auditing procedures and the adequacy of
the Company's internal control procedures.
DIRECTOR COMPENSATION
Under the terms of the Company's 1994 Directors' Share Option Plan (the
"1994 Directors' Plan"), members of the Board of Directors who have been
designated to serve as such by one of the Investors (as defined) receive, in
lieu of director fees, options to purchase Common Shares having a value equal to
$1,000 per each meeting attended by the director ($500 for each meeting attended
by telephone). Options awarded to directors designated by Oxford BioScience
Partners or its various affiliates are to be awarded to an affiliate of Oxford
specified by such director, presently Oxford Bioscience Management Partners. As
of March 31, 1996, options to purchase an aggregate of 10,000 Common Shares have
been awarded to directors of the Company pursuant to the 1994 Directors' Plan.
The exercise prices of options awarded pursuant to the 1994 Directors' Plan
range from $0.80 to $9.60 per share, and vest six months and one day from the
date of grant. In the event of a change in control of the Company, the options
granted under the 1994 Directors' Plan will vest upon the earlier to occur of
(i) such change in control or (ii) six months and one day from the date of
grant. A change in control is defined as (i) a tender offer being made for the
ownership of 25% or more of the outstanding voting securities of the Company,
(ii) the Company being merged or consolidated with another corporation and, as a
result of such merger or consolidation, less than 75% of the outstanding voting
securities of the surviving or resulting corporation being owned in the
aggregate by the former shareholders of the Company, (iii) the Company selling
substantially all of its assets to another corporation which is not a
wholly-owned subsidiary or (iv) a person, within the meaning of Section 3(a)(9)
or of Section 13(d)(3) of the Securities Exchange Act of 1934 acquiring, other
than by reason of inheritance, 25% or more of the outstanding voting securities
of the Company. The Company does not intend to make any additional awards under
the 1994 Directors' Plan subsequent to the Offering.
Directors of the Company have also received awards of options under the
Company's 1992 Stock Incentive Plan. Options to purchase an aggregate of 55,000
Common Shares have been awarded to non-employee directors of the Company under
the terms of that plan, at an exercise price of $0.15 per share. Each director
of the Company who is not a Named Executive Officer (listed in the Summary
Compensation Table) has received options to purchase the following number of
shares under that plan: Mr. Harris, 25,000 shares; Dr. Stote, 25,000 shares; and
Mr. Terwoord, 5,000 shares. Information concerning option awards to directors
who are also Named Executive Officers is set forth in the Fiscal Year-End Option
Value Table appearing elsewhere herein. See "Management -- Executive
Compensation" and "-- 1992 Stock Incentive Plan."
Subsequent to this offering, except for stock options granted under the
Company's 1996 Outside Directors Stock Option Plan, the Company does not intend
to compensate directors for any meetings that they attend, but will reimburse
them for reasonable expenses that are incurred in attending such meetings.
1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
In connection with this offering, the Company adopted the 1996 Outside
Directors Stock Option Plan (the "Outside Directors Plan") providing for the
granting of options to purchase up to 25,000 Common Shares to those directors
who are not employees of the Company ("Eligible Directors"). The
39
<PAGE> 42
Outside Directors Plan provides for the annual granting of options to purchase
an aggregate of 1,500 Common Shares to each Eligible Director and is
administered by the Compensation Committee. The option price for options granted
under the Outside Directors Plan will be equal to the fair market value of a
Common Share on the date of grant. Options granted under the Outside Directors
Plan will be exercisable for a period of ten years from the date of grant but
will not be exercisable during the first year of that period. Thereafter, the
option may be exercised in full at any time or in part from time to time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was comprised of Messrs. Biro and Harris and Dr.
Green. Dr. Green is the President and Chief Executive Officer of the Company.
Dr. Green did not participate in the Committee's decisions concerning his
compensation. During the last three fiscal years, the Company has engaged in
various transactions with the members of its Compensation Committee or entities
with which they are affiliated. The Company believes that these transactions
have been on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. Subsequent to the Offering, Dr. Green
will be replaced by Dr. Stote on the Compensation Committee.
Mr. Biro is a general partner of Brantley. On March 25, 1992, Brantley
purchased 500,000 Series A Preferred Shares at a purchase price of $600,000. An
aggregate of $30,000 of the purchase price for the Series A Preferred Shares was
paid through the surrender of $30,000 in aggregate principal amount of a
Promissory Note issued by the Company in exchange for a loan from Brantley on
September 9, 1991, together with accrued interest thereon. On January 11, 1993,
Mr. Harris purchased an aggregate of 16,667 Series B Preferred Shares of the
Company at a purchase price of $25,000. On July 25, 1994, Brantley, Mr. Harris
and Dr. Green participated with other investors in the purchase of Series C
Preferred Shares from the Company. In that transaction, Brantley acquired
166,667 Series C Preferred Shares at an aggregate purchase price of $500,000,
Mr. Harris acquired 25,000 Series C Preferred Shares at an aggregate purchase
price of $75,000 and Dr. Green acquired 10,000 Series C Preferred Shares at an
aggregate purchase price of $30,000. Brantley, Mr. Harris and Dr. Green, along
with the Company and its other shareholders, are parties to a Second Amended and
Restated Shareholders' Agreement (the "Shareholders' Agreement"), under which
they have been provided with certain rights by the Company. In addition,
Brantley, Dr. Green and Mr. Harris, along with the Company's other shareholders,
are parties to a Registration Agreement under which the Company has provided
them with certain rights to have their shares registered under the Securities
Act. See "Certain Transactions."
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and long-term
compensation for services in all capacities for the Company for the year ended
December 31, 1995, with respect to those persons who were (i) the Chief
Executive Officer and (ii) the only other executive officer whose annual salary
and bonus exceeded $100,000 (the "Named Executive Officers") at December 31,
1995.
40
<PAGE> 43
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION(1) SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS(#)
------------------------------------------ -------- ------- -------------
<S> <C> <C> <C>
Dr. Jeffrey A. Green...................... $120,000 $ -- 25,000(2)
President and Chief Executive Officer
Nathan F. Messinger....................... 100,000 72,397 101,000(3)
Vice President of Business Development
<FN>
- ---------------
(1) No Named Executive Officer received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus.
(2) Dr. Green's options were granted on July 1, 1995, at an exercise price of
$4.15 per share, 25% of which become exercisable on each of July 1, 1996,
July 1, 1997, July 1, 1998 and July 1, 1999.
(3) Mr. Messinger's options were granted as follows: (i) 20,000 on December 30,
1993, at an exercise price of $0.15 per share, 25% of which are exercisable
on each of August 9, 1994, August 9, 1995, August 9, 1996 and August 9,
1997; (ii) 20,000 on April 1, 1994, at an exercise price of $0.15 per share,
25% of which are exercisable on each of April 1, 1995, April 1, 1996, April
1, 1997 and April 1, 1998; (iii) 50,000 on March 1, 1995, at an exercise
price of $4.15 per share, 25% of which are exercisable on each of March 1,
1996, March 1, 1997, March 1, 1998 and March 1, 1999; (iv) 1,000 on July 1,
1995, at an exercise price of $4.15 per share, which become fully
exercisable on July 1, 1996; and (v) 10,000 on July 1, 1995, at an exercise
price of $4.15 per share, 25% of which become exercisable on each of July 1,
1996, July 1, 1997, July 1, 1998 and July 1, 1999.
</TABLE>
OPTION GRANTS IN 1995
Shown below is information relating to grants of stock options pursuant to
the 1992 Stock Incentive Plan of the Company during the year ended December 31,
1995 to the Named Executive Officers. Such grants are reflected in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NO. OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(3)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) YEAR(2) ($/SH) DATE 5%($) 10%($)
- ----------------------------- ------------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Dr. Jeffrey A. Green......... 25,000(4) 13% $4.15 7/2/05 $168,998 $269,101
Nathan F. Messinger.......... 50,000(5) 26 4.15 3/2/05 337,996 538,202
10,000(6) 5 4.15 7/2/05 67,599 107,640
1,000(7) 1 4.15 7/2/05 6,760 10,764
<FN>
- ---------------
(1) All options reflected in the table above were awarded at an exercise price
equal to the fair market value of the Common Shares on the date of grant, as
determined by the Board of Directors.
(2) Based on an aggregate of 190,000 options granted under the 1992 Stock
Incentive Plan to employees of the Company, including the Named Executive
Officers.
(3) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the Common Shares. There can be no assurance that the amounts
reflected in this table will be achieved. In accordance with rules
promulgated by the Securities and Exchange Commission, Potential Realizable
Value is based upon the exercise price of the options, which is
substantially less than the expected initial public offering price.
Therefore, the Potential Realizable Values may be significantly understated.
</TABLE>
41
<PAGE> 44
(4) These options were granted on July 1, 1995, 25% of which are exercisable on
each of July 1, 1996, July 1, 1997, July 1, 1998 and July 1, 1999.
(5) These options were granted on March 1, 1995, 25% of which are exercisable on
each of March 1, 1996, March 1, 1997, March 1, 1998 and March 1, 1999.
(6) These options were granted on July 1, 1995, 25% of which are exercisable on
each of July 1, 1996, July 1, 1997, July 1, 1998 and July 1, 1999.
(7) These options were granted on July 1, 1995 and are fully exercisable on July
1, 1996.
1992 STOCK INCENTIVE PLAN
Prior to this offering, the Company awarded stock options to certain
directors, employees and consultants under the terms of its 1992 Stock Incentive
Plan (the "1992 Plan"). Options to purchase an aggregate of 468,075 Common
Shares are outstanding under the 1992 Plan at exercise prices ranging from $0.15
to $7.00 per share. The exercise prices of such options reflect the Board of
Directors' determination of the fair market value of a Common Share on the date
of grant. Options awarded under the plan vest in equal increments over a six
month to five year period commencing on a date specified in each option
agreement. Options awarded to employees of the Company under the plan are
intended to qualify as incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"). Options awarded
to directors and consultants of the Company under the 1992 Plan are
non-qualified options for federal income tax purposes. In the event of a change
of control of the Company, the options granted under the 1992 Plan will become
immediately exercisable in full. A change in control is defined as (i) a tender
offer being made and consummated for the ownership of 75% or more of the
outstanding voting securities of the Company, (ii) the Company being merged or
consolidated with another corporation and, as a result of such merger or
consolidation, less than 25% of the outstanding voting securities of the
surviving or resulting corporation being owned in the aggregate by the former
shareholders of the Company, (iii) the Company selling substantially all of its
assets to another corporation which is not a wholly owned subsidiary or (iv) a
person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) of the
Exchange Act, acquiring, other than by reason of inheritance, 25% or more of the
outstanding voting securities of the Company. The Company does not intend to
make any additional option awards under the 1992 Plan subsequent to the
Offering.
1996 KEY EMPLOYEES AND CONSULTANTS STOCK OPTION PLAN
In connection with the Offering, the Board of Directors of the Company
adopted the 1996 Key Employees and Consultants Stock Option Plan (the "1996
Plan"). The 1996 Plan is administered by the Compensation Committee of the Board
of Directors, and provides for the issuance of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code to employees of the
Company and other stock options which are non-qualified for federal income tax
purposes to employees and consultants. The 1996 Plan provides for the granting
of options to purchase an aggregate of up to 182,667 Common Shares. Incentive
stock options are exercisable for up to ten years, at an option price of not
less than the market price on the date the option is granted or at a price of
not less than 110% of the market price in the case of an option granted to an
individual who at the time of grant owns more than 10% of the Company's Common
Shares. Nonqualified stock options may be issued at such exercise price and on
such other terms and conditions as the Compensation Committee may determine. The
Compensation Committee has broad discretion to determine that prescribed
conditions (such as the completion of a period of employment with the Company
following the grant of an option to an employee) be satisfied before an option
becomes exercisable. Optionees may also be granted stock appreciation rights
under which they may, in lieu of exercising an option, elect to receive cash or
Common Shares, or a combination thereof, equal to the excess of the market price
of the Common Shares over the option price.
42
<PAGE> 45
FISCAL YEAR-END OPTION VALUE TABLE
The following table shows the number of Common Shares represented by
outstanding stock options held by each of the Named Executive Officers as of
December 31, 1995. None of the Named Executive Officers exercised any stock
options during 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(2)(3)
--------------------------- ---------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
- ---------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Dr. Jeffrey A. Green........ -- 25,000 $ -- $ 71,250
Nathan F. Messinger......... 15,000 86,000 102,750 $ 345,100
<FN>
- ---------------
(1) Includes options exercisable within 60 days after December 31, 1995.
(2) Options are in-the-money if the fair market value of the Common Shares
exceeds the exercise price.
(3) Represents the total gain which would be realized if all in-the-money
options beneficially held at December 31, 1995 were exercised, determined by
multiplying the number of shares underlying the options by the difference
between the per share option exercise price and $7.00, the estimated fair
market value per share of the Common Shares at December 31, 1995, as
established by the Board of Directors. Had the fair market value per share
equaled $12.00 per share (the mid-point of the estimated initial public
offering price range), the value of the unexercised in-the-money options
beneficially owned at December 31, 1995, exercisable and unexercisable,
respectively, would have been: for Mr. Green: $0 exercisable; $196,250
unexercisable; for Mr. Messinger: $177,750 exercisable; $775,100
unexercisable.
</TABLE>
EMPLOYMENT CONTRACTS
The Company is a party to employment agreements with each of its executive
officers except Dr. Linberg. The Company entered into employment agreements with
Drs. Green, Stigelman, Kasmer and Mr. Black in 1994. Additionally, the Company
proposes to enter into an employment agreement with Dr. Linberg. These
employment agreements are substantially similar except with respect to each
executive's compensation and provide for an initial term of four years. The
agreements will automatically renew for successive one-year periods thereafter
unless certain prior notice requirements are satisfied. Drs. Stigelman, Kasmer,
and Mr. Black's agreements provide for an annual review of each employee's base
salary by the Compensation Committee of the Board of Directors. Dr. Green's
agreement provides that his base salary may be changed after the initial
four-year term as determined by the Compensation Committee and as long as
evidenced by a written memorandum executed by the parties. All agreements
provide that bonuses may be paid to the employee at the discretion of the
Compensation Committee. The agreements also provide each employee with the right
to participate in all benefit plans made available to the Company's executives
and/or employees. The employment agreements provide that the Company may
terminate the employee with or without cause or upon his death or disability.
Additionally, Dr. Green's employment agreement entitles him to terminate his
employment for "good reason." For purposes of Dr. Green's agreement, "good
reason" for such termination will exist if at any time, except in connection
with the termination of the employee's employment in strict compliance with the
terms of the agreement, the Board of Directors fails to elect the employee to
his current positions with the Company or significantly diminishes his
responsibilities, duties, power or authority. If Dr. Green terminates his
employment with the Company for "good reason," he will be entitled to continue
to receive his base salary for two years following the date of such termination.
If the employment of Drs. Green, Stigelman, Kasmer or Mr. Black is terminated in
connection with a sale of the Company, each will be entitled to continue to
receive his base salary for one year following the date of such termination. If
Dr. Green's employment with the Company is terminated without cause, he will be
entitled to continue to receive his base salary for a period of two years
subsequent to the date of termination. If Drs. Stigelman or Kasmer or Mr.
Black's employment is terminated without cause, each will be entitled to
continue to receive his base salary for the lesser of one year or through the
expiration of the original term of the agreement. If Drs. Green, Stigelman,
Kasmer or Mr. Black terminate their employment without "good reason" or are
terminated by the
43
<PAGE> 46
Company for "cause," then they will be entitled to receive their base salary
through the date of termination. If they are terminated for cause prior to
January 1, 1997, the Company will have the right to repurchase 25% of the Common
Shares owned by them or which they have the right to acquire upon the exercise
of options at a price equal to the fair market value of such shares determined
in accordance with the provisions of the Second Amended and Restated
Shareholders' Agreement (the "Shareholders' Agreement") to which all current
shareholders are parties. To the extent that the Company does not exercise such
right within a specified time period, certain other shareholders of the Company
will have the right to acquire such shares on the same terms in accordance with
the terms of such Shareholders' Agreement. For purposes of the agreements,
"cause" is defined to mean a determination by the Board of Directors that the
employee was engaged in (i) fraud, (ii) a breach of the material provisions of
the employment agreement or (iii) a willful failure to perform his duties as
required under the agreement.
Mr. Messinger's agreement was entered into in 1993 and is similar to those
entered into with Drs. Green, Stigelman, Kasmer, and Mr. Black. In the event
that Mr. Messinger is terminated other than for cause, he will be entitled to
continue to receive his salary and benefits for a period equal to the lesser of
one year or through the expiration of the original four year term of the
agreement. In the event that Mr. Messinger's employment is terminated in
connection with the sale of the Company, he will be entitled to receive a
lump-sum payment equal to two months base salary for each full year of service.
Upon termination of Mr. Messinger's employment prior to August 10, 1998, the
Company will have an option to repurchase a specified percentage of the Common
Shares that he owns or has the right to acquire. Initially, all Common Shares
owned by Mr. Messinger or which he had the right to acquire were subject to such
repurchase option. The number of Common Shares subject to repurchase decreases
by 20% per annum. Any repurchase of Common Shares under the terms of the
agreement will be made at a price equal to the fair market value of such shares
determined in accordance with the provisions of the Shareholders' Agreement. To
the extent that the Company does not exercise such right within a specified time
period, certain other shareholders of the Company will have the right to acquire
such shares on the same terms in accordance with the terms of such Shareholders'
Agreement.
The Company also entered into employment agreements with Ms. Adamson and
Dr. Westrick on February 1, 1996. These employment agreements are similar to Dr.
Green's employment agreement except that they: (i) provide for an initial term
of five years; (ii) provide Ms. Adamson and Dr. Westrick with the right to
participate in all of GFI's benefit plans if they are not revised to be
consistent with the Company's benefit plans; (iii) provide the Company with the
right to terminate Ms. Adamson or Dr. Westrick for "sufficient reason" and they
have the right to their base salary for one year following the date of such
termination; (iv) provide that if Ms. Adamson or Dr. Westrick terminate their
employment for "good reason," they will be entitled to receive their base salary
for one year following the date of such termination; and (v) provide that if the
Company terminates Ms. Adamson or Dr. Westrick without "cause" or "sufficient
reason," they are entitled to receive their base salary for two years following
the date of such termination. For purposes of the agreements, "sufficient
reason" for such termination will mean the good faith determination of the Chief
Executive Officer of the Company that Ms. Adamson or Dr. Westrick failed (i) to
adequately perform her duties, (ii) to exercise and employ a level of judgment
and skill in the management of the Company and the supervision of its employees
commensurate with her position and comparable to other executives of similar
companies or (iii) to achieve the business objectives established from time to
time by the Chief Executive Officer and the employee. Additionally, the Company
has agreed to use its best efforts to cause either Ms. Adamson or Dr. Westrick
to be elected to the Company's Board of Directors.
Dr. Linberg's employment agreement will provide for an initial term of four
years and will provide that his base salary will be reviewed by the Compensation
Committee on an annual basis. Dr. Linberg will be entitled to receive a one time
bonus in the amount of $200,000, payable on or before December 31, 1996, and
will also be entitled to receive a bonus payable prior to February 15, 1997 in
an amount equal to two times the 1996 net income earned by the Company on
business developed by Dr. Linberg exclusively through his own efforts. Dr.
Linberg's employment agreement will also provide
44
<PAGE> 47
for the payment of annual bonuses of $28,500 on November 20 of each year during
the term of his agreement, beginning in 1996. This bonus will only be payable if
Dr. Linberg is employed by the Company at the time the bonus becomes payable
with respect to any particular year. If Dr. Linberg's employment with the
Company is terminated for cause prior to January 1, 1999, the Company will have
the right to repurchase specified percentages of the Common Shares owned by him
or which he has the right to acquire. Initially, 50% of such Common Shares will
be subject to this repurchase option. That percentage will decline to 25% on
January 1, 1998, and the Company's repurchase option will terminate on January
1, 1999. Any repurchase of Common Shares under the terms of the agreement will
be made at a price equal to the fair market value of such shares determined in
accordance with the terms of the Shareholders' Agreement. If the Company does
not exercise such right within a specified time period, certain other
shareholders of the Company will have the right to acquire such shares on the
same terms in accordance with the terms of such Shareholders' Agreement. If Dr.
Linberg's employment with the Company is terminated without cause or in
connection with a sale of the Company, he will be entitled to continue to
receive his base salary for one year following the date of termination. In
addition, if Dr. Linberg's responsibilities, duties, powers or authorities are
significantly diminished subsequent to a sale of the Company, he will be
entitled to voluntarily terminate his employment and receive either a lump sum
payment equal to one year's salary or, at his option, a release from the
non-competition provisions of the agreement.
CERTAIN TRANSACTIONS
In connection with its various financing transactions, the Company has
entered into certain agreements with each of its investors. Since these
arrangements were the result of arm's length negotiation among the Company and
its investors prior to their acquisition of an interest in the Company, the
Company believes that they are on terms no less favorable to it than could have
been obtained from unaffiliated third parties. Relationships between the Company
and those investors who are affiliated with members of the Compensation
Committee of the Board of Directors are described under the caption "Management
- -- Compensation Committee Interlocks and Insider Participation."
Financing Arrangements. The Company has engaged in three rounds of venture
capital financing. On March 25, 1992, Brantley purchased 500,000 Series A
Preferred Shares for an aggregate purchase price of $600,000. An aggregate of
$30,000 of the purchase price for the Series A Preferred Shares was paid through
the surrender of $30,000 in aggregate principal amount of a Promissory Note
issued by the Company in exchange for a loan from Brantley on September 9, 1991,
together with accrued interest thereon. On November 12, 1992, Mr. Terwoord
purchased an aggregate of 50,000 Series B Preferred Shares at an aggregate
purchase price of $75,000. On January 11, 1993, Mr. Harris purchased an
aggregate of 16,667 Series B Preferred Shares at a purchase price $25,000. On
July 15, 1994, each of Oxford BioScience Partners, L.P., Oxford BioScience
Partners (Bermuda), L.P., Oxford BioScience Partners (Adjunct), L.P., Axiom,
Brantley, Drs. Green, Kasmer, Stigelman, Stote and Messrs. Harris and Terwoord,
together with one additional investor affiliated with Axiom, purchased an
aggregate of 1,412,367 Series C Preferred Shares at an aggregate purchase price
of $4,237,101.
Shareholders' Agreement. In connection with each of the foregoing
transactions, the Company entered into a shareholders' agreement with its
shareholders. This agreement was modified in connection with subsequent
financings. On July 25, 1994, the Company entered into a Second Amended and
Restated Shareholders' Agreement (the "Shareholders' Agreement"), which governs
certain aspects of the relationship among the Company and its current
shareholders. In the Shareholders' Agreement, each party has agreed to vote all
shares over which that party exercises control to elect as directors of the
Company: (i) one representative designated by each of Brantley, Oxford and Axiom
(collectively, the "Investors") to serve as directors of the Company; (ii) Dr.
Green; (iii) two representatives designated by Dr. Green, one of whom is
required to have experience in the pharmaceutical industry and both of whom are
subject to the approval of the Investors; and (iv) one additional representative
designated jointly by Dr. Green and the Investors. Pursuant to these
arrangements, Brantley designated Mr. Biro to serve as a director, Oxford
designated Dr. Walton, Axiom designated Mr. Mendel-
45
<PAGE> 48
son, Dr. Green designated Mr. Harris and Dr. Stote, and Dr. Green and the
Investors designated Mr. Terwoord. The Shareholders' Agreement also provides for
the establishment of and membership on Board committees, the removal and
replacement of any director designated by a party to the Shareholders'
Agreement, and the termination of each Investor's right to designate a director.
The Shareholders' Agreement also provides the Company with a right of first
refusal in the event of any proposed transfer of shares by a party to the
Shareholders' Agreement. To the extent that such right is not exercised by the
Company, each shareholder has the right to purchase his or its pro rata share of
such shares. Each shareholder is prohibited from transferring any shares to any
competitor of the Company, and each individual shareholder is prohibited, so
long as the Investors continue to own any shares, from transferring shares if
thereafter he would own less than two-thirds of the shares owned by him
immediately prior to such transfer. In addition, each of the Investors has a
right to participate in any proposed transfer of any shares by any other party
to the Shareholders' Agreement (other than certain transfers to family members
or affiliates of such shareholder). Upon the death, disability or insolvency of
a shareholder, the Company will have the right to repurchase the shares held by
such shareholder at the fair market value thereof, determined in accordance with
the Shareholders' Agreement (other than shares that would be transferred to
certain members of an individual shareholder's family in the event of the
shareholder's death or disability). To the extent that such right is not
exercised by the Company, each shareholder has the right to purchase his or its
pro rata share of such shares. Subject to certain exceptions, if the Company
determines to issue any additional equity securities, the Shareholders'
Agreement provides each shareholder with the right to purchase, on the most
favorable terms to be offered to any third party, an amount of equity securities
sufficient to permit that shareholder to maintain his or its current percentage
ownership of the Company's equity securities on a fully diluted basis. If the
Company determines to raise additional capital through the issuance of
additional debt, the Shareholders' Agreement provides that the Company must
offer to the Investors the right to provide or cause to be provided such
financing.
The Shareholders' Agreement will terminate upon the consummation of the
Offering.
Registration Rights. The Company is a party to a registration rights
agreement with each of its existing shareholders, as well as PMSI, its joint
venture partner in HRI. Under the terms of this agreement, the holders of an
aggregate of 2,137,633 Common Shares acquired upon conversion of Series A and
Series C Preferred Shares (the "Registrable Shares") have the right to demand,
no more than once every six months, registration of Common Shares having a
market value of at least $5,000,000 (in the case of a registration on Form S-1)
or $1,000,000 (in the case of a registration on Form S-2 or S-3) their
Registrable Shares under the Securities Act. Such demand right may be exercised
by the holders of 40% of the Registrable Shares. The holders of Registrable
Shares may exercise their right to demand registration of the Registrable Shares
on Form S-1 up to two times at the Company's expense, and may demand
registrations on Form S-2 or S-3 an unlimited number of times at the Company's
expense. Although the holders of Registrable Shares have the right to demand
additional registrations on Form S-1, they will be required to pay their share
of the expenses associated with such registration. The agreement also provides
the holders of an aggregate of 782,592 Common Shares (including Common Shares
issued upon the exercise of the Warrants issued to PMSI and the Common Shares
issued in connection with the acquisition of GFI) (the "Related Shares"), with
the limited right to participate, at their own expense, in a registration
statement demanded by the holders of Registrable Shares. In addition, under
certain conditions, the holders of Registered Shares and Related Shares have the
limited right to include some or all of such shares in any registration
statement filed by the Company with respect to the sale of its Common Shares.
46
<PAGE> 49
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Shares on a fully diluted basis as of March
31, 1996, and as adjusted to reflect the sale of the 2,000,000 Common Shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by (i) each director, (ii) each Named Executive Officer, (iii) all
directors and executive officers as a group and (iv) each person known by the
Company to be the beneficial owner of more than 5% of the Common Shares on a
fully diluted basis. Unless otherwise indicated in a footnote, each person
possesses sole voting and investment power with respect to the shares indicated
as beneficially owned. Unless otherwise indicated, the address of each
beneficial owner is 20600 Chagrin Boulevard, Suite 1050, Cleveland, Ohio 44122.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
NUMBER OF OWNED(1)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- -------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Dr. Jeffrey A. Green (2)...................................... 392,436 14.2% 8.3%
Timothy G. Biro (3)........................................... 744,219 27.0 15.7
Seth B. Harris................................................ 59,634 2.2 1.2
Alan Mendelson (4)............................................ 655,586 23.8 13.8
Dr. Robert M. Stote........................................... 19,474 * *
James A. Terwoord (5)......................................... 80,467 2.9 1.7
Nathan F. Messinger........................................... 36,000 1.1 *
Dr. Alan G. Walton (6)........................................ 655,585 23.8 13.8
c/o Oxford BioScience Funds
315 Post Road West
Westport, Connecticut 06880
Brantley Venture Partners II, L.P. (7)........................ 744,219 27.0 15.7
20600 Chagrin Boulevard, Suite 1150
Cleveland, Ohio 44122
Axiom Venture Partners Limited Partnership (8)................ 655,586 23.8 13.8
242 Trumbull Street
Hartford, Connecticut 06103
Oxford BioScience Funds (6)................................... 655,585 23.8 13.8
315 Post Road West
Westport, Connecticut 06880
All directors and executive officers as a group (14
persons).................................................... 2,901,155 95.0 57.4
<FN>
- ---------------
* Less than one percent.
(1) Gives effect to the conversion of the Preferred Shares (including additional
Preferred Shares issuable as Preferred Share dividends through May 31, 1996)
into an aggregate of 2,201,133 Common Shares. Includes with respect to each
of the following individuals and group the following number of Common Shares
which (i) may be acquired upon exercise of options that become exercisable
within 60 days after the Offering, and (ii) Common Shares to be issued to
the former shareholders of GFI in connection with the acquisition of GFI:
Dr. Green (6,250 shares); Mr. Biro (3,333 shares); Mr. Harris (15,000
shares); Mr. Mendelson (3,000 shares); Dr. Stote (15,000 shares); Mr.
Terwoord (2,500 shares); Mr. Messinger (36,000 shares); Dr. Walton (3,000
shares); all directors and executive officers as a group (325,000 shares).
(2) Includes 150,000 shares held by Dr. Green's wife.
(3) Includes 740,886 shares owned by Brantley. Mr. Biro, a director of the
Company, is a general partner and may be deemed to be a beneficial owner.
(4) Includes 652,586 shares owned by Axiom. Mr. Mendelson, a director of the
Company, is a general partner and may be deemed to be a beneficial owner.
(5) Includes 50,000 shares held by Mr. Terwoord's wife and 27,967 shares held in
trust for Mr. Terwoord.
(6) Includes 408,690 and 130,517 Common Shares owned by Oxford BioScience
Partners, L.P. ("Oxford") and Oxford BioScience Partners (Adjunct), L.P.
("Oxford Adjunct"), respectively, of which OBP Management, L.P. ("OBP") is
the general partner, and 113,378 Common Shares owned by Oxford BioScience
Partners (Bermuda) Limited Partnership ("Oxford Bermuda"), of which OBP
Management (Bermuda) Limited Partnership ("OBP Bermuda") is the general
partner. OBP may be deemed to be the beneficial owner of shares owned by
Oxford Bermuda. Also includes 3,000 Common Shares issuable upon exercise of
options owned by Oxford BioScience Management Partners ("OBM") that are
currently exercisable. Dr. Walton, a Director of the Company, is a general
partner of OBP, OBP Bermuda and OBM.
(7) Includes 3,333 Common Shares issuable upon exercise of options owned by Mr.
Biro that are currently exercisable. Mr. Biro is a general partner of
Brantley.
(8) Includes 3,000 Common Shares issuable upon exercise of options owned by Mr.
Mendelson that are currently exercisable. Mr. Mendelson is a general partner
of Axiom.
</TABLE>
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation, as amended (the "Articles")
currently authorizes 6,520,000 shares of capital stock, consisting of 3,660,000
Common Shares, without par value and 2,860,000 Preferred Shares, $.001 par
value. As of March 31, 1996, 413,258 Common Shares were issued and outstanding
and held by nine holders of record and 2,182,353 Preferred Shares were issued
and outstanding and held by 13 holders of record. In connection with the
Offering, the Company's Articles will be amended and restated (the "Amended
Articles"). The Amended Articles will authorize the issuance of 16,000,000
shares of capital stock, consisting of 1,000,000 Serial Preferred Shares,
without par value, issuable in series (the "Serial Preferred Shares") and
15,000,000 Common Shares, without par value. Set forth below is a description of
the capital stock of the Company after giving effect to the amendment and
restatement of the Articles.
COMMON SHARES
The holders of Common Shares are entitled to receive dividends when, if and
as declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." The Common Shares have no preemptive
rights or conversion rights and are not subject to further calls or assessments
by the Company. There are no redemption or sinking fund provisions applicable to
the Common Shares. All currently outstanding Common Shares are, and the Common
Shares being sold by the Company in the Offering will be, duly authorized,
validly issued, fully paid and nonassessable. The holders of Common Shares are
entitled to one vote per share on all matters to be voted upon by the
shareholders. The holders of Common Shares do not have the right to vote
cumulatively in the election of directors. Subsequent to the Offering, the Board
of Directors will consist of seven members divided into three classes of two,
two and three members, respectively. The directors of the class elected at each
Annual Meeting of Shareholders will hold office for a term of three years.
Subject to the rights of the holders of Serial Preferred Shares which may be
issued from time to time and except for the provisions of the Articles relating
to the classification of directors, the denial of preemptive rights and
cumulative voting rights and the approval requirements for certain Business
Combinations described herein, the amendment of which, under certain
circumstances, will require the affirmative vote of the holders of 80% of the
outstanding Common Shares, and at least a majority of the Common Shares held by
persons other than a Related Person (as hereinafter defined), the Articles can
be amended by the affirmative vote of the holders of at least a majority of the
Company's then outstanding shares having voting power thereon.
WARRANTS
In connection with its joint venture with PMSI, the Company entered into a
Warrant Agreement dated as of June 1, 1995 providing for the issuance of
warrants to purchase Common Shares to PMSI. The Warrants entitle the holder
thereof to purchase an aggregate of 68,000 Common Shares at an exercise price of
$5.50 per share and an aggregate of 68,000 Common Shares at an exercise price of
$7.50 per share. Each Warrant is exercisable at any time or from time to time
prior to the earliest of: (i) November 30, 1996 (with respect to the $5.50 per
share Warrants) or August 31, 1997 (with respect to the $7.50 per share
Warrants); (ii) five business days prior to the consummation of an initial
public offering of the Company's Common Shares underwritten on a firm commitment
basis; (iii) five business days prior to the consummation of a sale or other
disposition of a majority of the Company's capital stock or a sale of all or
substantially all of the Company's assets or a merger or consolidation resulting
in a similar effect on the Company's capital stock or assets; (iv) the
termination, or change in participants, of the PMSI joint venture; or (v)
immediately prior to the consummation of any transaction where any participant
in the PMSI joint venture becomes subject to the control of a competitor of the
Company. The Company has the right to repurchase all, but not less than all, of
the Common Shares acquired upon exercise of the Warrants in the event that PMSI
or its affiliates engage in any transaction that results in PMSI or any of its
affiliates becoming subject to the control of a person or entity which competes
with the Company. Any such repurchase will be at the fair market value of the
Common Shares as of the date that the Company exercises its repurchase right, as
determined through a procedure set forth in the Warrant Agreement.
48
<PAGE> 51
SERIAL PREFERRED SHARES
The Amended Articles authorize the directors, without further action by the
shareholders, to issue, from time to time, Serial Preferred Shares in one or
more classes or series which would entitle the holder thereof to one vote per
share, and to fix or alter the designations, powers and preferences, and
relative, participating, optional or other rights, if any, and qualifications,
limitations or restrictions thereof, including, without limitation, dividend
rights (and whether dividends are cumulative), conversion rights, if any, rights
and terms of redemption (including sinking fund provisions, if any), redemption
price and liquidation preferences of any unissued shares or wholly unissued
series of Serial Preferred Shares. In addition, the Board may establish the
number of shares constituting any such class or series and the designation
thereof, and increase or decrease the number of shares of any such class or
series subsequent to the issuance of shares of such class or series, but not
below the number of shares of such class or series then outstanding.
BUSINESS COMBINATIONS
Under the Amended Articles, the affirmative vote of not less than 80% of
the outstanding Common Shares, in addition to the affirmative vote, which may be
required of any series of Serial Preferred Shares that may then be outstanding,
and the affirmative vote of a majority of the Common Shares held or beneficially
owned other than by a Related Person (as hereinafter defined) are generally
required for the approval or authorization of any Business Combination (as
hereinafter defined) of the Company with any Related Person. These provisions of
the Amended Articles do not apply to Business Combinations with Related Persons
which have been approved by a majority of the Disinterested Directors (as
hereinafter defined) of the Company or which satisfy certain provisions of the
Amended Articles relating to the consideration to be paid to the holders of
Common Shares by the Related Person. For purposes of the Amended Articles, the
term "Business Combination" means (i) any merger or consolidation of the Company
with or into a Related Person, (ii) any sale, lease, exchange, transfer or other
disposition, including, without limitation, a mortgage or any other security
device, of all or any substantial part (as hereinafter defined) of the assets of
the Company (including, without limitation, any voting securities of a
subsidiary) or of a subsidiary, to a Related Person, (iii) any merger or
consolidation of a Related Person with or into the Company or a subsidiary of
the Company, (iv) any sale, lease, exchange, transfer or other disposition of
all or any substantial part of the assets of a Related Person to the Company or
a subsidiary of the Company, (v) the reclassification of the shares of stock of
the Company generally possessing voting rights in elections of directors, the
purchase by the Company of such shares, or the issuance by the Company of shares
of any securities convertible thereto or exchangeable therefor which in any such
case has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of the Company which are directly or indirectly owned by any Related Person or
(vi) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination. The term
"Disinterested Director" means a director of the Company who is not the Related
Person or an affiliate or associate of the Related Person and who was a member
of the Board of Directors of the Company prior to the time that the Related
Person became the Related Person, and any successor of a Disinterested Director
who is not the Related Person or an affiliate or associate of the Related Person
and is recommended to succeed a Disinterested Director by a majority of the
Disinterested Directors then in office. The term "Related Person" means any
individual, corporation, partnership or other person or entity which, together
with its "affiliates" and "associates" "beneficially" owns (as those terms are
defined in the Exchange Act and the rules promulgated thereunder), in the
aggregate, 15% or more of the outstanding Common Shares of the Company, and any
affiliate or associate of any such individual, corporation, partnership or other
person or entity; provided that shares held by or over which such entity has
power to vote or otherwise control as a trustee, plan administrator, officer of
the Company or in a similar capacity under an employee benefit plan of the
Company or an employee benefit plan of an affiliate of the Company will not be
deemed to be beneficially owned for purposes of this definition. The term
"substantial part" means more than 10% of the total consolidated assets of the
Company as at the end of its most recent fiscal year ending prior to the time
the determination is made.
49
<PAGE> 52
CERTAIN PROVISIONS OF OHIO LAW
After the Offering, the Company will be subject to certain provisions of
Ohio law which may discourage or render more difficult an unsolicited takeover
of the Company. Among these are provisions that (i) prohibit certain mergers,
sales of assets, issuance or purchases of securities, liquidation or
dissolution, or reclassification of the then outstanding shares of an Ohio
corporation involving certain holders of stock representing 10% or more of the
voting power (other than present shareholders), unless (a) such transactions are
approved by the Board of Directors prior to the 10% shareholder becoming such,
(b) the acquisition of 10% of the voting power is approved by the Board of
Directors prior to the 10% shareholders becoming such, or (c) involve a 10%
shareholder which has been such for at least three years and the transaction is
approved by holders of two-thirds of the voting power of the Company and the
holders of a majority of the voting power not owned by the 10% shareholders or
certain minimum price and form of consideration requirements are met; and (ii)
provide Ohio corporations, or in certain circumstances the shareholders of an
Ohio corporation, a cause of action to recover profits realized under certain
circumstances by persons who dispose of securities of a corporation within 18
months of proposing to acquire such corporation.
In addition, the acquisition of shares entitling the holder to execute
certain levels of voting power of the Company (one-fifth or more, one-third or
more, or a majority) can be made only with the prior authorization of (i) the
holders of at least a majority of the total voting power and (ii) the holders of
at least a majority of the total voting power held by shareholders other than
the proposed acquirer, officers of the Company elected or appointed by the Board
of Directors, and directors of the Company who are also employees and excluding
certain shares that are transferred after the announcement of the proposed
acquisition and prior to the vote with respect to the proposed acquisition. In
light of the fact that, upon completion of the Offering, the directors and
executive officers of the Company and their respective affiliates will continue
to own approximately 57% of the Company's outstanding Common Shares,
acquisitions of the foregoing levels of voting power by third parties may not be
possible unless officers and directors and current shareholders of the Company
vote in favor thereof.
DIRECTOR AND OFFICER INDEMNIFICATION
The Company's Code of Regulations contains provisions indemnifying
directors and officers of the Company to the fullest extent permitted by law and
providing for the advancement of expenses incurred in connection with an action
upon the receipt of an appropriate undertaking to repay said amount if it is
determined that the individual in question is not entitled to indemnification.
The Company has also entered into indemnity agreements pursuant to which it has
agreed, among other things, to indemnify its directors for settlements in
derivative actions.
GENERAL
It is possible that the division of the Board of Directors of the Company
into classes provided for in the Amended Articles, the ability of the Board of
Directors to issue Serial Preferred Shares, the heightened shareholder voting
requirements applicable to certain proposed business combination transactions
and/or the provisions of Ohio law discussed above may discourage other persons
from making a tender offer for or acquisitions of substantial amounts of the
Company's Common Shares. This could have an incidental effect of inhibiting
changes in management and may also prevent temporary fluctuations in the market
price of the Company's Common Shares which often result from actual or rumored
takeover attempts. In addition, the indemnification provisions of the Code of
Regulations and the indemnity agreements may have the effect of reducing the
likelihood of derivative litigation against directors and to deter shareholders
from bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefitted the
Company and the shareholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Shares is National City
Bank, Cleveland, Ohio.
50
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, of the 15,000,000 Common Shares
authorized, 5,069,899 Common Shares will be outstanding or reserved for issuance
pursuant to the exercise of exercisable stock options or warrants. Of these
5,069,899 Common Shares, the 2,000,000 Common Shares purchased in the Offering
by persons who are not "affiliates" of the Company will be freely tradeable
without restriction under the Securities Act. The Company believes that 979,925
Common Shares currently may be sold pursuant to Rule 144 under the Securities
Act in compliance with the resale volume limitations of Rule 144. These volume
limitations will apply only if and as long as the holders of these shares are
"affiliates" of the Company for purposes of Rule 144. The Company believes that
2,089,974 Common Shares are considered "restricted securities" under the
Securities Act and holders may not utilize Rule 144 until such shares have been
held for at least two years. The 2,089,974 Common Shares were issued between
July 15, 1994 and the date of this Prospectus.
The 478,075 Common Shares reserved for issuance upon exercise of
outstanding options will become eligible for resale under Rule 144 two years
subsequent to the date or dates that the holders of such options exercise the
same. Subsequent to the Offering, however, the Company intends to file
registration statements on Form S-8 with respect to the 478,075 Common Shares
reserved for issuance upon exercise of outstanding options.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her shares for at
least two years, including an "affiliate," as that term is defined below, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares or the average
weekly trading volume of the then outstanding shares during the four calendar
weeks preceding each such sale. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company, and who has
beneficially owned shares for at least three years, is entitled to sell such
shares under Rule 144 without regard to the volume limitations described above.
As defined in Rule 144, an "affiliate" of an issuer is a person that directly or
indirectly, through the use of one or more intermediaries, controls, or is
controlled by, or is under the common control with, such issuer. Under
amendments to Rule 144 proposed by the SEC, the two-year and three-year periods
described above may be reduced to one year and two years, respectively.
REGISTRATION RIGHTS
The Company is a party to a registration rights agreement with certain of
its existing shareholders, as well as PMSI. Under the terms of these agreements,
these shareholders and PMSI have certain demand registration rights or the right
to include their shares in any registration statement filed by the Company with
respect to an offering of Common Shares under the Securities Act. See "Certain
Transactions."
LOCK-UP AGREEMENTS
The Company, its current shareholders and certain holders of options who
beneficially own 3,041,530 Common Shares have agreed that they will not,
directly or indirectly, without the prior written consent of the
Representatives, offer, sell, grant any option to purchase or otherwise dispose
of any Common Shares, or any securities convertible into, or exchangeable or
exercisable for, Common Shares for a period of 180 days after the date of this
Prospectus.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares (including shares issued upon the exercise of the
outstanding stock options), or the perception that such sales could occur, could
adversely affect the prevailing market prices for the Common Shares.
51
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. and McDonald & Company Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective number
of Common Shares.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
-------------------------------------------------------------------- ----------------
<S> <C>
Vector Securities International, Inc. ..............................
McDonald & Company Securities, Inc. ................................
----------------
Total..................................................... 2,000,000
==============
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all Common Shares offered hereby if any of such
shares are purchased.
The Underwriters propose to offer the shares to the public initially at the
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow to selected dealers, and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the Common Shares, the offering price and other
selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 300,000 Common Shares at the initial public offering price set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purposes
of covering over-allotments, if any, in connection with the Offering. To the
extent such option is exercised, each Underwriter will be obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares set forth next to such Underwriter's
name in the preceding table bears to the total number of shares listed in the
table.
The Company and the executive officers, directors and certain shareholders
and employees of the Company have agreed not to offer, sell, contract to sell,
grant any option to purchase, or otherwise dispose of any Common Shares for a
period of 180 days after the date of this Prospectus without the written consent
of the Representatives. See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Prior to the Offering, there has not been any public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
included in the Offering has been determined by negotiations between the Company
and the Representatives. Among the factors considered in determining such price
were the history of and prospects for the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the past and present revenues and earnings
of the Company, the prospects for growth of the Company's revenues and earnings,
the current state of the economy in the United States and the current level of
economic activity in the industry in which the Company competes and
52
<PAGE> 55
in related or comparable industries, and currently prevailing conditions in the
securities markets, including current market valuations of publicly traded
companies that are comparable to the Company.
LEGAL MATTERS
The validity of the issuance of the Common Shares offered hereby will be
passed upon for the Company by Calfee, Halter & Griswold, Cleveland, Ohio.
Certain legal matters will be passed upon for the Underwriters by Willkie Farr &
Gallagher, New York, New York.
EXPERTS
The financial statements of Collaborative Clinical Research, Inc. at
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, and the balance sheets of GFI Pharmaceutical Services, Inc.
at December 31, 1995 and 1994, and the statements of income and cash flows for
each of the three years in the period ended December 31, 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Shares offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, part of which has been omitted in accordance
with the rules and regulations of the Commission. For further information about
the Company and the Common Shares offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as part thereof.
Although the descriptions in this Prospectus of the contracts or other documents
referred to herein address the material terms thereof, statements contained in
this Prospectus as to the contents of any contract or any other referenced
document are not necessarily complete, and in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement.
The Registration Statement (with exhibits and schedules thereto) can be
inspected and copied at the public reference facilities maintained by the
Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material can also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
53
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
COLLABORATIVE CLINICAL RESEARCH, INC.
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and March 31,
1996 (unaudited) and Pro Forma at March 31, 1996 (unaudited)............ F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1995 and for the three month periods ended
March 31, 1995 and 1996 (unaudited)..................................... F-4
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1995 and for the three month period
ended March 31, 1996 (unaudited)........................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 and for the three month periods ended
March 31, 1995 and 1996 (unaudited)..................................... F-6
Notes to Consolidated Financial Statements................................. F-7
GFI PHARMACEUTICAL SERVICES, INC.
Report of Independent Auditors............................................. F-16
Balance Sheets at December 31, 1994 and 1995............................... F-17
Statements of Income for each of the three years in the period ended
December 31, 1995 and for the month ended January 31, 1996
(unaudited)............................................................. F-18
Statements of Cash Flows for each of the three years in the period ended
December 31, 1995 and for the month ended January 31, 1996
(unaudited)............................................................. F-19
Notes to Financial Statements.............................................. F-20
PRO FORMA CONSOLIDATED FINANCIAL DATA
Introduction............................................................... F-23
Pro Forma Consolidated Balance Sheet at March 31, 1996..................... F-24
Notes to Pro Forma Consolidated Balance Sheet.............................. F-25
Pro Forma Consolidated Statements of Operations for the year ended December
31, 1995 and for the three months ended March 31, 1996
and Notes thereto....................................................... F-26
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
When the transactions referred to in the first paragraph of Note 6 and Note
11 of the Notes to the Consolidated Financial Statements have been consummated,
we will be in a position to render the following report.
ERNST & YOUNG LLP
The Board of Directors and Shareholders
Collaborative Clinical Research, Inc.
We have audited the accompanying balance sheets of Collaborative Clinical
Research, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Collaborative Clinical
Research, Inc. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
January 31, 1996, except as to the first paragraph of Note 6 and Note 11 as to
which the date is , 1996
F-2
<PAGE> 58
COLLABORATIVE CLINICAL RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ MARCH 31, MARCH 31,
1994 1995 1996 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,116,815 $ 1,156,925 $ 406,361 $ 406,361
Short-term investments................................ 2,988,498 1,854,396 -- --
Accounts receivable (less allowance for doubtful
accounts of $65,000 and $89,000 as of December 31,
1994 and 1995 and $165,500 as of March 31, 1996).... 1,201,304 2,936,119 4,964,659 4,964,659
Prepaid expenses...................................... 91,331 715,101 952,722 952,722
---------- ----------- ----------- -----------
Total current assets........................... 5,397,948 6,662,541 6,323,742 6,323,742
Property and equipment:
Equipment............................................. 197,122 403,258 1,210,700 1,210,700
Leasehold improvements................................ -- 35,586 35,586 35,586
---------- ----------- ----------- -----------
197,122 438,844 1,246,286 1,246,286
Less accumulated depreciation......................... 78,530 140,030 191,120 191,120
---------- ----------- ----------- -----------
118,592 298,814 1,055,166 1,055,166
Goodwill, less accumulated amortization of $48,350 as of
March 31, 1996........................................ -- -- 5,753,998 5,753,998
Other assets............................................ 6,165 25,818 218,022 218,022
Investment in HRI....................................... -- 37,937 33,418 33,418
---------- ----------- ----------- -----------
Total assets................................... $5,522,705 $ 7,025,110 $13,384,346 $13,384,346
========== =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank................................. $ -- $ -- $ 1,000,000 $ 1,000,000
Notes and other acquisition payables to officers...... -- -- 4,000,000 4,000,000
Accounts payable...................................... 734,474 2,696,746 3,506,703 3,506,703
Accrued expenses...................................... 162,703 445,859 476,046 476,046
Deferred revenue...................................... 621,616 559,213 1,012,772 1,012,772
---------- ----------- ----------- -----------
Total current liabilities...................... 1,518,793 3,701,818 9,995,521 9,995,521
Shareholders' equity:
Series A, B and C Convertible Preferred Shares:
$.001 par value, authorized 2,860,000 shares; issued
and outstanding 2,062,929 and 2,182,353 shares as of
December 31, 1994 and 1995, 2,182,353 shares as of
March 31, 1996 and 0 shares upon conversion of
Preferred Shares at the closing of the initial
public offering..................................... 2,063 2,182 2,182 --
Additional paid-in capital.......................... 4,848,004 4,847,885 4,847,885 --
Common Shares without par value, authorized 3,660,000
shares; issued and outstanding 400,000 and 402,500
shares as of December 31, 1994 and 1995, 413,258
shares as of March 31, 1996 and 2,595,611 shares
upon conversion of Preferred Shares at the closing
of the initial public offering...................... 11,906 84,011 93,579 4,943,646
Accumulated deficit................................... (858,061) (1,610,786) (1,554,821) (1,554,821)
---------- ----------- ----------- -----------
Total shareholders' equity..................... 4,003,912 3,323,292 3,388,825 3,388,825
---------- ----------- ----------- -----------
Total liabilities and shareholders' equity..... $5,522,705 $ 7,025,110 $13,384,346 $13,384,346
========== =========== ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 59
COLLABORATIVE CLINICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................... $ 1,423,177 $ 4,046,884 $10,452,920 $1,919,776 $5,302,216
Direct costs.............. 974,883 2,907,895 8,490,465 1,451,209 4,012,607
----------- ----------- ----------- ---------- ----------
Gross profit.............. 448,294 1,138,989 1,962,455 468,567 1,289,609
Selling, general and
administrative
expenses................ 686,581 1,386,519 2,770,590 641,423 1,092,613
Depreciation and
amortization............ 117,794 58,631 61,500 11,500 99,438
----------- ----------- ----------- ---------- ----------
Income (loss) from
operations.............. (356,081) (306,161) (869,635) (184,356) 97,558
Other income (expense):
Interest income......... 5,129 92,063 222,054 58,294 17,893
Interest expense........ -- -- -- -- (36,267)
Loss from joint
venture.............. -- -- (105,144) -- (4,519)
----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes............ (350,952) (214,098) (752,725) (126,062) 74,665
Income tax expense........ -- -- -- -- 18,700
----------- ----------- ----------- ---------- ----------
Net income (loss)......... $ (350,952) $ (214,098) $ (752,725) $ (126,062) $ 55,965
========== ========== ========== ========= =========
Net income (loss) per
share................... $ (0.25) $ (0.10) $ (0.24) $ (0.04) $ 0.02
========== ========== ========== ========= =========
Weighted average common
shares outstanding...... 1,387,797 2,162,993 3,082,795 3,087,162 3,076,824
========== ========== ========== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 60
COLLABORATIVE CLINICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES C
SERIES A SERIES B PREFERRED
PREFERRED SHARES PREFERRED SHARES SHARES
------------------------ ------------------------ ----------
NUMBER NUMBER NUMBER
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993.......................... 500,000 $500 50,000 $ 50 --
Issuance of Series B Preferred Shares.............. 16,667 17
Stock compensation.................................
Net loss...........................................
--
---------- --- ---------- ----------
BALANCE AT DECEMBER 31, 1993........................ 500,000 500 66,667 67 --
Issuance of Series C Preferred Shares.............. 1,412,367
Series A and Series C Preferred Share dividends.... 30,604 31 53,291
Stock compensation.................................
Net loss...........................................
--
---------- --- ---------- ----------
BALANCE AT DECEMBER 31, 1994........................ 530,604 531 66,667 67 1,465,658
Exercise of Common Share Options...................
Series A and Series C Preferred Share dividends.... 9,396 9 110,028
Stock compensation.................................
Net loss...........................................
--
---------- --- ---------- ----------
BALANCE AT DECEMBER 31, 1995........................ 540,000 540 66,667 67 1,575,686
(Unaudited)--
Exercise of Common Share Options...................
Stock compensation.................................
Net income.........................................
--
---------- --- ---------- ----------
BALANCE AT MARCH 31, 1996 (UNAUDITED)............... 540,000 $540 66,667 $ 67 1,575,686
=========== =========== =========== =========== ===========
<CAPTION>
COMMON SHARES
ADDITIONAL ------------------------
PAID-IN NUMBER STATED ACCUMULATED
PAR VALUE CAPITAL OF SHARES AMOUNT DEFICIT
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993.......................... $ -- $ 642,815 400,000 $ 3,500 $ (293,011)
Issuance of Series B Preferred Shares.............. 24,983
Stock compensation................................. 1,781
Net loss........................................... (350,952)
---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1993........................ -- 667,798 400,000 5,281 (643,963)
Issuance of Series C Preferred Shares.............. 1,412 4,180,290
Series A and Series C Preferred Share dividends.... 53 (84)
Stock compensation................................. 6,625
Net loss........................................... (214,098)
---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1994........................ 1,465 4,848,004 400,000 11,906 (858,061)
Exercise of Common Share Options................... 2,500 375
Series A and Series C Preferred Share dividends.... 110 (119)
Stock compensation................................. 71,730
Net loss........................................... (752,725)
---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1995........................ 1,575 4,847,885 402,500 84,011 (1,610,786)
(Unaudited)--
Exercise of Common Share Options................... 10,758 1,915
Stock compensation................................. 7,653
Net income......................................... 55,965
---------- ---------- ---------- ---------- -----------
BALANCE AT MARCH 31, 1996 (UNAUDITED)............... $1,575 $4,847,885 413,258 $ 93,579 $(1,554,821)
=========== =========== =========== =========== ============
<CAPTION>
TOTAL
----------
<S> <C>
BALANCE AT JANUARY 1, 1993.......................... $ 353,854
Issuance of Series B Preferred Shares.............. 25,000
Stock compensation................................. 1,781
Net loss........................................... (350,952)
----------
BALANCE AT DECEMBER 31, 1993........................ 29,683
Issuance of Series C Preferred Shares.............. 4,181,702
Series A and Series C Preferred Share dividends....
Stock compensation................................. 6,625
Net loss........................................... (214,098)
----------
BALANCE AT DECEMBER 31, 1994........................ 4,003,912
Exercise of Common Share Options................... 375
Series A and Series C Preferred Share dividends....
Stock compensation................................. 71,730
Net loss........................................... (752,725)
----------
BALANCE AT DECEMBER 31, 1995........................ 3,323,292
(Unaudited)--
Exercise of Common Share Options................... 1,915
Stock compensation................................. 7,653
Net income......................................... 55,965
----------
BALANCE AT MARCH 31, 1996 (UNAUDITED)............... $3,388,825
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 61
COLLABORATIVE CLINICAL RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................... $ (350,952) $ (214,098) $ (752,725) $ (126,062) $ 55,965
Adjustments to reconcile net income (loss)
to net cash used in operating
activities:
Equity loss in HRI...................... -- -- 105,144 -- 4,519
Depreciation and amortization........... 117,794 58,631 61,500 11,500 99,438
Provision for doubtful accounts......... 40,000 25,000 24,000 6,000 16,500
Accretion of discount on investments.... -- (60,584) (143,526) (36,418) (3,782)
Stock compensation expense.............. 1,781 6,625 71,730 34,650 7,653
Changes in operating assets and
liabilities:
Accounts receivable................... (184,941) (934,059) (1,758,815) (472,854) (827,866)
Prepaid expenses...................... (32,490) (45,832) (623,770) 31,637 (221,522)
Other assets.......................... -- (5,815) (19,653) (1,090) (192,204)
Accounts payable and accrued
expenses........................... 234,502 502,628 2,245,428 460,858 392,514
Deferred revenue...................... (9,573) 489,069 (62,403) (1,185) 438,321
---------- ---------- ---------- ---------- ----------
Net cash used in operating activities... (183,879) (178,435) (853,090) (92,964) (230,464)
INVESTING ACTIVITIES
Purchases of property and equipment....... (50,159) (65,036) (241,722) (112,140) (251,740)
Purchase of businesses (net of cash
acquired)............................... -- -- -- -- (1,997,044)
Maturities of short-term investments...... -- -- 3,075,700 1,255,000 1,858,178
Purchases of short-term investments....... -- (2,927,914) (1,798,072) (751,423) --
Investment in HRI......................... -- -- (143,081) -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities............................ (50,159) (2,992,950) 892,825 391,437 (390,606)
FINANCING ACTIVITIES
Borrowings on line of credit.............. 22,615 100,000 -- -- 1,021,111
Payments on line of credit................ (52,403) (200,710) -- -- (1,152,520)
Proceeds from issuance of shares.......... 25,000 4,181,702 375 -- 1,915
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities............................ (4,788) 4,080,992 375 -- (129,494)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................... (238,826) 909,607 40,110 298,473 (750,564)
Cash and cash equivalents at beginning
of period................................. 446,034 207,208 1,116,815 1,116,815 1,156,925
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD................................. $ 207,208 $1,116,815 $1,156,925 $1,415,288 $ 406,361
========== ========== ========== ========== ==========
CASH PAID DURING THE PERIOD FOR
INTEREST.................................. $ -- $ -- $ -- $ -- $ 3,767
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 62
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Collaborative Clinical Research, Inc. (the "Company") manages a network of
affiliated clinical research sites. The Company provides sponsors of clinical
research (primarily pharmaceutical and biotechnology companies and, in selected
cases, contract research organizations) with an innovative, time-efficient
method of site selection and clinical trial management.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary GFI Pharmaceutical Services, Inc. ("GFI"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The results of operations of the business acquired (GFI) have been included
in the consolidated financial statements of the Company from the date of
acquisition (See Note 8).
INTERIM FINANCIAL DATA
Interim financial information as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 is unaudited. In the opinion of the Company, this
financial information includes all adjustments, consisting solely of normal
recurring adjustments, necessary to fairly present the financial information set
forth. The results for the three months ended March 31, 1996 may not be
indicative of operating results for the full year.
REVENUE RECOGNITION
Revenue and related direct costs of revenue are recognized as specific
contract terms are fulfilled under the percentage-of-completion method (the
units-of-delivery method). Fees for individual contract services are fixed upon
execution of the contract and provide for payment for all work performed.
Pass-through costs that are paid directly by the Company's clients, and for
which the Company does not bear the risk of performance, are excluded from
revenue. The termination of a contract results in no material adjustments to the
revenue or costs previously recognized.
The following sets forth the revenue generated by customers who accounted
for more than 10% of the Company's revenue during each of the periods presented
(in thousands):
F-7
<PAGE> 63
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- -----------------
CUSTOMER 1993 1994 1995 1995 1996
----------------------------------------- ---- ---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
A $252 $522 $ * $ * $ *
B 166 -- -- -- --
C 164 * * * *
D 215 * -- -- *
E -- 950 7,935 1,439 2,516
F -- 654 -- -- --
G -- -- * -- 836
</TABLE>
* Less than 10% of revenue.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Investments in cash
equivalents are carried at cost which approximates market value.
PREPAID EXPENSES
Included in prepaid expenses is $35,500 and $670,600 at December 31, 1994
and 1995, respectively, and $813,900 at March 31, 1996 (unaudited) advanced to
vendors for services to be provided under current contracts.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of U.S. Treasury securities with
maturities of one year or less. These securities are stated at amortized cost,
which approximates fair value. The Company has the positive intent and ability
to hold the securities to maturity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciable assets consist of
medical, office and computer equipment. Depreciation on equipment is computed
using the straight-line method over estimated useful lives of 5 to 7 years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the assets' estimated useful life or the lease term (4 years).
DEFERRED REVENUE
Deferred revenue represents cash advances received in excess of revenue
earned on on-going contracts. Payment terms vary with each contract but may
include an initial payment at the time the contract is executed, with future
payments dependent upon the completion of certain contract phases or targeted
milestones. In the event of contract cancellation, the Company is entitled to
payment for all work performed through the point of cancellation.
F-8
<PAGE> 64
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined by dividing net income (loss)
applicable to Common Shares by the weighted average number of Common Shares and
Common Share equivalents outstanding during the year. Common Share equivalents
consist of Convertible Preferred Shares (all of which will convert, according to
their terms, upon completion of the Company's initial public offering -- see
Notes 6 and 11) and Common Shares which are issuable upon exercise of
outstanding options and warrants to purchase Common Shares.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Share options, Preferred Share dividends and Common Share
warrants granted by the Company during the twelve months preceding the offering
date have been included in the calculation of Common Shares and Common Share
equivalents outstanding as if they were outstanding for all periods presented,
using the treasury stock method (at an assumed initial public offering price of
$12.00 per share). 1995 pro forma loss per share, reflecting the acquisition of
GFI and the use of proceeds from the initial public offering to reduce
outstanding debt and related interest expense as if the offering had occurred on
January 1, 1995, was $(0.26).
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.
GOODWILL
The Company has classified as goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Goodwill is amortized over a
20-year period using the straight-line method. The carrying value of goodwill is
evaluated if circumstances indicate a possible impairment in value. If
undiscounted cash flows over the remaining amortization period indicate that
goodwill may not be recoverable, the carrying value of goodwill will be reduced
by the estimated shortfall of cash flows on a discounted basis.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled. A valuation allowance is provided for deferred tax assets
for which realization currently is not certain.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that might affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
F-9
<PAGE> 65
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets
carrying amounts. The Company adopted Statement 121 in the first quarter of 1996
and there was no effect to the financial position or results of operations for
the adoption.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- 1996
1994 1995 (UNAUDITED)
---------- ---------- -----------
<S> <C> <C> <C>
Billed............................. $ 645,697 $2,729,189 $ 4,053,398
Unbilled........................... 620,607 295,930 1,076,761
Allowance for doubtful accounts.... (65,000) (89,000) (165,500)
---------- ---------- -----------
$1,201,304 $2,936,119 $ 4,964,659
========= ========= =========
</TABLE>
3. FINANCING ARRANGEMENTS
The Company has a line of credit agreement with a bank which provides for
borrowings up to $5.0 million that bears interest at rates not to exceed 1%
above the bank's prime rate (no amounts are outstanding at December 31, 1995).
Substantially all of the Company's assets are pledged as collateral on the line
of credit. The line of credit agreement prohibits the Company from paying cash
dividends on its Common Shares. At March 31, 1996, $1,000,000 was outstanding on
this line of credit.
4. INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $1.4 million which expire in the years 2006 through 2010. The
significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...... $ 189,000 $ 238,000 $ 568,000
Allowances and accruals............... 32,000 30,000 70,000
--------- --------- ---------
221,000 268,000 638,000
Valuation allowance................... (221,000) (268,000) (638,000)
--------- --------- ---------
Net deferred tax assets recorded...... $ 0 $ 0 $ 0
======== ======== ========
</TABLE>
F-10
<PAGE> 66
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. INCOME TAXES (CONTINUED)
The valuation allowance is primarily provided for the deferred tax assets
associated with the net operating loss carryforwards. During 1994 and 1995, the
valuation allowance increased primarily due to the uncertainty of realizing the
net operating loss carryforwards.
5. OPERATING LEASES
The Company leases certain office equipment and space. Rent expense
relating to these operating leases was approximately $42,000, $46,000 and
$123,000 in 1993, 1994 and 1995, respectively and $29,000 and $110,000 for the
three months ended March 31, 1995 and 1996, respectively (unaudited). Future
minimum lease payments for the Company, including GFI, under noncancelable
operating leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------------------------- ----------
<S> <C>
1996........................................ $ 521,900
1997........................................ 508,200
1998........................................ 468,600
1999........................................ 361,200
2000........................................ 328,200
----------
$2,188,100
=========
</TABLE>
6. SHAREHOLDERS' EQUITY
Convertible Preferred Shares
The Series A, B and C Convertible Preferred Shares ("Preferred Shares") are
convertible to Common Shares on a one-for-one basis, have voting rights and have
liquidation preferences over Common Shares. Effective upon the closing of an
initial public offering, all outstanding Preferred Shares will automatically be
converted into Common Shares. The Company is required to convert the Preferred
Shares to Common Shares in equal annual installments over a three-year period
beginning March 25, 1999. The conversion of 2,182,353 Preferred Shares into
Common Shares is reflected in the unaudited pro forma balance sheet at March 31,
1996.
The Series A Preferred Shares have a dividend rate of $0.10 and dividends
are cumulative. Such dividends accrue on or after the second anniversary of the
original issue date. Dividends accrued between the second and third anniversary
of the original issue date were paid in the form of Series A Preferred Shares.
From and after the third anniversary of the original issue date, dividends are
payable in the form of Series C Preferred Shares. Dividends on Series B
Preferred Shares are discretionary or accrue to the extent dividends are
declared on Common Shares. The Series C Preferred Shares have a dividend rate of
$0.24 and dividends are cumulative. Dividends on the Series C Preferred Shares
are payable in Series C Preferred Shares.
Common Share Warrants
At December 31, 1995, the Company had outstanding warrants to purchase an
aggregate of 136,000 Common Shares (68,000 Common Shares at an exercise price of
$5.50 per share and 68,000
F-11
<PAGE> 67
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' EQUITY (CONTINUED)
Common Shares at an exercise price of $7.50 per share). These warrants were
issued in conjunction with the formation of Health Research Innovations, L.L.C.
("HRI") (see Note 9). The warrants are subject to early expiration in the event
of an initial public offering.
Reserved Shares
At December 31, 1995, the Company had reserved 489,833 Common Shares
(479,075 at March 31, 1996 (unaudited)) for the exercise of Common Share options
and 2,182,353 and 136,000 Common Shares for the conversion of outstanding
Preferred Shares and Common Shares issuable upon the exercise of outstanding
warrants, respectively.
7. SHARE OPTION PLANS
The Company has two active share option plans.
The 1994 Directors' Share Option Plan ("Director Plan"), was established by
the Company in July, 1994, and was amended by the Company's shareholders on
December 31, 1995. The Director Plan provides for the granting of a maximum of
11,000 options to purchase Common Shares to directors of the Company for their
participation in board of directors' meetings. The option price per share is
equal to the fair market value of a Common Share on the date of grant. Options
fully vest after six months and one day from the date of grant, and all options
granted under the Director Plan expire ten years after the grant date.
The 1992 Stock Incentive Plan ("1992 Plan"), was approved by the Company's
shareholders on September 23, 1992 and amended by the Company's shareholders on
December 31, 1995. The 1992 Plan provides for the granting of a maximum of
481,333 options to purchase Common Shares to key employees and consultants of
the Company and its affiliates. Prior to May 1995, options to purchase 316,499
Common Shares were granted at exercise prices of less than fair market value of
a Common Share on the date of grant. The Company has recognized compensation
expense related to these Common Share options of $1,781 in 1993, $6,625 in 1994,
$71,730 in 1995, and $7,653 for the three months ended March 31, 1996
(unaudited). Options awarded under the plan vest in equal increments over a
three to five year period commencing on the first anniversary date of the grant.
If all options vest, additional compensation expense of $69,000 will be
recognized through 1998.
Subsequent to April 1995, all options to purchase Common Shares awarded
under the 1992 Plan were granted at exercise prices that represented the fair
market value of a Common Share on the date of grant. All options granted under
the 1992 Plan expire ten years after the grant date.
F-12
<PAGE> 68
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. SHARE OPTION PLANS (CONTINUED)
Information regarding the Company's share option plan is summarized below:
<TABLE>
<CAPTION>
1992 DIRECTOR
PLAN PLAN
-------- --------
<S> <C> <C>
Shares under options:
Outstanding at January 1, 1993........................................ 55,000 --
Granted............................................................ 77,500 --
Exercised.......................................................... -- --
Canceled........................................................... -- --
-------- -------
Outstanding at December 31, 1993...................................... 132,500 --
Granted............................................................ 176,999 2,666
Exercised.......................................................... -- --
Canceled........................................................... (7,500) --
-------- -------
Outstanding at December 31, 1994...................................... 301,999 2,666
Granted............................................................ 190,000 6,000
Exercised.......................................................... (2,500) --
Canceled........................................................... (10,666) --
-------- -------
Outstanding at December 31, 1995...................................... 478,833 8,666
Granted............................................................ -- 1,334
Exercised.......................................................... (10,758) --
Canceled........................................................... -- --
-------- -------
Outstanding at March 31, 1996 (unaudited)............................. 468,075 10,000
======== =======
Options available to grant at:
March 31, 1996 (unaudited)............................................ -- 1,000
======== =======
Average option price per share:
At December 31, 1993.................................................. $ 0.15 $ --
At December 31, 1994.................................................. 0.19 0.80
At December 31, 1995.................................................. 1.85 3.45
At March 31, 1996 (unaudited)......................................... 1.88 4.27
Options exercisable:
At December 31, 1993.................................................. 12,500 --
At December 31, 1994.................................................. 41,250 --
At December 31, 1995.................................................. 118,183 5,666
At March 31, 1996 (unaudited)......................................... 129,800 7,665
Average price of options exercised:
Year ended December 31, 1993.......................................... $ -- $ --
Year ended December 31, 1994.......................................... -- --
Year ended December 31, 1995.......................................... 0.15 --
Three months ended March 31, 1996 (unaudited)......................... 0.18 --
</TABLE>
F-13
<PAGE> 69
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. ACQUISITION
Effective January 31, 1996, the Company acquired GFI, located in
Evansville, Indiana, which is not included in the audited financial statements
at December 31, 1995. The acquisition was accounted for under the purchase
method. The purchase price was $6.0 million and consisted of $2.0 million each
of cash, Common Shares and notes payable. The notes payable are due in 1996 and
bear interest at prime plus 1%.
Unaudited pro forma data for the year ended December 31, 1995 and three
months ended March 31, 1996, as though the Company had acquired GFI at the
beginning of 1995 are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
<S> <C> <C>
Revenue......................... $16,439,000 $5,819,000
Net loss........................ (1,085,000) (25,000)
</TABLE>
9. INVESTMENT IN HRI
In June 1995, the Company entered into an equally-owned joint venture, HRI,
with Pharmaceutical Marketing Services, Inc. ("PMSI") to collect health care
information. Through HRI, the Company and PMSI will market their health care
data collection and analysis capabilities to the health care industry. The
Company accounts for its investment in HRI using the equity method.
Summarized financial information of HRI as of December 31, 1995 and March
31, 1996 (unaudited) and for the six month period from inception (July 1, 1995)
to December 31, 1995 and for the three months ended March 31, 1996 (unaudited)
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
---------
(UNAUDITED)
<S> <C> <C>
Current assets......................... $ 88,000 $ 216,000
Noncurrent assets...................... 14,000 12,000
Current liabilities.................... 61,000 196,000
Shareholders' equity................... 41,000 32,000
Revenue................................ 40,000 114,000
Gross profit........................... 33,000 89,000
Net loss............................... (210,000) (9,000)
</TABLE>
F-14
<PAGE> 70
COLLABORATIVE CLINICAL RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. QUARTERLY DATA (UNAUDITED)
Selected quarterly data is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 742 $1,105 $ 904 $1,296 $4,047
Gross profit.......................... 289 266 246 338 1,139
Loss from operations.................. (3 ) (37 ) (132 ) (134 ) (306 )
Net loss.............................. (3 ) (37 ) (91 ) (83 ) (214 )
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue............................... $1,920 $2,116 $2,751 $3,666 $10,453
Gross profit.......................... 469 358 459 676 1,962
Income (loss) from operations......... (184 ) (338 ) (367 ) 19 (870 )
Net income (loss)..................... (126 ) (287 ) (375 ) 35 (753 )
</TABLE>
11. SUBSEQUENT EVENTS
On February 29, 1996, the Board authorized the sale of up to 2,300,000
Common Shares to the public. On June , 1996 the Board declared and issued
18,780 Preferred Shares for stock dividends accrued since December 31, 1995. On
June , 1996, all outstanding Preferred Shares automatically converted into
Common Shares effective upon the closing of the Company's initial public
offering.
F-15
<PAGE> 71
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
GFI Pharmaceutical Services, Inc.
We have audited the accompanying balance sheets of GFI Pharmaceutical
Services, Inc. as of December 31, 1994 and 1995, and the related statements of
income and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GFI Pharmaceutical Services,
Inc. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
January 31, 1996
F-16
<PAGE> 72
GFI PHARMACEUTICAL SERVICES, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 3,105 $ 1,350
Accounts receivable (less allowance for doubtful accounts
of $40,000 in 1994 and $60,000 in 1995)........................ 850,037 872,023
Prepaid expenses.................................................. 20,827 24,341
---------- ----------
Total current assets...................................... 873,969 897,714
Property and equipment:
Equipment......................................................... 744,519 961,385
Leasehold improvements............................................ 49,302 111,708
---------- ----------
793,821 1,073,093
Less accumulated depreciation and amortization.................... 373,804 522,254
---------- ----------
420,017 550,839
---------- ----------
Total assets.............................................. $1,293,986 $1,448,553
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 271,568 $ 189,437
Notes payable to bank............................................. 219,001 821,409
Accrued expenses.................................................. 151,766 136,710
Deferred revenue.................................................. 300,460 18,556
---------- ----------
Total current liabilities................................. 942,795 1,166,112
Shareholders' equity:
Common Shares, no par value; authorized 1,000 shares,
issued and outstanding, 100 shares............................. 20,000 20,000
Retained earnings................................................. 331,191 262,441
---------- ----------
Total shareholders' equity................................ 351,191 282,441
---------- ----------
Total liabilities and shareholders' equity................ $1,293,986 $1,448,553
========= =========
</TABLE>
See accompanying notes.
F-17
<PAGE> 73
GFI PHARMACEUTICAL SERVICES, INC.
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, MONTH ENDED
---------------------------------------- JANUARY 31,
1993 1994 1995 1996
---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................... $4,166,040 $5,030,119 $5,986,444 $515,826
Direct costs.............................. 2,777,334 3,335,157 3,796,865 368,992
---------- ---------- ---------- ------------
Gross profit.............................. 1,388,706 1,694,962 2,189,579 146,834
Selling, general and administrative
expenses................................ 1,075,247 1,342,092 1,741,632 187,006
Depreciation and amortization............. 113,946 117,098 148,450 14,799
---------- ---------- ---------- ------------
Operating income (loss)................... 199,513 235,772 299,497 (54,971)
Interest expense.......................... 20,872 9,380 51,847 7,645
---------- ---------- ---------- ------------
Net income (loss)......................... $ 178,641 $ 226,392 $ 247,650 $(62,616)
========= ========= ========= =========
</TABLE>
See accompanying notes.
F-18
<PAGE> 74
GFI PHARMACEUTICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------- MONTH ENDED
1993 1994 1995 JANUARY 31, 1996
---------- ---------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................... $ 178,641 $ 226,392 $ 247,650 $ (62,616)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization............... 113,946 117,098 148,450 14,799
Loss on disposal of property
and equipment.............. 8,129 4,328 -- --
Provision for doubtful
accounts................... 20,000 20,000 20,000 --
Changes in operating assets
and liabilities:
Accounts receivable........ (78,306) (417,513) (41,986) (345,151)
Prepaid expenses........... 4,111 (10,609) (3,514) 8,242
Accounts payable and
accrued expenses........ 89,394 (49,393) (97,187) 134,048
Deferred revenue........... 86,116 55,688 (281,904) (3,318)
---------- ---------- ---------- ----------------
Net cash provided by (used
in) operating activities... 422,031 (54,009) (8,491) (253,996)
INVESTING ACTIVITIES
Purchases of property and equipment.. (89,839) (157,251) (279,272) (19,662)
Proceeds from sale of property and
equipment......................... 9,000 600 -- --
---------- ---------- ---------- ----------------
Net cash used in investing
activities................. (80,839) (156,651) (279,272) (19,662)
FINANCING ACTIVITIES
Proceeds from borrowings of notes
payable........................... 2,558,529 1,541,626 4,945,408 310,000
Principal payments on notes
payable........................... (2,742,220) (1,303,073) (4,343,000) --
Dividends paid....................... (32,000) (166,800) (316,400) (36,320)
---------- ---------- ---------- ----------------
Net cash (used in) provided
by financing activities.... (215,691) 71,753 286,008 273,680
---------- ---------- ---------- ----------------
Increase (decrease) in cash and cash
equivalents....................... 125,501 (138,907) (1,755) 22
Cash and cash equivalents at
beginning of year................. 16,511 142,012 3,105 1,350
---------- ---------- ---------- ----------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................. $ 142,012 $ 3,105 $ 1,350 $ 1,372
========= ========= ========= ============
</TABLE>
See accompanying notes.
F-19
<PAGE> 75
GFI PHARMACEUTICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE MONTH ENDED JANUARY 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
GFI Pharmaceutical Services, Inc. (the "Company") owns research facilities
for conducting Phase I through Phase IV clinical research and provides clinical
reference laboratory and Institutional Review Board services.
Effective January 31, 1996, the shareholders of the Company sold all of
their issued and outstanding common shares to Collaborative Clinical Research,
Inc., an Ohio corporation.
REVENUE RECOGNITION
Revenue and related direct costs of revenue are recognized as specific
contract terms are fulfilled under the percentage-of-completion method. Fees for
individual contract services are fixed upon execution of the contract, and are
typically less than one year, provide for payment for all work performed. The
termination of a contract results in no material adjustments to the revenue or
costs previously recognized.
For the years ended December 31, 1993, 1994 and 1995 revenue from major
customers was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
CUSTOMER AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- ----------------------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
A $1,654 40% $517 10% $ * *%
B * * 528 10 * *
C * * 493 10 663 11
D * * 607 12 797 13
</TABLE>
* Less than 10% of revenue.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Investments in cash
equivalents are carried at cost, which approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciable assets consist of
medical, office and computer equipment. Depreciation on equipment is computed
using the straight-line method over estimated useful lives of 5 to 10 years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the assets' estimated useful life or the lease term (5 years).
DEFERRED REVENUE
Deferred revenue represents cash advances received in excess of revenue
earned on on-going contracts. Payment terms vary with each contract but may
include an initial payment at the time the contract is executed, with future
payment dependent upon the completion of certain contract phases or
F-20
<PAGE> 76
GFI PHARMACEUTICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE MONTH ENDED JANUARY 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (CONTINUED)
targeted milestones. In the event of contract cancellation, the Company is
entitled to payment for all work performed through the point of cancellation.
INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
under sections of the federal income tax laws (S Corporation election), which
provide that, in lieu of corporate income taxes, the shareholders separately
account for their pro rata share of the Company's income, deductions, losses and
credits. Accordingly, the accompanying statements do not include any provision
for federal or state income taxes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that might affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. FINANCING ARRANGEMENTS
The Company has $2,600,000 available through three lines of credit. Two
lines of credit bear interest at 1/4% above prime (8.75% at December 31, 1995).
At December 31, 1994 and 1995, the Company had an aggregate of $219,001 and
$821,409 outstanding on these two lines of credit, respectively. No amounts were
outstanding on a third line of credit at December 31, 1995 which bears interest
at 3/4% above prime. All three lines of credit are due in May 1996, and are
collateralized by personal guarantees from the Company's shareholders, accounts
receivable and equipment. Interest paid approximated interest expense in 1993,
1994 and 1995.
3. OPERATING LEASES
The Company leases certain equipment and office space under operating lease
commitments. Rent expense relating to these operating leases was approximately
$240,000, $280,000 and $405,000 in 1993, 1994 and 1995, respectively, and
$25,200 for the month ended January 31, 1996 (unaudited).
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
--------------------------------------------------- ----------
<S> <C>
1996........................................ $ 380,600
1997........................................ 369,500
1998........................................ 350,300
1999........................................ 346,100
2000........................................ 315,200
----------
$1,761,700
=========
</TABLE>
F-21
<PAGE> 77
GFI PHARMACEUTICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND UNAUDITED FOR THE MONTH ENDED JANUARY 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. PROFIT SHARING PLAN
The Company began a profit sharing plan in 1995 with an Internal Revenue
Code Section 401(k) feature covering substantially all of their employees. Under
the terms of the plan, the Company will match up to 50% of the first 3% of
eligible employee contributions and 25% of the next 3%. Total Company
contributions to the plan were $10,100 in 1995.
In addition, the Company has a discretionary profit sharing plan
("Discretionary Plan") covering substantially all of its employees. The Company
recognized pension expense of $72,000, $80,000 and $40,000 in 1993, 1994 and
1995, respectively, in connection with its Discretionary Plan.
5. RELATED PARTY TRANSACTIONS
The Company is related through common ownership to another Indiana company,
Ohio Valley Institutional Review Board ("Ohio Valley"). Payments to Ohio Valley
were $42,000, $58,700 and $69,900 in 1993, 1994 and 1995, respectively. At
December 31, 1994 and 1995, the Company owed Ohio Valley $0 and $5,439,
respectively. In connection with the sale of all of the Company's issued and
outstanding Common Shares as discussed in Note 1, Ohio Valley was sold to
Collaborative Clinical Research, Inc.
F-22
<PAGE> 78
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1996 and Consolidated Statements of Operations for the year ended December
31, 1995 and for the three months ended March 31, 1996, are based on the
historical financial statements of the Company. The Pro Forma Consolidated
Balance Sheet is adjusted to give effect to the exercise of Common Share
warrants, the issuance of Preferred Share dividends, the conversion of Preferred
Shares into Common Shares, and the sale of Common Shares from this offering and
the use of proceeds from this offering had these transactions occurred on March
31, 1996. The Pro Forma Consolidated Statements of Operations are adjusted to
give effect to the acquisition of GFI, and the related issuance of notes payable
and Common Shares as if these transactions had occurred as of the beginning of
the periods presented. The Pro Forma as Adjusted Consolidated Statements of
Operations is adjusted to give effect to the sale of Common Shares from this
offering (at an assumed initial public offering price of $12.00 per share) and
the use of proceeds from this offering had these transactions occurred as of the
beginning of the periods presented. The pro forma operating results are not
necessarily indicative of the operating results that would have been achieved
had the acquisition actually occurred at the beginning of each period presented,
nor do they purport to indicate the results of future operations.
The Pro Forma Consolidated Financial Statements are based on the
assumptions set forth in the Notes to such statements and should be read in
conjunction with the related consolidated financial statements and Notes thereto
of the Company included elsewhere in this Prospectus.
F-23
<PAGE> 79
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA
Assets:
Current assets:
Cash and cash equivalents............................ $ 406 $19,451(2,3) $19,857
Accounts receivable, net............................. 4,965 -- 4,965
Prepaid expenses..................................... 953 -- 953
------- ------- -------
Total current assets................................... 6,324 19,451 25,775
Property and equipment, net............................ 1,055 -- 1,055
Goodwill and other assets, net......................... 6,006 -- 6,006
------- ------- -------
Total assets.................................. $ 13,385 $19,451 $32,836
======= ======= =======
Current liabilities:
Notes payable to bank................................ $ 1,000 $(1,000)(3) $ --
Notes and other acquisition payables to officers..... 4,000 (4,000)(3,4) --
Accounts payable..................................... 3,507 -- 3,507
Accrued expenses..................................... 476 (33)(3) 443
Deferred revenue..................................... 1,013 -- 1,013
------- ------- -------
Total current liabilities..................... 9,996 (5,033) 4,963
Shareholders' equity:
Series A, B and C Convertible Preferred Shares....... 2 (2)(1) --
Additional paid-in capital........................... 4,848 (4,848)(1) --
Common Shares, without par value per share........... 94 29,334(1,2,3,4) 29,428
Retained earnings (deficit).......................... (1,555) -- (1,555)
------- ------- -------
Total shareholders' equity.................... 3,389 24,484 27,873
------- ------- -------
Total liabilities and shareholders' equity.... $ 13,385 $19,451 $32,836
======= ======= =======
</TABLE>
See accompanying Notes to Pro Forma Consolidated Balance Sheet.
F-24
<PAGE> 80
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(1) Represents the issuance of 18,780 Preferred Shares for share dividends
declared on the effective date of the initial public offering contemplated
hereby at $9.60 per share (80% of the assumed initial public offering price
of $12.00 per share), and the issuance of an aggregate of 2,201,133 Common
Shares in connection with the conversion of all convertible Preferred
Shares.
(2) Reflects the exercise of Common Share warrants to purchase 68,000 Common
Shares at $5.50 per share and 68,000 Common Shares at $7.50 per share.
(3) Reflects issuance of 2,000,000 Common Shares offered by the Company hereby
at an assumed initial public offering price of $12.00 per share and the use
of the proceeds therefrom as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from the offering................................. $ 24,000
Underwriting discounts and commissions........................... (1,680)
Estimated expenses of the offering............................... (720)
--------------
Net proceeds..................................................... 21,600
Repayment of notes payable to bank............................... (1,000)
Repayment of notes payable to officers and accrued interest...... (2,033)
--------------
Net increase in cash and cash equivalents........................ $ 18,567
===============
</TABLE>
(4) Reflects the issuance of 166,667 Common Shares (assuming an initial public
offering price of $12.00 per share) to the former shareholders of GFI to pay
$2,000,000 of acquisition payables.
F-25
<PAGE> 81
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION OFFERING PRO FORMA
---------------- PRO FORMA PRO PRO FORMA AS
CCR GFI(1) ADJUSTMENTS FORMA ADJUSTMENTS ADJUSTED
------- ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $10,453 $5,986 $ -- $16,439 $ -- $16,439
Direct costs......................... 8,491 3,796 -- 12,287 -- 12,287
------- ------ ----------- --------- ----------- -----------
Gross profit......................... 1,962 2,190 -- 4,152 -- 4,152
Selling, general and administrative
expenses........................... 2,770 1,742 -- 4,512 -- 4,512
Depreciation and amortization........ 62 148 286(2) 496 -- 496
------- ------ ----------- --------- ----------- -----------
Income (loss) from operations........ (870) 300 (286) (856) -- (856)
Interest income...................... 222 -- (176)(3) 46 46
Interest expense..................... (52 ) (118)(4) (170) 170(5) --
Equity loss HRI...................... (105) -- -- (105) -- (105)
------- ------ ----------- --------- ----------- -----------
Net income (loss).................... $ (753) $ 248 $ (580) $(1,085) $ 170 $ (915)
======== ======= ============ ========== ============ ============
Net loss per share................... $ (0.24) $ (0.33) $ (0.26)
======== ========== ============
Shares used in the computation....... 3,083 3,249 3,490
======== ========== ============
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ACQUISITION OFFERING PRO FORMA
---------------- PRO FORMA PRO PRO FORMA AS
CCR GFI(1) ADJUSTMENTS FORMA ADJUSTMENTS ADJUSTED
------- ------ ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $ 5,303 $ 516 $ -- $ 5,819 $ -- $ 5,819
Direct costs......................... 4,013 369 -- 4,382 -- 4,382
------- ------ ----------- --------- ----------- -----------
Gross profit......................... 1,290 147 -- 1,437 -- 1,437
Selling, general and administrative
expenses........................... 1,093 187 -- 1,280 -- 1,280
Depreciation and amortization........ 99 15 24(2) 138 -- 138
------- ------ ----------- --------- ----------- -----------
Operating income (loss).............. 98 (55 ) (24) 19 -- 19
Interest income...................... 18 -- (14)(3) 4 4
Interest expense..................... (36) (8 ) (7)(4) (51) 51(5) --
Equity loss HRI...................... (5) -- -- (5) -- (5)
------- ------ ----------- --------- ----------- -----------
Income (loss) before income taxes.... 75 (63 ) (45) (33) 51 18
Income tax expense (benefit)......... 19 -- (27) (8) 13 5
------- ------ ----------- --------- ----------- -----------
Net income (loss).................... $ 56 $ (63 ) $ (18) $ (25) $ 38 $ 13
======== ======= ============ ========== ============ ============
Net income (loss) per share.......... $ 0.02 $ (0.01) $ 0.00
======== ========== ============
Shares used in the computation....... 3,077 3,243 5,317
======== ========== ============
<FN>
(1) The historical statement of operations data for GFI for the year ended
December 31, 1995 represents the results of operations of GFI from January
1, 1995 to December 31, 1995. The historical statement of operations data
for GFI for the three months ended March 31, 1996, represents the results of
operations of GFI from January 1, 1996 through January 31, 1996, its date of
acquisition. The GFI acquisition has been accounted for as a purchase. See
Note 8 of Notes to the Consolidated Financial Statements of the Company and
the financial statements of GFI appearing elsewhere in this Prospectus.
(2) The adjustment to depreciation and amortization expense reflects the
amortization of goodwill over a 20-year period arising from the excess of
cost over fair value of net assets of GFI, as if it was acquired as of
January 1, 1995.
(3) The adjustment to interest income reflects the reduction that would have
occurred had the consideration in the form of cash and investments for the
acquisition of GFI been paid on January 1, 1995.
</TABLE>
F-26
<PAGE> 82
(4) The adjustment to interest expense consists of: (i) the additional interest
expense that would have been incurred had the consideration in the form of
notes payable for the acquisition of GFI been issued on January 1, 1995; and
(ii) the reduction of interest expense had the retirement of notes payable
of GFI occurred on January 1, 1995.
(5) The adjustment to interest expense reflects the retirement of all
outstanding notes payable of the Company by applying a portion of the
estimated net proceeds of the offering as more fully described under "Use of
Proceeds" as if the offering had occurred on January 1, 1995.
F-27
<PAGE> 83
==============================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED
IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED HEREIN AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 6
Use of Proceeds.............................. 12
Dividend Policy.............................. 12
Capitalization............................... 13
Dilution..................................... 14
Selected Consolidated Financial Data......... 15
Management's Discussion and Analysis of
Results of Operations and Financial
Condition.................................. 16
Business..................................... 23
Management................................... 36
Certain Transactions......................... 45
Principal Shareholders....................... 47
Description of Capital Stock................. 48
Shares Eligible for Future Sale.............. 51
Underwriting................................. 52
Legal Matters................................ 53
Experts...................................... 53
Additional Information....................... 53
Index to Financial Statements................ F-1
</TABLE>
------------------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
==============================================================================
==============================================================================
2,000,000 SHARES
LOGO
COLLABORATIVE CLINICAL RESEARCH, INC.
COMMON SHARES
---------------------------
PROSPECTUS
---------------------------
Vector Securities International, Inc.
McDonald & Company
Securities, Inc.
, 1996
==============================================================================
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of the estimated expenses to be incurred by the
Company in connection with the distribution of the Common Shares being
registered hereby. Except for the Securities and Exchange Commission
Registration Fee, the National Association of Securities Dealers, Inc. Filing
Fee and the Nasdaq National Market Listing Fee, all amounts are estimates.
The following table sets forth the estimated expenses payable by the
Registrant in connection with the sale and distribution of the Common Shares
registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 10,311
National Association of Securities Dealers, Inc. Filing Fee.... 3,490
Nasdaq National Market Listing Fee............................. 27,607
Printing and Engraving Costs................................... 100,000
Accounting Fees and Expenses................................... 125,000
Legal Fees and Expenses (excluding Blue Sky)................... 180,000
Blue Sky Fees and Expenses..................................... 15,000
Directors' and Officers' Liability Insurance................... 250,000
Transfer Agent and Registrar Fees.............................. 5,000
Miscellaneous.................................................. 3,592
--------
Total..................................................... $720,000
========
</TABLE>
- ---------------
*To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1701.13 of the Ohio Revised Code sets forth the conditions and
limitations governing the indemnification of officers, directors and other
persons. Section 1701.13 provides that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or contemplated action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation in a similar capacity with another corporation or
other entity, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement incurred in connection therewith if he acted in good
faith and in a manner that he reasonably believed to be in the best interests of
the corporation and, with respect to a criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful. With respect to a suit by
or in the right of the corporation, indemnity may be provided to the foregoing
persons under Section 1701.13 on a basis similar to that set forth above, except
that no indemnity may be provided in respect of any claim, issue or matter as to
which such person has been adjudged to be liable to the corporation unless and
to the extent that the Court of Common Pleas or the court in which such action,
suit or proceeding was brought determines that despite the adjudication of
liability but in view of all the circumstances of the case such person is
entitled to indemnity for such expenses as the court deems proper. Moreover,
Section 1701.13 provides for mandatory indemnification of a director, officer,
employee or agent of the corporation to the extent that such person has been
successful in defense of any such action, suit or proceeding and provides that a
corporation shall pay the expenses of an officer or director in defending an
action, suit or proceeding upon receipt of an undertaking to repay such amounts
if it is ultimately determined that such person is not entitled to be
indemnified. Section 1701.13 establishes provisions for determining whether a
given person is entitled to indemnification, and also provides that the
indemnification provided by or granted under Section 1701.13 is not exclusive of
any rights to
II-1
<PAGE> 85
indemnity or advancement of expenses to which such person may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise.
Under certain circumstances provided in Article V of the Registrant's Code
of Regulations, as amended, and subject to Section 1701.13 of the Ohio Revised
Code (which sets forth the conditions and limitations governing the
indemnification of officers, directors and other persons), the Registrant will
indemnify any Director or officer or any former director or officer of the
Registrant against expenses, including attorney's fees, judgments, fines and
amounts paid in settlement, actually and reasonably incurred by him by reason of
the fact that he is or was such director or officer in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative. A copy of Article V of the
Registrant's Code of Regulations, as amended, is included herein in Exhibit 3.4.
The Registrant has entered into indemnity agreements (the "Indemnity
Agreements") with the current directors and executive officers of the Registrant
and expects to enter into similar agreements with any director or executive
officer elected or appointed in the future at the time of their election or
appointment. Pursuant to the Indemnity Agreements, the Registrant will indemnify
a director or executive officer of the Registrant (the "Indemnitee") if the
Indemnitee is a party to or otherwise involved in any legal proceeding by reason
of the fact that the Indemnitee is or was a director or executive officer of the
Registrant, or is or was serving at the request of the Registrant in certain
capacities with another entity, against all expenses, judgments, settlements,
fines and penalties, actually and reasonably incurred by the Indemnitee in
connection with the defense or settlement of such proceeding. Indemnity is only
available if the Indemnitee acted in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant. The same coverage is provided whether or not the suit or proceeding
is a derivative action. Derivative actions may be defined as actions brought by
one or more shareholders of a corporation to enforce a corporate right or to
prevent or remedy a wrong to the corporation in cases where the corporation,
because it is controlled by the wrongdoers or for other reasons, fails or
refuses to take appropriate action for its own protection. The Indemnity
Agreements mandate advancement of expenses to the Indemnitee if the Indemnitee
provides the Registrant with a written promise to repay the advanced amounts in
the event that it is determined that the conduct of the Indemnitee has not met
the applicable standard of conduct. In addition, the Indemnity Agreements
provide various procedures and presumptions in favor of the Indemnitee's right
to receive indemnification under the Indemnity Agreement. A copy of the form of
Indemnity Agreement is included herein as Exhibit 10.7.
Under the Registrant's Director and Officer Liability Insurance Policy,
each Director and certain officers of the Registrant are insured against certain
liabilities, including liabilities arising under the Securities Act. A copy of
such insurance policy is included herein as Exhibit 99.1.
Reference is made to the Form of Underwriting Agreement filed as Exhibit
1.1 hereto with respect to the indemnification provisions contained therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information is furnished as to securities of the Company sold
within the past three years that were not registered under the Securities Act of
1933 (the "Act").
(a) Between June 1, 1993, and March 21, 1996, the Company granted
stock options to purchase an aggregate of 15,000 Common Shares to certain
Directors of the Company pursuant to the terms of two stock option plans.
No consideration (other than services) was received from these Directors
for these options to purchase Common Shares. Exemption from registration is
claimed under Section 2(3) of the Act.
(b) Between June 1, 1993, and March 21, 1996, the Company granted
stock options to purchase an aggregate of 311,333 Common Shares to certain
officers and employees of the Company pursuant to the terms of a stock
option plan. No consideration (other than services) was received from these
officers, employees or consultants for these options to purchase Common
Shares. Exemption from registration is claimed under Section 2(3) of the
Act.
II-2
<PAGE> 86
(c) Between July 26, 1995, and February 6, 1996, an aggregate of
13,258 Common Shares were issued upon the exercise of options, which were
granted pursuant to the terms of a stock option plan, for $2,289.90.
Exemption from registration is claimed under Section 3(b) of the Act and
Rule 701 promulgated thereunder for offers and sales of securities made
pursuant to the terms of compensatory benefit plans or written contracts.
(d) Between March 31, 1994, and December 31, 1995, the Company issued
40,000 Series A Preferred Shares in the form of dividends to the holders of
Series A Preferred Shares pursuant to the terms of the Company's Fourth
Amended and Restated Articles of Incorporation. Exemption from registration
is claimed under Section 2(3) of the Act.
(e) Between May 20, 1994, and October 1, 1994, the Company granted
stock options to purchase an aggregate of 65,000 Common Shares to certain
members of its Scientific Advisory Board pursuant to a stock option plan.
No consideration (other than services) was received from these consultants
for these options to purchase Common Shares. Exemption from registration is
claimed under Section 2(3) of the Act.
(f) On July 15, 1994, the Company sold an aggregate of 1,412,367
Series C Preferred Shares to Brantley Venture Partners II, L.P.; Oxford
BioScience Partners, L.P.; Oxford BioScience (Bermuda) Limited Partnership;
Oxford BioScience Partners (Adjunct) L.P.; Delaware Charter Guarantee &
Trust Company, fbo James A. Terwoord; Seth B. Harris; Axiom Venture
Partners Limited Partnership; Barry M. Bloom; Richard J. Kasmer; William H.
Stigelman, Jr.; Jeffrey A. Green and Robert M. Stote for an aggregate
purchase price of $4,237,102. Exemption from registration is claimed under
Section 4(2) of the Act.
(g) Between July 15, 1994, and March 21, 1996, the Company issued
182,099 Series C Preferred Shares in the form of dividends to the holders
of Series A and Series C Preferred Shares pursuant to the terms of the
Company's Fourth Amended and Restated Articles of Incorporation. Exemption
from registration is claimed under Section 2(3) of the Act.
(h) On June 1, 1995, the Company issued warrants to purchase an
aggregate of 68,000 Common Shares at an exercise price of $5.50 per share
and an aggregate of 68,000 Common Shares at an exercise price of $7.50 per
share. Exemption from registration is claimed under Section 2(3) of the
Act.
(i) On January 3, 1996, an employee exercised options for 1,250 Common
Shares for an exercise price of $375.00. Exemption from registration is
claimed under Section 3(b) of the Act and Rule 701 promulgated thereunder
for offers and sales of securities made pursuant to the terms of
compensatory benefit plans or written contracts.
(j) On January 10, 1996, an employee exercised options for 1,250
Common Shares for an exercise price of $187.50. Exemption from registration
is claimed under Section 3(b) of the Act and Rule 701 promulgated
thereunder for offers and sales of securities made pursuant to the terms of
compensatory benefit plans or written contracts.
(k) On January 11, 1996, two employees exercised options for 3,883
Common Shares and 3,750 Common Shares, respectively, for exercise prices of
$602.40 and $562.50, respectively. Exemption from registration is claimed
under Section 3(b) of the Act and Rule 701 promulgated thereunder for
offers and sales of securities made pursuant to the terms of compensatory
benefit plans or written contracts.
(l) On January 31, 1996, an employee exercised options for 625 Common
Shares for an exercise price of $187.50. Exemption from registration is
claimed under Section 3(b) of the Act and Rule 701 promulgated thereunder
for offers and sales of securities made pursuant to the terms of
compensatory benefit plans or written contracts.
(m) On January 31, 1996, the Company entered into an agreement whereby
the Company is obligated to issue a number of shares equal to $2,000,000.
Based on an assumed initial public offering price of $12.00 per share, the
Company will issue 166,667 Common Shares to two former shareholders of GFI
for an aggregate purchase price of $2,000,000. Exemption from registration
is claimed under Section 4(2) of the Act.
II-3
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
See Exhibit Index at page E-1 of this Registration Statement.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide public offering thereof.
II-4
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on May 10, 1996.
COLLABORATIVE CLINICAL RESEARCH, INC.
By: /s/ Terry C. Black
---------------------------------
Terry C. Black
Vice President of Finance, Chief
Financial Officer,
Treasurer and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 10th day of May, 1996.
<TABLE>
<CAPTION>
SIGNATURE
---------
<S> <C>
* President and Chief Executive Officer and a
- -------------------------------------- Director (Principal Executive Officer)
Jeffrey A. Green
/s/ Terry C. Black
- -------------------------------------- Vice President of Finance, Chief Financial Officer,
Terry C. Black Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Timothy G. Biro
* Director
- --------------------------------------
Seth B. Harris
* Director
- --------------------------------------
Alan C. Mendelson
* Director
- --------------------------------------
Robert M. Stote
* Director
- --------------------------------------
James A. Terwoord
* Director
- --------------------------------------
Alan G. Walton
</TABLE>
- ---------------
* The undersigned has executed this Amendment No. 1 to the Registration
Statement on behalf of each of the persons named above pursuant to Powers of
Attorney filed with the Securities and Exchange Commission.
/s/ Terry C. Black
----------------------------------------------
Terry C. Black
II-5
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION SYSTEM
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
+1.1 Form of Underwriting Agreement.........................................
**3.1 Fourth Amended and Restated Articles of Incorporation..................
**3.2 Form of Fifth Amended and Restated Articles of Incorporation...........
**3.3 Second Amended and Restated Code of Regulations........................
**3.4 Form of Third Amended and Restated Code of Regulations.................
+4.1 Specimen Certificate of the Company's Common Shares, without par
value..................................................................
**4.2 Warrant Agreement, dated June 1, 1995, by and between the Company and
PMSI, with related form of warrants....................................
**4.3 Demand Promissory Note, dated as of January 19, 1995, payable to the
order of Society National Bank.........................................
**4.4 Promissory Note, dated February 1, 1996, payable to the order of Debra
S. Adamson.............................................................
**4.5 Promissory Note, dated February 1, 1996, payable to the order of Mary
L. Westrick............................................................
**4.6 Stock Purchase Agreement, dated as of March 25, 1992, by and among the
Company and Brantley Venture Partners II, L.P..........................
**4.7 Stock Purchase Agreement, dated as of November 25, 1992, by and among
the Company, James A. Terwood and Seth Harris..........................
**4.8 Share Purchase Agreement, dated as of July 24, 1994, among the Company,
Oxford BioScience Partners, L.P., Oxford BioScience Partners (Bermuda)
Limited Partnership, Oxford BioScience Partners (Adjunct) L.P., Axiom
Venture Partners Limited Partnership, Brantley Venture Partners II,
L.P., Dr. Barry M. Bloom, Dr. Richard J. Kasmer, Dr. William H.
Stigelman, Jr., Seth Harris, Dr. Robert M. Stote, Dr. Jeffrey A. Green
and Delaware Charter Guarantee & Trust Company, Trustee FBO James A.
Terwood IRA No. 450-39040-1-5..........................................
**4.9 Second Amended and Restated Shareholders' Agreement, dated July 15,
1994, as amended on June 1, 1995 and February 5, 1996..................
**4.10 Second Amended and Restated Registration Agreement, dated July 15,
1994, as amended on June 1, 1995 and February 5, 1996..................
+5.1 Opinion of Calfee, Halter & Griswold as to the validity of the Common
Shares of the Company..................................................
**10.1 1994 Directors Share Option Plan.......................................
**10.2 Form of 1996 Outside Directors' Stock Option Plan......................
**10.3 1992 Share Incentive Plan..............................................
**10.4 Form of 1996 Key Employees' and Consultants Stock Option Plan..........
**10.5 Form of Affiliation Agreement by and among the Company and
physicians.............................................................
**10.6 Form of Affiliation Agreement by and among the Company and research
institutions...........................................................
**10.7 Form of Indemnification Agreement......................................
**10.8 Stock Purchase Agreement among GFI, Ohio Valley IRB, Inc., Debra S.
Adamson, the Revocable Trust of Debra S. Adamson, UAT dated August 26,
1992, Mary L. Westrick and the Company, dated February 5, 1996.........
</TABLE>
E-1
<PAGE> 90
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
EXHIBIT NUMBERING
NUMBER DESCRIPTION SYSTEM
- ------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
**10.9 Limited Liability Company Agreement, dated as of June 1, 1995, by and
among the Company and PMSI.............................................
**10.10 Employment Agreement between the Company and Debra S. Adamson, dated
February 1, 1996.......................................................
**10.11 Employment Agreement between the Company and Mary L. Westrick, dated
February 1, 1996.......................................................
**10.12 Employment Agreement between the Company and Richard J. Kasmer, dated
June 14, 1994..........................................................
**10.13 Employment Agreement between the Company and Jeffrey A. Green, dated
July 1, 1994...........................................................
**10.14 Employment Agreement between the Company and William H. Stigelman, Jr.,
dated July 15, 1994....................................................
**10.15 Employment Agreement between the Company and Terry C. Black, dated July
20, 1994...............................................................
**10.16 Employment Agreement between the Company and Nathan F. Messinger, dated
December 10, 1993......................................................
+10.17 Form of Employment Agreement between the Company and Steven E. Linberg,
dated ......................................................
**10.18 GFI Pharmaceutical Services, Inc. Associates' Profit Sharing and 401(k)
Plan...................................................................
+11.1 Statement re Computation of Net Income (Loss) Per Common Share.........
**21.1 Subsidiaries of the Company............................................
**23.1 Consent of Calfee, Halter & Griswold (included in Exhibit 5.1 of this
Registration Statement)................................................
+23.2 Consent of Ernst & Young LLP...........................................
**24.1 Power of Attorney and related certified resolution.....................
+27.1 Financial Data Schedule................................................
*99.1 Director and Officer Liability Insurance Policy........................
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Filed herewith.
E-2
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
COLLABORATIVE CLINICAL RESEARCH
(an Ohio corporation)
Common Shares
(without par value)
UNDERWRITING AGREEMENT
----------------------
May , 1996
VECTOR SECURITIES INTERNATIONAL, INC.
McDONALD & COMPANY SECURITIES, INC.
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Dear Sirs:
Collaborative Clinical Research, an Ohio corporation (the
"Company"), proposes to issue and sell an aggregate of 2,000,000 shares of its
common stock, without par value, (the "Initial Securities") to the several
Underwriters named in Schedule I hereto (the "Underwriters") for whom Vector
Securities International, Inc. ("Vector") and McDonald & Company Securities,
Inc. are acting as representatives (the "Representatives"). In addition,
solely for the purpose of covering over-allotments, the Company proposes to
grant to the several Underwriters, upon the terms and conditions set forth in
Section 2 hereof, an option to purchase up to an additional 300,000 shares of
Common Stock of the
<PAGE> 2
Company (the "Option Securities"). The Initial Securities and the Option
Securities are hereinafter collectively referred to as the "Securities." The
Company's Common Shares, without par value, including the Securities, are
hereinafter referred to as the "Common Stock." The Company wishes to confirm as
follows its agreements with you and the other Underwriters on whose behalf you
are acting in connection with the several purchases by the Underwriters of the
Securities:
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-2140) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus, or
prospectuses, and either (A) has prepared and filed, prior to the effective
date of such registration statement, an amendment to such registration
statement, including a final prospectus or (B) if the Company has elected to
rely upon Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and
file a prospectus, in accordance with the provisions of Rule 430A and Rule
424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution
and delivery of this Agreement. Additionally, if the Company has elected to
rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will
prepare and file a term sheet (a "Term Sheet") in accordance with the
provisions of Rule 434 and Rule 424(b), promptly after execution and delivery
of this Agreement. The information, if any, included in such prospectus or in
such Term Sheet, that was omitted from such registration statement at the time
it became effective but that is deemed to be part of such registration
statement at the time it becomes effective (a) pursuant to paragraph (b) of
Rule 430A, is referred to herein as the "Rule 430A Information," or (b)
pursuant to paragraph (d) of Rule 434, is referred to herein as the "Rule 434
Information." Each prospectus used before the time such registration statement
became effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information that was used after effectiveness and
prior to the execution and delivery of this Agreement is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
and schedules thereto, at the time it became effective and including, if
applicable, the Rule 430A Information or the Rule 434 Information, is herein
called the "Registration Statement." Any registration statement filed
pursuant to Rule
-2-
<PAGE> 3
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term Registration Statement
shall include the Rule 462(b) Registration Statement. The final prospectus in
the form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein referred to as the "Prospectus." If Rule
434 is relied upon, the term "Prospectus" shall refer to the preliminary
prospectus last furnished to the Underwriters in connection with the offering
of the Securities, together with the Term Sheet, and all references to the date
of the Prospectus shall mean the date of the Term Sheet.
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $ per share
(the "purchase price per share"), the number of Initial Securities set forth in
Schedule I opposite the name of such Underwriter under the column "Number of
Initial Securities to be Purchased from the Company" (or such number of Initial
Securities increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and
agreements contained herein and subject to all the terms and conditions set
forth herein, the Company hereby grants an option (the "over-allotment option")
to the Underwriters to purchase from the Company, at the purchase price per
share, up to an aggregate of 300,000 Option Securities. Option Securities may
be purchased solely for the purpose of covering over-allotments made in
connection with the offering of the Securities. Such option shall expire at
5:00 P.M., Chicago time, on the 30th day after the date of this Agreement (or,
if such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading).
Such over-allotment option may be exercised at any time or from time to time
until its expiration. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company
that proportion of the total number of Option Securities as is equal to the
percentage of Initial Securities that such Underwriter is purchasing from the
Company (or such number of Initial Securities increased as set forth in Section
10 hereof), subject to such adjustments as you may determine to avoid
fractional shares.
-3-
<PAGE> 4
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Underwriters propose to make a public offering of the Securities as
soon after the Registration Statement and this Agreement have become effective
as in your judgment is advisable and initially to offer the Securities upon the
terms set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to
the Underwriters of and payment for the Initial Securities shall be made at the
office of Vector Securities International, Inc., 1751 Lake Cook Road, Suite
350, Deerfield, Illinois 60015, at 9:00 A.M., Chicago time, on the third
(fourth, if the pricing occurs after 4:30 p.m. (Eastern Time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10 hereof) (the "Closing Date"). The place of closing
for the Initial Securities and the Closing Date may be varied by agreement
among you and the Company.
Delivery to the Underwriters of and payment for any Option
Securities to be purchased by the Underwriters shall be made at the
aforementioned office of Vector Securities International, Inc. at such time on
such date (an "Option Closing Date"), which may be the same as the Closing Date
but shall in no event be earlier than the Closing Date nor earlier than two nor
later than ten business days after the giving of the notice hereinafter
referred to, as shall be specified in a written notice from you on behalf of
the Underwriters to the Company of the Underwriters' determination to purchase
a number, specified in such notice, of Option Securities. The place of closing
for any Option Securities and the Option Closing Date for such Option
Securities may be varied by agreement between you and the Company.
Certificates for the Initial Securities and for any Option
Securities to be purchased hereunder shall be registered in such names and in
such denominations as you shall request by written notice (it being understood
that a facsimile transmission shall be deemed written notice) prior to 9:30
A.M., Chicago time, on the second business day preceding the Closing Date or
any Option Closing
-4-
<PAGE> 5
Date, as the case may be. Such certificates shall be made available to you in
Chicago, Illinois or New York, New York, as requested by you in the aforesaid
notice, for inspection and packaging not later than 9:30 A.M., Chicago time, on
the business day next preceding the Closing Date or an Option Closing Date, as
the case may be. The certificates evidencing the Initial Securities and any
Option Securities to be purchased hereunder shall be delivered to you on the
Closing Date or the Option Closing Date, as the case may be, against payment of
the purchase price therefor by certified or official bank check or checks
payable in New York Clearing House (next day) funds to the order of the
Company. It is understood that each Underwriter has authorized you, for its
account, to accept delivery of, acknowledge receipt of, and make payment of the
purchase price for, the Initial Securities and the Option Securities, if any,
which it has agreed to purchase. Vector, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose check has not been
received by the Closing Date or the Option Closing Date, as the case may be,
but such payment shall not relieve such Underwriter from its obligations
hereunder.
5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters as follows:
a. The Company will notify the Underwriters promptly,
(i) of the effectiveness of the Registration Statement and any amendment
thereto, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for additional information,
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the suspension of qualification
of the Securities for offering or sale in any jurisdiction or the initiation of
any proceedings for such purpose and (v) during the period when the Prospectus
is required to be delivered under the 1933 Act or Securities Exchange Act of
1934, as amended (the "1934 Act"), of any change, or any event or occurrence
which could result in such a change, in the Company's condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company or the happening of any event, including the filing of any information,
documents or reports pursuant to the 1934 Act, that makes any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions
to or changes in the Registration Statement or the Prospectus in order to state
a material fact required by the 1933 Act or the 1933 Act
-5-
<PAGE> 6
Regulations to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectus to comply with the 1933 Act, the 1933 Act Regulations or any other
law. The Company shall use its best efforts to prevent the issuance of any
stop order or order suspending the qualification or exemption of the Securities
under any state securities or Blue Sky laws, and, if at any time the Commission
shall issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, the Company shall use
every reasonable effort to obtain the withdrawal or lifting of such order at
the earliest possible time.
b. The Company will give the Underwriters notice of its
intention to prepare or file any amendment to the Registration Statement
(including any post-effective amendment), any Rule 462(b) Registration
Statement, any Term Sheet or any amendment or supplement to the Prospectus
(including any revised prospectus or Term Sheet and preliminary prospectus
which the Company proposes for use by the Underwriters in connection with the
offering of the Securities which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus or Term Sheet and preliminary prospectus is
required to be filed pursuant to Rule 424(b)), whether pursuant to the 1933
Act, the 1934 Act or otherwise, will furnish the Underwriters with copies of
any Rule 462(b) Registration Statement, Term Sheet, amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such Rule 462(b) Registration Statement, Term Sheet,
amendment or supplement or use any such prospectus to which the Underwriters or
counsel for the Underwriters shall object.
c. The Company has furnished or will deliver to the
Underwriters and their counsel, without charge, as many signed and conformed
copies of the Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by reference
therein) as the Underwriters may reasonably request.
-6-
<PAGE> 7
d. The Company will furnish to each Underwriter, without
charge, from time to time during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request for the purposes contemplated by the 1933 Act, the 1934 Act, the 1933
Act Regulations or the 1934 Act Regulations.
e. The Company will comply with the 1933 Act and the
1933 Act Regulations so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement and in the Prospectus. If at any
time when a prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act
Regulations or the 1934 Act Regulations to be delivered in connection with
sales of the Securities, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the Underwriters
or for the Company, to amend the Registration statement or amend or supplement
the Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to Section
5(b), such amendment or supplement as may be necessary to correct such
statement or omission or to make the Registration Statement or the Prospectus
comply with such requirements and the Company will furnish to the Underwriters
such number of copies of such amendment or supplement as the Underwriters may
reasonably request.
f. During the period of five years hereafter, the
Company will furnish to you (i) as soon as available, a copy of each report of
the Company mailed to stockholders or filed with the Commission or Nasdaq
National Market ("NASDAQ"), and (ii) from time to time such other information
of a public nature concerning the Company as you may reasonably request.
g. The Company will use its best efforts, in cooperation
with counsel to the Underwriters, to qualify the Securities for offering and
sale under the applicable securities
-7-
<PAGE> 8
or Blue Sky laws of such states and other jurisdictions of the United States as
the Underwriters may designate and to maintain such qualifications in effect
for a period of not less than one year from the later of the effective date of
the Registration Statement and any Rule 462(b) Registration Statement;
PROVIDED, HOWEVER, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified. In
each jurisdiction in which the Securities have been so qualified, the Company
will file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
h. The Company will make generally available to its
security holders as soon as practicable, but not later than 45 days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the 1933 Act Regulations) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the "effective date" (as defined in said Rule
158) of the Registration Statement.
i. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds."
j. If, at the time that the Registration Statement
becomes effective, any Rule 430A Information or Rule 434 Information shall have
been omitted therefrom, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A or Rule 434 and Rule 424(b), copies of
a Prospectus or Term Sheet containing such Rule 430A Information and Rule 434
Information, respectively, or, if required by Rule 430A, a post-effective
amendment to the Registration Statement (including an amended Prospectus),
containing such Rule 430A Information.
k. If the Company elects to rely upon Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 of the 1933 Act
-8-
<PAGE> 9
Regulations by the earlier of (i) 10:00 P.M. Eastern Time on the date hereof
and (ii) the time confirmations are sent or given, as specified by Rule
462(b)(2).
l. The Company, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, will file all
documents required to be filed with the Commission pursuant to Section 13, 14
or 15 of the 1934 Act within the time periods required by the 1934 Act and the
rules and regulations of the Commission under the 1934 Act.
m. During a period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of Vector,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to
(A) the Securities to be sold hereunder, (B) any shares of Common Stock issued
by the Company upon the exercise of an option or warrant or the conversion of
security outstanding on the date hereof and referred to in the Prospectus or
pursuant to the terms of the Stock Purchase Agreement among GFI Pharmaceutical
Services, Inc., Ohio Valley IRB, Inc., Debra S. Adamson, the Revocable Trust of
Debra S. Adamson, UAT dated August 26, 1992, Mary L. Westrick and the Company,
(C) any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company referred to
in the Prospectus or (D) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to any non-employee director stock plan.
n. The Company has furnished or will furnish to you
"lock-up" letters, in form and substance satisfactory to you, signed by each of
its current officers and directors and each of its stockholders designated by
you.
-9-
<PAGE> 10
o. The Company will supply the Underwriters with copies
of all correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Securities under the 1933
Act.
p. Prior to the Closing Date, the Company shall furnish
to the Underwriters, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company and its
subsidiaries, for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
q. Prior to the Closing Date, the Company will issue no
press release or other communications directly or indirectly and hold no press
conference with respect to the Company or any of its subsidiaries, the
condition, financial or otherwise, or the earnings, business affairs or
business prospects of any of them, or the offering of the Securities, without
the prior written consent of the Representatives unless in the judgment of the
Company and its counsel, and after notification to the Representatives, such
press release or communication is required by law.
r. The Company will comply with all provisions of
Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with
Cuba.
s. The Company has not taken, nor will it take, directly
or indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
t. The Company will use its best efforts to have the
Securities approved for listing on the NASDAQ.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a. When the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto becomes
effective, at the date of the Prospectus, if different,
-10-
<PAGE> 11
and at the Closing Date and the Option Closing Date, as the case may be, (i)
the Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied or will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any supplements or
amendments thereto will not at the date of the Prospectus, at the date of any
such supplements or amendments, or at the Closing Date or the Option Closing
Date, if any, include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and the
Prospectus shall not be "materially different," as such term is used in Rule
434, from the Prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement or
Prospectus relating to any Underwriter made in reliance upon and in conformity
with information furnished to the Company in writing by any Underwriter,
through Vector expressly for use in the Registration Statement or Prospectus.
The Company has not distributed any offering materials in connection with the
offering or sale of the Securities other than the Registration Statement, the
preliminary prospectus, the Prospectus, the Term Sheet, if applicable, or any
other materials, if any, permitted by the 1933 Act or the 1933 Act Regulations.
b. Each preliminary prospectus and the prospectus filed
as part of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied
when so filed in all material respects with the 1933 Act Regulations.
c. The accountants who certified the financial
statements and supporting schedules included in the Registration Statement are
independent public accountants as required by the 1933 Act and the 1933 Act
Regulations.
d. The financial statements included in the Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated
-11-
<PAGE> 12
subsidiaries as of the dates indicated and the results of their operations for
the periods specified; except as otherwise stated in the Registration
Statement, said financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis; and the
supporting schedules included in the Registration Statement present fairly the
information required to be stated therein. The financial information and
statistical data set forth in the Prospectus are prepared on an accounting
basis consistent with such financial statements.
e. Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein or contemplated thereby, (i) there has been no material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, (ii)
there have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which are
material with respect to the Company, and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class of
its capital stock. The Company has no material contingent obligations which
are not disclosed in the Registration Statement.
f. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of Ohio
with corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise.
g. Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
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<PAGE> 13
standing under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction
in which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to so
qualify would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise; all of the issued
and outstanding capital stock of each such subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and, upon application of
the proceeds of the offering in the manner contemplated by the Prospectus,
shall be directly owned by the Company, free and clear of any security
interest, mortgage, pledge, lien, charge, encumbrance, claim or equity. There
are no outstanding subscriptions, options, warrants, commitments, convertible
or exchangeable securities or other rights granted by the Company or any
subsidiary to acquire any shares of capital stock of or ownership interests in
any subsidiary of the Company and there are no commitments, plans or
arrangements to do so. Except as described in the Prospectus, the Company does
not own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, association or other entity.
h. The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under "Capitalization" (except
for subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee or director benefit plans or the exercise of
warrants or convertible securities referred to in the Prospectus); the shares
of issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable and have
not been issued in violation of or are not otherwise subject to any preemptive
or other similar rights; the Securities have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable; the certificates evidencing the Securities are in due and
proper form under Ohio law; the authorized capital stock of the Company,
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<PAGE> 14
including the Securities, conforms to all statements relating thereto contained
in the Prospectus; and the issuance of the Securities is not subject to
preemptive or other similar rights. There are no outstanding subscriptions,
options, warrants, convertible or exchangeable securities or other rights
granted to or by the Company to purchase shares of Common Stock or other
securities of the Company and there are no commitments, plans or arrangements
to issue any shares of Common Stock or any security convertible into or
exchangeable for Common Stock, in each case other than as described in the
Prospectus.
i. Except as disclosed in the Registration Statement and
except as would not, singly or in the aggregate, reasonably be expected to have
a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, (A) the Company and its subsidiaries
are each in compliance with all applicable Environmental Laws, (B) the Company
and its subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with the
requirements of such permits, authorizations and approvals, (C) there
are no pending or, to the best knowledge of the Company, threatened
Environmental Claims against the Company or any of its subsidiaries and (D)
under applicable law, to the best knowledge of the Company, there are no
circumstances with respect to any property or operations of the Company or its
subsidiaries that are reasonably likely to form the basis of an Environmental
Claim against the Company or any of its subsidiaries.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority. "Environmental
Claims" means any and all administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of noncompliance or
violation, investigations or proceedings relating in any way to any
Environmental Law.
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<PAGE> 15
j. Neither the Company nor any of its subsidiaries is in
violation of its articles of incorporation or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, deed, trust,
note, lease, sublease, voting agreement, voting trust, or other instrument or
agreement to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or assets
of the Company or any of its subsidiaries is subject; and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and compliance by the Company with its
obligations hereunder have been duly authorized by all necessary corporate
action and will not conflict with or constitute a breach of, or default under,
or result in the creation or imposition of any material lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement,
deed, trust, note, lease, sublease, voting agreement, voting trust or other
instrument or agreement to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of the provisions of the charter or
bylaws of the Company or any of its subsidiaries or any applicable statute,
law, rule, regulation, ordinance, decision, directive or order.
k. No labor dispute with the employees of the Company or
any of its subsidiaries exists or, to the best knowledge of the Company, is
imminent; which might, singly or in the aggregate, be expected to result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise.
l. To the best of the Company's knowledge, there is no
action, suit or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any of its subsidiaries, which
is required to be disclosed in the Registration Statement (other than as
disclosed therein), or which, singly or in the aggregate, might result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or
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<PAGE> 16
business prospects of the Company and its subsidiaries considered as one
enterprise, or which, singly or in the aggregate, might materially and
adversely affect the properties or assets thereof or which might materially and
adversely affect the consummation of this Agreement; all pending legal or
governmental proceedings to which the Company or any of its subsidiaries is a
party or of which any of their respective property or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, are, considered in the
aggregate, not material; and there are no contracts or documents of the Company
or any of its subsidiaries which are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations which
have not been so filed.
m. The Company and its subsidiaries own or are licensed
to use all patents, patent applications, inventions, trademarks, trade names,
applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade
secrets, licenses and rights in any thereof and any other intangible property
and assets (herein called the "Proprietary Rights") which are material to the
businesses of the Company and its subsidiaries, in each case as described in
the Prospectus. The description of the Proprietary Rights is correct in all
material respects and fairly and correctly describes the Company's and its
subsidiaries' rights with respect thereto. The Company does not have any
knowledge of, and the Company has not given or received any notice of, any
pending conflicts with or infringement of the rights of others with respect to
any Proprietary Rights or with respect to any license of Proprietary Rights.
No action, suit, arbitration, or legal, administrative or other proceeding, or
investigation is pending, or, to the best knowledge of the Company, threatened,
against the Company or
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<PAGE> 17
any of its subsidiaries which involves any Proprietary Rights. Neither the
Company nor any subsidiary is subject to any judgment, order, writ, injunction
or decree of any court or any Federal, state, local, foreign or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or any arbitrator, or has entered into or is a party to
any contract which restricts or impairs the use of any such Proprietary Rights
in a manner which would have a material adverse effect on the use of any of the
Proprietary Rights. To the best knowledge of the Company, no Proprietary
Rights used by the Company or any of its subsidiaries, and no services or
products sold by the Company or any of its subsidiaries, conflict with or
infringe upon any proprietary rights of any third party. Neither the Company
nor any subsidiary has received written notice of any pending conflict with or
infringement upon such third party proprietary rights. Neither the Company nor
any subsidiary has entered into any consent, indemnification, forbearance to
sue or settlement agreement with respect to Proprietary Rights other than in
the ordinary course of business. No claims have been asserted by any person
with respect to the validity of the Company's or any of its subsidiaries'
ownership or right to use the Proprietary Rights and, to the best knowledge of
the Company, there is no reasonable basis for any such claim to be successful.
The Proprietary Rights which are material to the business of the Company and
its subsidiaries are valid and enforceable and no registration relating thereto
has lapsed, expired or been abandoned or canceled or is the subject of
cancellation or other adversarial proceedings, and all applications therefore
are pending and are in good standing. The Company and its subsidiaries have
complied, in all material respects, with their respective contractual
obligations relating to the protection of the Proprietary Rights used pursuant
to licenses. To the best knowledge of the Company, no person is infringing on
or violating the Proprietary Rights owned or used by the Company or any of its
subsidiaries which are material to the business of the Company and its
subsidiaries.
n. No registration, authorization, approval,
qualification or consent of any court or governmental authority or agency is
necessary in connection with the offering, issuance or sale of the Securities
hereunder, except such as may be required under the 1933 Act or the 1933 Act
Regulations or state securities or Blue Sky laws (or such as may be required by
the National Association of Securities Dealers, Inc. ("NASD")).
o. The Company and each of its subsidiaries possess and
are operating in compliance with all licenses, certificates, consents,
authorities, approvals and permits (collectively, "permits") from all state,
Federal, foreign and other regulatory agencies or bodies necessary to conduct
the businesses now operated by them, except for such permits that the failure
to obtain would not, singly or in the aggregate, have a material adverse effect
on the condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
entity; and neither the Company nor any of its subsidiaries has received any
notice of
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<PAGE> 18
proceedings relating to the revocation or modification of any such permit or
any circumstance which would lead it to believe that such proceedings are
reasonably likely which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would materially and adversely affect
the condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise.
p. This Agreement has been duly executed and delivered
by the Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting the enforcement of creditors' rights and the application of equitable
principles relating to or affecting the availability of remedies and except as
rights to indemnity and contribution hereunder may be limited by Federal or
state securities laws or the public policy underlying such laws.
q. Except as described in the Prospectus, there are no
persons with registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered by
the Company under the 1933 Act.
r. No order preventing or suspending the use of any
preliminary prospectus has been issued and no proceedings for that purpose are
pending, threatened, or, to the knowledge of the Company, contemplated by the
Commission; and to the best knowledge of the Company, no order suspending the
offering of the Securities in any jurisdiction designated by the Underwriters
pursuant to Section 5(g) of this Agreement has been issued and, to the best
knowledge of the Company, no proceedings for that purpose have been instituted
or threatened or are contemplated.
s. The Company and each of its subsidiaries have good
and marketable title to their respective properties, free and clear of all
material security interests, mortgages, pledges, liens, charges, encumbrances,
claims and equities of record except for (i) such as are described in the
Prospectus, (ii) such as do not materially adversely affect the value of any of
such properties taken as a whole and do not interfere with the use made and
proposed to be made of any of such properties or (iii) liens for taxes not yet
due and payable as to which appropriate
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<PAGE> 19
reserves have been established and reflected on the financial statements
included in the Registration Statement. The properties of the Company and its
subsidiaries are, in the aggregate, in good repair (reasonable wear and tear
excepted), and suitable for their respective uses. Any real properties held
under lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the conduct of the business of the Company and its
subsidiaries considered as one enterprise.
t. The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access
to assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
u. The Company and its subsidiaries have conducted and
are conducting their respective businesses in compliance with all applicable
Federal, state, local and foreign statutes, laws, rules, regulations,
ordinances, codes, decisions, decrees, directives and orders, except where the
failure to do so would not, singly or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, or on the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise.
v. To the best of the Company's knowledge, neither the
Company nor any of its subsidiaries nor any employee or agent of the Company or
any subsidiary has made any payment of funds of the Company or any subsidiary
or received or retained any funds in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
w. The Company is not now, and after sale of the
Securities to be sold by it hereunder and application of the net proceeds from
such sale as described in the Prospectus under the
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<PAGE> 20
caption "Use of Proceeds" will not be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
x. All offers and sales of capital stock of the Company
prior to the date hereof were at all relevant times duly registered or exempt
from the registration requirements of the 1933 Act and were duly registered or
subject to an available exemption from the registration requirements of the
applicable state securities or Blue Sky laws.
y. The Company has complied with all provisions of
Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with
Cuba.
z. The Common Stock is registered pursuant to
Section 12(g) of the 1934 Act. The Securities have been duly authorized for
quotation on NASDAQ. The Company has taken no action designed to, or likely
to have the effect of, terminating the registration of the Common Stock under
the 1934 Act or delisting the Common Stock from NASDAQ, nor has the Company
received any notification that the Commission or NASDAQ is contemplating
terminating such registration or listing.
aa. Neither the Company nor, to its knowledge, any of
its officers, directors or affiliates has taken, and at the Closing Date and at
any later Option Closing Date, neither the Company nor, to its knowledge, any
of its officers, directors or affiliates will have taken, directly or
indirectly, any action which has constituted, or might reasonably be expected
to constitute, the stabilization or manipulation of the price of sale or resale
of the Securities.
bb. The Company and each of its subsidiaries maintain
insurance of the types and in amounts adequate for its and its subsidiaries'
business and consistent with insurance coverage maintained by similar companies
in similar business, including but not limited to, insurance covering clinical
trial liability, product liability and real and personal property owned or
leased against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect.
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<PAGE> 21
cc. The Company and each of its subsidiaries have filed
all material tax returns required to be filed, which returns are true and
correct in all material respects, and neither the Company nor any of its
subsidiaries is in default in the payment of any taxes, including penalties and
interest, assessments, fees and other charges, shown thereon due or otherwise
assessed, other than those being contested in good faith and for which adequate
reserves have been provided or those currently payable without interest which
were payable pursuant to said returns or any assessments with respect thereto.
dd. Except as described in the Prospectus, to the best of
the Company's knowledge, there are no rulemaking or similar proceedings before
The United States Food and Drug Administration or comparable Federal, state,
local or foreign government bodies which involve or affect the Company or any
subsidiary, which, if the subject of an action unfavorable to the Company or
any subsidiary, could involve a prospective material adverse change in or
effect on the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise.
ee. The Company has not received any communication
(whether written or oral) relating to the termination or threatened termination
or material modification or threatened material modification of any material
consulting, licensing, marketing, research and development, cooperative,
affiliate or any similar agreement, other than such agreements the termination
or modification of which would not, singly or in the aggregate, have a material
adverse effect.
ff. To the knowledge of the Company, if any full-time
employee identified in the Prospectus has entered into any non- competition,
non-disclosure, confidentiality or other similar agreement with any party other
than the Company or any subsidiary, such employee is neither in violation
thereof nor is expected to be in violation thereof as a result of the business
conducted or expected to be conducted by the Company or any subsidiary as
described in the Prospectus or such person's performance of his obligations to
the Company or any subsidiary; and neither the Company nor any subsidiary has
received written notice that any consultant or scientific advisor of the
Company or any subsidiary is in violation of any non-competition,
non-disclosure, confidentiality or similar agreement.
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<PAGE> 22
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless (i)
each Underwriter and (ii) each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act (any of the persons referred
to in this clause (ii) being hereinafter referred to as a "controlling person")
and (iii) the respective directors, officers, partners and employees of any of
the Underwriters or any controlling person (any person referred to in clause
(i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Person")
to the fullest extent lawful, from and against any and all losses, claims,
damages, liabilities and expenses whatsoever (including, without limitation,
all reasonable costs of pursuing, investigating and defending any claim, suit
or action or any investigation or proceeding by any governmental agency or
body, commenced or threatened, including the reasonable fees and expenses of
counsel to any Indemnified Person), directly or indirectly, caused by, related
to, based upon or arising out of or in connection with any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereto, including the Rule 430A Information and
Rule 434 Information, if applicable, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading or caused by, related to, based
upon, arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith PROVIDED, HOWEVER, that such indemnity with respect to any
preliminary prospectus shall not enure to the benefit of any Underwriter (or to
the benefit of any controlling person of such Underwriter or the directors,
officers, partners and employees of such Underwriter or its controlling
persons) from whom the person asserting any such loss, claim, damage or
liability purchased Securities which
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<PAGE> 23
are the subject thereof if such Underwriter failed to send or give a copy of
the Prospectus (as the same may have been amended or supplemented) to such
person at or prior to the confirmation of the sale of such Securities to such
person in any case where such delivery is required by the 1933 Act and the
untrue statement or omission of a material fact contained in such preliminary
prospectus was corrected in the Prospectus (as the same may have been amended
or supplemented), unless such failure resulted from non-compliance by the
Company with Section 5 d. hereof.
b. If any action, suit or proceeding shall be brought
against any Indemnified Person in respect of which indemnity may be sought
against the Company, such Indemnified Person shall promptly notify the parties
against whom indemnification is being sought (the "indemnifying parties"), and
such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit,
investigation or proceeding (including any impleaded parties) include both such
Indemnified Person and the indemnifying parties and representation of such
Indemnified Person and any indemnifying party by the same counsel would, in the
reasonable judgment of the Indemnified Person, be inappropriate due to actual
or potential differing interests between them (in which case the indemnifying
party shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Indemnified Person). It is understood, however,
that the indemnifying parties shall, in connection with any one such action,
suit or proceeding or separate but substantially similar or related actions,
suits or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Indemnified Persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by Vector, and that all such fees and
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<PAGE> 24
expenses shall be reimbursed as they are incurred. The indemnifying parties
shall not be liable for any settlement of any such action, suit or proceeding
effected without their written consent, which consent shall not be unreasonably
withheld, but if settled with such written consent, or if there be a final
judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying parties agree to indemnify and hold harmless any Indemnified
Person, to the extent provided in the preceding paragraph, from and against any
loss, claim, damage, liability or expense by reason of such settlement or
judgment.
c. Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, any person who controls the Company within the
meaning of Section 15 of the 1933 Act, to the same extent as the foregoing
indemnity from the Company to each Indemnified Person, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through Vector expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus, or any amendment or
supplement thereto. If any action, suit, investigation or proceeding shall be
brought against the Company, any of its directors, any such officer or any such
controlling person based on the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Underwriter pursuant to this
paragraph (c), such Underwriter shall have the rights and duties given to the
Company by paragraph (b) above, and the Company, its directors, any such
officer and any such controlling person shall have the rights and duties given
to the Indemnified Persons by paragraph (a) above, except that the provisions
of the last sentence of paragraph (a) above excluding from such right to
indemnity with respect to a preliminary prospectus in certain circumstances
shall not apply to the Company, its directors, officers or controlling persons.
d. If the indemnification provided for in this Section 7
is unavailable to, or insufficient to hold harmless, an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
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<PAGE> 25
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law or judicial determination, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters on
the other hand, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus or, if Rule 434 is used, the corresponding location on the Term
Sheet. The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Underwriters on the other
hand and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The indemnity
and contribution obligations of the Company set forth herein shall be in
addition to any liability or obligation the Company may otherwise have to any
Indemnified Person.
e. The Company and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 7 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 7, no Underwriter (or any of its
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<PAGE> 26
related Indemnified Persons) shall be required to contribute (whether pursuant
to subsection (a) or (c) or otherwise) any amount in excess of the underwriting
discount applicable to the Securities underwritten by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective numbers of Securities set forth opposite their names in
Schedule I hereto (or such numbers of Securities increased as set forth in
Section 10 hereof) and not joint.
f. No indemnifying party shall, without the prior
written consent of the Indemnified Person, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any Indemnified
Person is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Person, unless such settlement includes an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such action, suit or proceeding.
g. Any losses, claims, damages, liabilities or expenses
for which an indemnified party is entitled to indemnification or contribution
under this Section 7 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Indemnified Person, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Securities and payment therefor hereunder and (iii) any termination of this
Agreement.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Initial Securities hereunder
are subject to the following conditions:
a. The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective on the date hereof; no stop
order suspending the effectiveness of the
-26-
<PAGE> 27
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission. If the Company has elected
to rely upon Rule 430A, Rule 430A Information previously omitted from the
effective Registration Statement pursuant to Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) within the
prescribed time period and the Company shall have provided evidence
satisfactory to the Underwriters of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule 430A. If the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) within the
prescribed time period.
b. The Underwriters shall have received:
(i) The favorable opinion, dated as of the
Closing Date, of Calfee, Halter & Griswold, counsel for the Company,
in form and substance satisfactory to counsel for the Underwriters, to
the effect that:
A. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Ohio.
B. The Company has corporate power and authority
to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus and to enter into and perform its obligations under
this Agreement.
C. To the best of their knowledge, the Company
is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which
such qualification is required, except for such jurisdictions
where the failure to be so qualified would not have a material
adverse effect on the Company and its subsidiaries, considered
as one enterprise.
D. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under "Capitalization" (except for subsequent issuances, if
any, pursuant to reservations, agreements, employee benefit
plans or the exercise of
-27-
<PAGE> 28
warrants or convertible securities referred to in the
Prospectus), and the shares of issued and outstanding capital
stock of the Company, including the Common Shares, have been
duly authorized and validly issued and are fully paid and
non-assessable and, to their knowledge and information, have
not been issued in violation of or are not otherwise subject
to any preemptive rights or other similar rights.
E. The Securities have been duly authorized for
issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and
fully paid and non-assessable; and to the best knowledge of
such counsel, the issuance of the Securities is not subject to
preemptive or other similar rights.
F. Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease
and operate its properties and to conduct its business as
described in the Registration Statement and, to the best of
their knowledge and information, is duly qualified as a
foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is
required, except for such jurisdictions where the failure to
be so qualified would not have a material adverse effect on
the Company and its subsidiaries, considered as one
enterprise; all of the issued and outstanding capital stock of
each such subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and, upon application
of the proceeds of the offering in the manner contemplated by
the Prospectus, to the best knowledge of such counsel shall be
directly owned by the Company, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or
equity.
G. To the best of their knowledge, except as
described in the Prospectus; (i) there are no outstanding
options, warrants or other rights granted to or by the Company
to purchase shares of Common Stock
-28-
<PAGE> 29
or other securities of the Company; and (ii) there are no
commitments, plans or arrangements to issue any shares of
Common Stock or other securities.
H. This Agreement has been duly authorized,
executed and delivered by the Company.
I. At the time the Registration Statement became
effective and at the Closing Date, the Registration Statement
(other than the financial statements and supporting schedules,
and other information derived from such financial statements,
included therein, as to which no opinion need be rendered)
appears on its face to have been appropriately responsive in
all material respects to the requirements of the 1933 Act and
the 1933 Act Regulations.
J. The form of certificate used to evidence each
of the Securities is in due and proper form and complies with
all applicable statutory requirements.
K. To the best of their knowledge, all pending
or threatened legal or governmental proceedings to which the
Company or any subsidiary is a party or to which any of their
property is subject are disclosed in the Registration
Statement.
L. The information in the Prospectus under "Risk
Factors--Governmental Regulation; Potential Impact of Health
Reform," "Risk Factors--Anti-Takeover Provisions; Certain
Provisions of Ohio Law; Articles of Incorporation and Code of
Regulations," "Risk Factors--Shares Eligible for Future Sale,"
"Business--Government Regulation," "Management--Employment
Agreements," "Description of Capital Stock" and "Shares
Eligible for Future Sale" and Item 15 in Part II to the
Registration Statement to the extent that it constitutes
matters of law, summaries of legal matters, documents or
proceedings, or legal conclusions, has been reviewed by them
and is correct in all material respects and fairly and
correctly presents the information called for with respect
thereto.
M. To the best of their knowledge, there are no
contracts, indentures, mortgages, loan agreements,
-29-
<PAGE> 30
deeds, trusts, notes, leases, subleases, voting trusts, voting
agreements or other instruments or agreements of the Company
or any of its subsidiaries required to be described or
referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions thereof
or references thereto other than as listed in (L) above are
correct; and to the best of their knowledge, no default exists
by the Company or any of its subsidiaries in the due
performance or observance of any material obligation,
agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, deed, trust,
note, lease, sublease, voting trust, voting agreement or other
instrument or agreement of the Company or any of its
subsidiaries filed as an exhibit to the Registration
Statement.
N. No authorization, approval, consent or order
of any court or governmental authority or agency is required
in connection with the offering, issuance or sale of the
Securities to the Underwriters, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state
securities or Blue Sky laws or such as may be required by the
NASD; and the execution, delivery and performance of this
Agreement and the consummation of the transactions
contemplated herein and the compliance by the Company with its
obligations hereunder will not conflict with or constitute a
breach of, or default under, or result in the creation or
imposition of any material lien, charge or encumbrance upon
any property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage,
loan agreement, note, deed, trust, lease, sublease, voting
trust, voting agreement or other instrument or agreement to
which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries
is subject and which is filed as an exhibit to the
Registration Statement, nor will such action result in any
violation of the provisions of the articles of incorporation
or code of regulations of the Company or the charter documents
of any of its subsidiaries, or to the best of their knowledge,
any applicable statute,
-30-
<PAGE> 31
law, rule or regulation, decision, directive or order of any
court or administrative agency having jurisdiction over the
Company or any of its subsidiaries or any of their respective
properties.
O. To the best of their knowledge, the Company
and its subsidiaries possess and are in compliance with all
permits issued by the Food and Drug Administration, necessary
to conduct the businesses now operated by them, except where
the failure to so possess or comply with any permit would not
have, singly or in the aggregate, a material adverse effect on
the business or condition, financial or otherwise, of the
Company and its subsidiaries considered as one enterprise.
P. Except as described in the Prospectus, to the
best of their knowledge, there are no persons with
registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
Q. The Company is not an "investment company" or
a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
R. To the best of their knowledge, the Company
and its subsidiaries are not in violation of any federal or
Ohio laws and regulations that are of general application to
corporations in the conduct of their business, except to the
extent that any failure so to comply or conform would not have
a material adverse effect upon the business or condition,
financial or otherwise, of the Company and its subsidiaries
considered as one enterprise.
S. The Registration Statement has become
effective under the 1933 Act; any required filing of the
Prospectus, and any supplements thereto or the Term Sheet,
pursuant to Rule 424(b) and if applicable, Rule 434, has been
made in the manner and within the time period required; and to
their best knowledge, no stop order suspending the
effectiveness of the Registration Statement or any part
thereof has been issued and no
-31-
<PAGE> 32
proceedings therefor have been instituted or are pending or
contemplated under the 1933 Act.
(ii) The favorable opinion, dated as of the
Closing Date, of Willkie Farr & Gallagher counsel for the Underwriters
with respect to the issuance and sale of the Securities, the
Registration Statement and the Prospectus and such other related
matters as the Underwriters shall reasonably request.
(iii) In giving their opinions required by
subsections (b)(i) and (b)(iii), respectively, of this Section 8,
Calfee, Halter & Griswold and Willkie Farr & Gallagher shall each
additionally state that nothing has come to their attention that leads
them to believe that the Registration Statement (except for financial
statements and schedules, and other information derived from such
financial statements, included therein, as to which counsel need make
no statement), at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (except for financial
statements and schedules and other financial information included
therein, as to which counsel need make no statement), as of its date
(unless the term "Prospectus" refers to a prospectus which has been
provided to the Underwriters by the Company for use in connection with
the offering of the Securities which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes
effective, in which case at the time it is first provided to the
Underwriters for such use) or at the Closing Date or the Option
Closing Date, as the case may be, included or includes an untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
c. (i) There shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, or in the earnings, business
-32-
<PAGE> 33
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, (ii)
the representations and warranties of the Company in Section 6 hereof shall be
true and correct with the same force and effect as though expressly made at and
as of the Closing Date, except to the extent that any such representation or
warranty relates to a specific date, (iii) the Company shall have complied in
all material respects with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Closing Date, (iv) no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been initiated or threatened by
the Commission and (v) the Representatives shall have received a certificate,
dated the Closing Date and signed by the President or any Vice President and
the chief financial or accounting officer of the Company to the effect set
forth in clauses (i), (ii), (iii) and (iv) above.
d. At the time of the execution of this Agreement, the
Underwriters shall have received from Ernst & Young, LLP a letter dated such
date, in form and substance satisfactory to the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
e. The Underwriters shall have received from Ernst &
Young, LLP a letter, dated as of the Closing Date, to the effect that they
reaffirm the statements made in the letter furnished pursuant to subsection (d)
of this Section, except that the specified date referred to shall be a date not
more than five business days prior to the Closing Date.
f. The Securities shall have been approved for quotation
on NASDAQ.
g. In the event that the Underwriters exercise their
option provided in Section 2 hereof to purchase all or any portion of the
Option Securities, the representations and warranties of the Company contained
herein and the statements in any certificates furnished by the Company
hereunder shall be true and correct as of the Option Closing Date and, at the
relevant Option Closing Date, the Underwriters shall have received:
-33-
<PAGE> 34
(1) A certificate, dated such Option
Closing Date, of the President or any Vice President of the Company
and of the chief financial or accounting officer of the Company
confirming that the certificate delivered at the Closing Date pursuant
to Section 8 (c) hereof remains true and correct as of such Option
Closing Date.
(2) The favorable opinion of counsel for
the Company, in form and substance satisfactory to counsel for the
Underwriters, dated such Option Closing Date, relating to the Option
Securities to be purchased on such Option Closing Date and otherwise
to the same effect as the opinion required by Sections 8 (b)(i) and 8
(b)(iv) hereof.
(3) The favorable opinion of Willkie
Farr & Gallagher, counsel for the Underwriters, dated such Option
Closing Date, relating to the Option Securities to be purchased on
such Option Closing Date and otherwise to the same effect as the
opinion required by Sections 8 (b)(iii) and 8 (b)(iv) hereof.
(4) A letter from Ernst & Young, LLP in
form and substance satisfactory to the Underwriters and dated such
Option Closing Date, substantially the same in form and substance as
the letter furnished to the Underwriters pursuant to Section 8(e)
hereof, except that the "specified date" in the letter furnished
pursuant to this Section 8(g)(5) shall be a date not more than three
business days prior to such Option Closing Date.
h. At the date of this Agreement, the Underwriters shall
have received lock-up agreements in form and substance satisfactory to the
Underwriters by the persons listed on Schedule B hereto.
i. Counsel for the Underwriters shall have been
furnished with such documents and opinions as they may require for the purpose
of enabling them to pass upon the issuance and sale of the Securities as herein
contemplated and related proceedings, or in order to evidence the accuracy of
any of the representations or warranties or the fulfillment of any of the
conditions herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein contemplated
shall be satisfactory in form
-34-
<PAGE> 35
and substance to the Underwriters and counsel for the Underwriters.
j. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
k. Any certificate or document signed by any officer of
the Company and delivered to you, as Representatives of the Underwriters, or to
counsel for the Underwriters, shall be deemed a representation and warranty by
the Company to each Underwriter as to the statements made therein.
l. If any condition specified in this Section 8 shall
not have been fulfilled when and as required to be fulfilled, this Agreement,
or, in the case of any condition to the purchase of Option Securities, on an
Option Closing Date which is after the Closing Date, the obligations of the
several Underwriters to purchase the relevant Option Securities, may be
terminated by the Representatives by notice to the Company at any time at or
prior to Closing Date or such an Option Closing Date as the case may be, and
such termination shall be without liability of any party to any other party
except as provided in Section 9 and except that Sections 6 and 7 shall survive
any such termination and remain in full force and effect.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each preliminary prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight and charges for
counting and packaging) of such copies of the Registration Statement, each
preliminary prospectus, the Prospectus, and all amendments or supplements to
any of them as may be reasonably requested for use in connection with the
offering and sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Securities,
including any stamp taxes in connection with the original issuance and sale of
the Securities; (iv) the printing (or reproduction) and delivery of this
Agreement, the preliminary and supplemental Blue Sky Memoranda and all other
agreements or documents printed (or reproduced) and
-35-
<PAGE> 36
delivered in connection with the original issuance and sale of the Securities;
(v) the registration of the Common Stock under the 1934 Act and the quotation
of the Securities on NASDAQ; (vi) the registration or qualification of the
Securities for offer and sale under the securities or Blue Sky laws of the
several states as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the Underwriters relating to
the preparation, printing or reproduction, and delivery of the preliminary and
supplemental Blue Sky Memoranda and such registration and qualification); (vii)
the filing fees and the reasonable fees and expenses of counsel for the
Underwriters incident to securing any required review by the NASD; and (viii)
the fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and (v)
of Section 11 hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply, in any material respect, with the terms or fulfill, in any material
respect, any of the conditions of this Agreement, the Company agrees to
reimburse the Representatives for all reasonable out-of-pocket expenses
(including reasonable fees and expenses of counsel for the Underwriters)
incurred by you in connection herewith.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the
Securities may commence, when notification of the effectiveness of the
Registration Statement or such post-effective amendment has been released by
the Commission. Until such time as this Agreement shall have become effective,
it may be terminated by the Company, by notifying you, or by you, as
Representatives of the several Underwriters, by notifying the Company.
If one or more of the Underwriters shall fail on the Closing
Date to purchase the Initial Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted
-36-
<PAGE> 37
Securities"), the Representatives shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and upon
the terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
a. if the number of Defaulted Securities does not exceed
10% of the number of Initial Securities, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
b. if the number of Defaulted Securities exceeds 10% of
the number of Initial Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone the Closing Date for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
Any notice under this Section 10 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT.
a. The Underwriters may terminate this Agreement, by
notice to the Company, at any time at or prior to the Closing Date or Option
Closing Date, as the case may be, (i) if there has been, since the date of this
Agreement or since the respective dates as of which information is given in the
Registration Statement, any material adverse change or any development
-37-
<PAGE> 38
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) if there has
occurred any change in the financial markets in the United States or elsewhere
or any outbreak of hostilities or escalation thereof or other calamity or
crisis the effect of which is such as to make it, in your judgment,
impracticable or inadvisable to market the Securities or to enforce contracts
for the sale of the Securities, (iii) if trading in the Common Stock has been
suspended by the Commission, or if trading generally on the American Stock
Exchange, the New York Stock Exchange or in the over-the-counter markets has
been suspended, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required, by such exchange
or markets or by order of the Commission or any other governmental authority,
or if a banking moratorium has been declared by either Federal, New York or
Illinois authorities, (iv) the enactment, publication, decree or other
promulgation of any Federal or state statute, regulation, rule or order of any
court or other governmental authority which in your judgment materially and
adversely affects or may materially or adversely affect the business or
operations of the Company and its subsidiaries or (v) the taking of any action
by any Federal, state or local government or agency in respect of its monetary
or fiscal affairs which in your judgment has a material adverse effect on the
securities markets in the United States, and would in your judgment make it
impracticable or inadvisable to market the Securities or to enforce any
contract for the sale thereof. Notice of such termination may be given by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
b. If this Agreement is terminated pursuant to this
Section 11, such termination shall be without liability of any party to any
other party except as provided in Section 9 and provided further that Sections
6 and 7 shall survive such termination and remain in full force and effect.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside front cover page, and the statements under the caption "Underwriting" in
any preliminary prospectus and in the Prospectus constitute the only
information
-38-
<PAGE> 39
furnished by or on behalf of the Underwriters through you as such information
is referred to in Sections 5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company at the office of the
Company at, 20600 Chagrin Boulevard, Suite 1050, Cleveland, Ohio 44122,
Attention: Jeffrey A. Green, President and Chief Executive Officer, or (ii) if
to you, as Representatives of the several Underwriters, care of Vector
Securities International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield,
Illinois 60015, Attention: Syndicate Department.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed within the State of Illinois.
This Agreement may be signed in various counterparts which together constitute
one and the same instrument. If signed in counterparts, this Agreement shall
not become effective unless at least one counterpart hereof shall have been
executed and delivered on behalf of each party hereto.
15. SUCCESSORS. This Agreement has been and is made solely for
the benefit of the several Underwriters, the Company, its directors and
officers, the other persons referred to in Section 7 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Securities in his status as such purchaser.
-39-
<PAGE> 40
Please confirm that the foregoing correctly sets forth the
agreement among the Company and the several Underwriters.
Very truly yours,
COLLABORATIVE CLINICAL RESEARCH
By: ______________________________
President and Chief
Executive Officer
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
McDONALD & COMPANY SECURITIES, INC.
As Representatives of the Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By: _________________________________
Vice President
-40-
<PAGE> 41
SCHEDULE I
[NAME OF COMPANY]
<TABLE>
<CAPTION>
Number of
---------
Initial
-------
Securities
----------
Purchased from
--------------
the Company
-----------
Underwriter
-----------
<S> <C>
Vector Securities
International, Inc. . . .
[Co-managers] . . . . . .
Total ___________
</TABLE>
-41-
<PAGE> 1
[LOGO]
COLLABORATIVE CLINICAL RESEARCH, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO
SEE REVERSE FOR
CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT CUSIP 194 190 104
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE OF
COLLABORATIVE CLINICAL RESEARCH, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
and the shares represented hereby are issued and shall be held subject to the
express terms and provisions of the Articles of Incorporation of the Corporation
filed in the office of the Secretary of State of Ohio. This certificate is not
valid unless countersigned by a Transfer Agent and registered by a Registrar.
WITNESS the facsimile signatures of its duly authorized officers.
Dated: COLLABORATIVE CLINICAL RESEARCH, INC.
Secretary President
<PAGE> 2
Countersigned and Registered:
NATIONAL CITY BANK
(Cleveland, Ohio)
Transfer Agent and Registrar
By:
Authorized Signature
<PAGE> 3
COLLABORATIVE CLINICAL RESEARCH, INC.
The following abbreviations when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF TRANS MIN ACT--___________ Custodian ___________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Transfers to Minors
Act ___________
JT TEN -- as joint tenants with right of (State)
survivorship and not as tenants
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
------------------
The Corporation will mail to the holder of record of the shares represented by
this certificate (without charge to the holder) within five days after receipt
of written request therefor a copy of the express terms, if any, of the shares
represented by this certificate and a copy of the express terms, if any, of the
other class or classes and series of shares, if any, which the Corporation is
authorized to issue.
For Value Received, ______ hereby sell, assign and transfer unto
<TABLE>
<S> <C>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________
_________________________________________________________________________of the Shares
represented by the within Certificate and do hereby irrevocably constitute and appoint
_____________________________________________________________________________ Attorney
to transfer the said shares on the books of the within-named Corporation with full power
of substitution in the premises.
</TABLE>
<TABLE>
<S> <C>
Dated _______________ 19 ____
__________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED
BY_________________________________________________________
The Signature(s) should be guaranteed by an eligible guarantor
institution (Banks, Stockholders, Savings and Loan Associations
and Credit Unions), with membership in an approved signature
guarantee medallion program pursuant to SEC Rule 17A d-15.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
CALFEE, HALTER & GRISWOLD
ATTORNEYS AT LAW
-------------------------------------
1400 McDonald Investment Center
800 Superior Avenue Cleveland, Ohio 44114-2688
216/622-8200 Fax 216/241-0816
May 10, 1996
Collaborative Clinical Research, Inc.
20600 Chagrin Boulevard
Cleveland, Ohio 44122
In connection with the filing by Collaborative Clinical
Research, Inc., an Ohio corporation (the "Company"), with the Securities and
Exchange Commission under the provisions of the Securities Act of 1933, as
amended, of a Registration Statement on Form S-1 with respect to up to
2,300,000 Common Shares, without par value, of the Company (the "Shares") to be
sold by the Company (including up to 300,000 Common Shares which may be issued
and sold to the Underwriters upon exercise of their over-allotment option), we
have examined the following:
(i) the form of Fifth Amended and Restated Articles of
Incorporation and the form of Third Amended and
Restated Code of Regulations of the Company, as the
same will be in effect upon the closing of the public
offering described in the Registration Statement;
(ii) the form of Registration Statement on Form S-1,
Registration No. 333-2140 (including Exhibits
thereto), as amended, filed with the Securities and
Exchange Commission (the "Registration Statement");
(iii) the form of Underwriting Agreement pursuant to which
all of the Shares are to be purchased by the
Underwriters and resold in the public offering;
(iv) the records relating to the organization of the
Company and such other documents as we deemed it
necessary to examine as a basis for the opinions
hereinafter expressed.
Based upon the foregoing, we are of the opinion that:
(i) The Company is incorporated and validly existing
under the laws of the State of Ohio.
<PAGE> 2
CALFEE, HALTER & GRISWOLD
Collaborative Clinical Research, Inc.
May 10, 1996
Page 2
(ii) Upon the filing of the Fifth Amended Articles of
Incorporation of the Company with the Secretary of
State of the State of Ohio, the Shares to be issued
and sold by the Company, when issued and sold in the
manner contemplated by the Registration Statement and
the Underwriting Agreement, will be legally issued,
fully paid and nonassessable.
We are attorneys licensed to practice law in the State of
Ohio. The opinions expressed herein are limited solely to the laws of the
State of Ohio. We express no opinion under the laws of any other jurisdiction.
This opinion is delivered to you solely in connection with the
filing of the Registration Statement with respect to the Shares, and this
letter and the opinions stated herein may not be relied upon for any other
purpose or by any persons other than the Directors and executive officers of
the Company.
We consent to the filing of this opinion with the Registration
Statement and to the use of our name therein under the caption "Legal Matters."
Respectfully submitted,
/s/ Calfee, Halter & Griswold
CALFEE, HALTER & GRISWOLD
<PAGE> 1
EXHIBIT 10.17
Draft 5/8/96
EMPLOYMENT AGREEMENT
--------------------
SECTION 1 - PARTIES. This employment agreement is between COLLABORATIVE
CLINICAL RESEARCH, INC., an Ohio corporation (the "Corporation"), and Steven
Linberg, Ph.D. ("Employee"). The Corporation is engaged in the business of
conducting biopharmaceutical and medical device clinical research projects. The
Corporation employs Employee on the terms set forth in this Agreement.
SECTION 2 - EMPLOYMENT AND DUTIES. During the term of this Agreement,
Employee shall, under the general supervision of the Corporation's Chief
Executive Officer or Chief Operating Officer, serve as Vice President For
Clinical Program Development, and devote his skill and experience to serving the
interests of the Corporation, to include overall responsibility for directing
the Company's Clinical Program Development area and its growth and profitability
and such other duties consistent with his position as may be determined by the
Chief Executive Officer or Chief Operating Officer of the Corporation from time
to time. The parties hereby acknowledge and agree that during the term of this
Agreement Employee will devote his full time and efforts toward the success of
the Corporation.
SECTION 3 - COMPENSATION AND BENEFITS.
3.1 BASE SALARY. During the term of this Agreement, which will
commence on December 1, 1995, the Corporation shall pay
Employee an annual base salary (base salary) of $110,000 to be
paid in equal monthly installments on the last business day of
each month. The Employee will be entitled to a monthly car
allowance of $350. Employee's base salary shall be reviewed at
least annually by the Compensation Committee of the
Corporation's Board of Directors, and Employee may receive
such base salary increases as may be determined by the
Compensation Committee, in its sole discretion.
3.2 BONUSES.
A. The Corporation will pay the Employee a non-discretionary
bonus of $28,500 on each of the following dates:
November 30, 1996
November 30. 1997
November 30, 1998
November 30, 1999
The total non-discretionary bonus will not exceed
$114,000. This payment may be in the form of cash,
stock or stock options to purchase common stock as
the parties agree upon at the time of each payment.
The Employee must be an employee of the Corporation
or one of its subsidiaries on the date of each
payment of the non-discretionary bonus to be eligible
to receive the non-discretionary bonus. Once Employee
ceases
<PAGE> 2
to be an employee of the Corporation or one of its
subsidiaries, the Corporation will have no obligation
to make future non-discretionary bonus payments.
B. The Employee will be entitled to receive a one time sign-on
bonus of $200,000 that will be earned throughout 1996 starting
with the signing of this agreement. This sign-on bonus will be
paid out in full on or before December 31, 1996. The Employee
will also earn a bonus in 1996 payable before February 15,
1997 equal to 2 times the 1996 net income (using generally
accepted accounting principles) earned on contracts brought to
the Corporation in 1996 as a result of the Employees efforts.
The contracts to be included for the calculation of this bonus
must result solely from the Employee's efforts. Any contracts
obtained by the Employee where the Corporation already has a
working relationship with the sponsor client will be excluded
from this bonus calculation.
C. The Corporation may also pay Employee additional
compensation in the form of a discretionary bonus. The
discretionary bonus structure is open-ended and the bonus
amount in any given year if any shall be determined from time
to time by the Compensation Committee of the Corporation's
Board of Directors. At the discretion of said Committee, any
discretionary bonus offered may be paid in cash, stock options
for the purchase of Common Shares of the Corporation, or a
combination of both.
3.3 BENEFITS. During the term of this Agreement, the Corporation
shall provide Employee with such benefits as are provided for
its other management executives and/or employees, subject to
all eligibility requirements, including health insurance under
the Corporation's regular group policy and participation in
any pension and profit-sharing plans which may be established.
Any of the foregoing benefits which are provided for all of
the Corporation's management executives and/or employees may
be modified or terminated at any time as to all of such
management executives and/or employees by the Corporation's
Board of Directors.
3.4 EXPENSES. During the term of this Agreement, Employee shall be
reimbursed for expenses reasonably incurred in connection with
the business of the Corporation, subject to approval of the
Chief Executive Officer or the Chief Operating Officer.
SECTION 4 - VACATION. Employee shall earn and be entitled to paid vacation
during each fiscal year of the Corporation and such additional time, if any, as
the Chief Executive Officer or Chief Operating Officer approves. The amount of
paid vacation will be as outlined in the Company's Employee Handbook, but will
not be less than 3 weeks per year. Vacations shall be scheduled, and Employee
shall make his request for vacation periods, reasonably in advance. Vacation
time accrued in any fiscal year but not taken in that year shall carry over as
provided in the Collaborative Clinical Research Employee Handbook.
2
<PAGE> 3
SECTION 5 - TERMINATION.
5.1 DEATH. If Employee dies while employed by the Corporation, his
employment shall terminate and (i) his base salary shall
continue through the last day of the month following death,
(ii) he shall be entitled to a discretionary bonus, if any is
determined to be paid under Section 3.3 for such year, pro
rated to the last day of the month following death based upon
the actual bonus which would have been earned for the entire
year, and (iii) he shall be entitled to any accrued and unpaid
expense reimbursement and earned vacation benefits as of the
date of death. Any payments to be made hereunder by the
Corporation after Employee's death shall be payable to
Employee's appropriate successors.
5.2 DISABILITY. Employee shall be considered absent from
employment because of disability if, as a result of disease,
mental or emotional illness or physical injury (i) he becomes
unable, or (ii) he is deemed by the Board of Directors, in its
judgment reasonably and in good faith exercised, to have
become unable, during the term of this Agreement, to perform
his duties and responsibilities hereunder for a period of at
least one hundred twenty (120) consecutive days, or for an
aggregate of at least one hundred eighty (180) days, whether
or not consecutive, during any twelve (12) month period. In
the event of such disability, the Corporation shall have the
right, subject to the other obligations of the Corporation as
set forth herein and upon thirty (30) days advance written
notice, to terminate Employee's employment. In the event of
such termination, Employee shall be entitled to (a) his base
salary through the date of such termination, (b) a
discretionary bonus, if any is determined to be paid under
Section 3.3 for such year, pro rated to the date of such
termination based upon the actual bonus which would have been
earned for the entire year, and (c) any accrued and unpaid
expense reimbursement and earned vacation benefits as of the
date of termination.
5.3 TERMINATION FOR CAUSE. The Corporation may terminate
Employee's employment hereunder at any time during the term of
this Agreement in the event Employee is convicted of a felony
or if the Board determines, in its judgment reasonably and in
good faith exercised, that Employee was engaged in: (i) fraud;
(ii) a breach of the material provisions of this Agreement; or
(iii) a willful failure to perform his duties as required
under this Agreement; PROVIDED, HOWEVER, that in the case of
(ii) or (iii) above, the Corporation shall first give written
notice to Employee of such breach or failure to perform and
thereafter Employee shall have a period of not less than
thirty (30) days to cure such breach or to perform. In the
event of such termination, Employee shall be entitled to (a)
his base salary through the date of such termination and (b)
any accrued and unpaid expense reimbursement as of the date of
termination. Any termination under this Section 5.3 shall not
affect any vested vacation, pension or profit-sharing benefits
or any conversion privileges which Employee might have under
benefit programs in which he is a participant.
3
<PAGE> 4
In the event this Agreement is terminated pursuant to this
Section 5.3, the Corporation shall have the right, at its
option, to acquire some or all of the applicable percentage of
shares of capital stock and options or rights to acquire
shares of capital stock of the Corporation then held by
Employee (the "Subject Shares") set forth below:
<TABLE>
<CAPTION>
If termination % of Shares
takes place before subject to repurchase
------------------ ---------------------
<S> <C>
January 1, 1997 50%
January 1, 1998 25%
January 1, 1999 0%
</TABLE>
The price at which the Subject Shares shall be subject to
repurchase shall be the fair market value of the Subject
Shares, in the case of Subject Shares which are then the
subject of options or rights to purchase held by Employee, net
of the exercise price payable under such options or rights to
be repurchased. The fair market value shall be determined in
accordance with the provisions of paragraph [4(a) (ii)] of the
Shareholder's Agreement between the Corporation and its
shareholders (the "Shareholders' Agreement").
If within forty five (45) days after the
Corporation's right to repurchase is triggered, the
Corporation fails to exercise fully its right to purchase all
of the Subject Shares, the Corporation shall so notify all
other shareholders of the Corporation, and the Subject Shares
not purchased by the Corporation shall be subject to purchase
(upon the terms described above) by, first, the holders of the
Corporation's Preferred Shares of all series, pro rata in
accordance with their then holdings of Preferred Shares of all
series, and then the other shareholders, in the manner set
forth in paragraph [3(b)] of the Shareholder's Agreement.
5.4 TERMINATION BY THE CORPORATION OTHER THAN FOR CAUSE. The
Corporation may, at any time during the term of this
Agreement, terminate Employee's duties and positions hereunder
for reasons other than cause or disability, as defined in this
Agreement, by giving him at least thirty (30) days advance
written notice to that effect. In the event of such
termination, Employee shall be entitled to receive (i) his
base salary for one (1) year and (ii) any accrued and unpaid
expense reimbursement and earned vacation benefits as of the
date of termination.
4
<PAGE> 5
5.5 SALE OF THE CORPORATION. If during Employee's employment by
the Corporation (i) a majority of the outstanding shares of
capital stock of the Corporation entitled to vote are sold
and/or transferred in a single transaction or a series of
related transactions, (ii) all or substantially all of the
assets of the Corporation are sold and/or transferred (other
than to an affiliate of the Corporation) in a single
transaction or a series of related transactions, or (iii) a
merger or consolidation having either of the effects described
in clauses (i) and (ii) above is effected, and Employee's
employment is not continued by the purchaser or successor,
Employee shall be entitled to receive (a) his current salary
for one (1) year following the date of Employee's termination
following the sale of the Corporation, and (b) any accrued and
unpaid expense reimbursement as of the date of termination.
If a sale of the Corporation to a third party leads to a
change in Employee's position that significantly diminishes
Employee's responsibilities, duties, powers or authority,
Employee will be entitled to voluntarily terminate his
employment and receive:
A) one (1) year of his current salary at that time or
B) be released from the Non-Competition Clause under
Section 7.
5.6 VOLUNTARY TERMINATION. Employee may terminate his employment
with the Corporation at any time after the first anniversary
of this Agreement upon at least ninety (90) days advance
written notice to such effect to the Corporation. In the event
of such termination, Employee shall be entitled to receive his
base salary through the date of termination.
5.7 EFFECT OF TERMINATION. Except for (i) the rights of the
Corporation to enforce the covenants of Employee under Section
7 below, which covenants shall survive the termination of
employment in accordance with the terms thereof, and (ii) the
rights and obligations of the Corporation under this Section 5
and under other benefit plans, policies and programs with
respect to which Employee is a participant, the Corporation
will have no further rights or obligations under this
Agreement and after the termination date of Employee's
employment. Except for (a) Employee's rights under this
Section 5 and Employee's rights to receive all other benefits
in accordance with the terms of the plans, policies and
programs providing such benefits, and (b) the covenants of
Employee under Section 7 hereof, which covenants shall survive
the termination of employment in accordance with the terms
thereof, Employee will have no further rights or obligations
under this Agreement from and after the termination date of
Employee's employment.
5
<PAGE> 6
SECTION 6 - TERM OF EMPLOYMENT. Except as otherwise provided herein,
this Agreement shall become effective as of December 1, 1995 and shall continue
for a term of four (4) years. This Agreement shall automatically renew for
successive additional one (1) year terms unless either party gives notice of
non-renewal at least one hundred twenty (120) days prior to the commencement of
such a renewal term.
SECTION 7 - NON-COMPETITION.
7.1 NON-COMPETITION. Employee further agrees that should he elect
to terminate his employment under Section 5.6, or if such
employment is terminated by the Corporation pursuant to
Section 5.3, he shall not for a period of eighteen (18) months
from his last date of employment with the Corporation (the
"Non-competition Period") (i) enter into the employment of
another clinical research network; (ii) develop or start-up
another clinical research network that would compete with the
Corporation; or (iii) join an already existing Contract
Research Organization (CRO) for the express purpose of
establishing a clinical research network that would solicit
business in direct competition with the Corporation.
Employee agrees not to initiate or support a proposal for any
new contracts on behalf of either himself or a new employer,
for a client who was introduced to Employee by the Corporation
or its successors or for a client that Employee was working
for on behalf of Corporation or its successors for a period of
one (1) year following any sort of disengagement with the
Corporation as a full-time employee. Clients that the
corporation did not have prior to the date of this agreement
that have been brought to the Corporation by the employee, as
a result of the Employees efforts or contacts, are exempt from
this non-compete clause.
Should the Corporation exercise its termination privileges
under Section 5.4, or Employee not be retained under
circumstances described in Section 5.5, Employee shall be
released from all non-competition restrictions and the
Corporation shall hold no claim or rights to interfere with
Employee's employment or business interests.
7.2 CONFIDENTIALITY AND WORK PRODUCT. Employee acknowledges that
during his employment with the Corporation he has had and will
have access to confidential information, knowledge and data
regarding the business of the Corporation and any parent or
subsidiary of, or entity controlling, controlled by or under
common control with, the Corporation ("Corporation
Affiliates"), whether received, acquired or developed by him
or otherwise, including, without limitation, trade secrets,
design information, research methods and techniques,
scientific data and formulae, pricing data, customer
information and all other information or data relevant to the
business of the Corporation (collectively, "Proprietary
Information"). Employee further acknowledges that in the
course of his employment he may be producing designs,
analyses, recommendations, reports, compilations, studies and
other work product, acquiring information on behalf of
6
<PAGE> 7
the Corporation and may conceive of ideas, innovations,
processes and improvements relating to the business of the
Corporation (collectively, "Work Product"). As to the
ownership, disclosure and use of Proprietary Information and
Work Product, Employee agrees that, on and after the date
hereof:
(i) he will promptly disclose in writing to
the Corporation all Work Product;
(ii) all Proprietary Information, all Work
Product and all rights therein are and shall be the
sole and exclusive property of the Corporation and
are hereby assigned to the Corporation, and Employee
will cooperate with and assist the Corporation from
time to time, in any manner reasonably requested by
the Corporation, in obtaining title or ownership
therein or evidence thereof;
(iii) he shall not divulge, disclose or
communicate to any third party in any manner,
directly or indirectly, Proprietary Information or
Work Product;
(iv) he will not use for his own benefit or
purposes or for the benefit or purposes of any third
party or permit or assist, by acquiescence or
otherwise, any third party to use in any manner,
directly or indirectly, Proprietary Information or
Work Product, except such Proprietary Information as
is at the time generally known to the public and
which did not become generally known through the
breach of any provision hereof; and
(v) upon the termination of this employment,
he will promptly deliver to the Corporation all
Proprietary Information and Work Product, including,
without limitation, any reproductions, copies,
abstracts, summaries or other documents or records of
Proprietary Information or Work Product.
7.3 NO INTERFERENCE. During the Non-competition Period, Employee
agrees that he shall not:
(i) take any action which would:
(a) interfere with the contractual
relationships of the Corporation, any Corporation
Affiliate, customers, suppliers, employees or others
which relate to the business of the Corporation or
any Corporation Affiliate; or
(b) induce any employee or
representative of the Corporation or any Corporation
Affiliate not to continue as an employee or
representative of the Corporation or any Corporation
Affiliate;
7
<PAGE> 8
(ii) make remarks or take any other action
which disparages or diminishes the reputation of the
Corporation or any Corporation Affiliate;
(iii) without limiting the generality of the
foregoing, without the prior written consent of the
Board of Directors of the Corporation, directly or
indirectly employ, whether as an employee, officer,
director, agent, consultant or independent
contractor, any person who was an employee,
representative, officer or director of the
Corporation or any Corporation Affiliate at any time
during the six-month period prior to the date of such
proposed employment; PROVIDED, HOWEVER, that the
covenants contained in this clause (iii) shall not
apply with respect to such person terminated by
action of the Corporation or any Corporation
Affiliate.
7.4 INJUNCTIVE RELIEF. Both parties hereto recognize that the
services to be rendered by Employee to the Corporation are
special, unique and of extraordinary character, and that if
Employee hereafter fails to comply with the restrictions and
obligations imposed upon him hereunder, the Corporation may
not have an adequate remedy at law. Accordingly, the
Corporation, in addition to any other rights which it may
have, shall be entitled to seek injunctive relief to enforce
such restrictions and obligations without the necessity of
posting any bond.
SECTION 8 - MISCELLANEOUS.
8.1 PARTIES BOUND. This Agreement shall be binding upon and be for
the benefit of the Corporation and its successors and assigns.
It shall be binding upon and be for the benefit of Employee
and his personal representatives, executors, administrators
and heirs, but the right and responsibility to render services
shall be personal to Employee.
8.2 ENTIRE AGREEMENT AND AMENDMENT. This Agreement is the entire
employment agreement between the parties and shall be modified
only by written amendment signed by the party or parties upon
whom the amendment imposes or may impose any additional duties
or obligations. Such amendment may be in the form of minutes
of a meeting of the Board of Directors; PROVIDED, that such
minutes are signed by at least two duly authorized officers of
the Corporation and are also signed by Employee if additional
obligations are imposed upon Employee or Employee's
compensation or benefits are reduced.
8.3 TAXES. The Corporation shall have the right to withhold any
federal, state and local taxes from any compensation of any
nature paid to Employee.
8.4 APPLICABLE LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of Ohio.
8
<PAGE> 9
8.5 CONSTRUCTION. The captions preceding the Sections in this
Agreement have been inserted for convenience only and shall
not be used to modify, expand or construe the provisions of
this Agreement.
8.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each of such an original and all of such
counterparts shall for all purposes be deemed to be an
original and all of such counterparts shall constitute one and
the same instrument.
EXECUTED at Cleveland, Ohio the _________________ day of .
COLLABORATIVE CLINICAL RESEARCH, INC.,
an Ohio Corporation
By: _____________________________________
Its: _____________________________________
"Corporation"
__________________________________________
"Employee"
9
<PAGE> 1
EXHIBIT 11.1
COLLABORATIVE CLINICAL RESEARCH, INC.
STATEMENT REGARDING COMPUTATION
OF NET INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -----------------
1992 1993 1994 1995 1995 1996
------- ------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)................... $ (245) $ (351) $ (214) $ (753) $ (126) $ 56
====== ====== ====== ====== ====== ======
Weighted average Common Shares
outstanding....................... 700 966 1,621 2,464 2,463 2,475
Net effect of dilutive Common Share
options and dilutive Common Share
warrants -- Note A................ 201 284 404 481 486 464
Net effect of Preferred Share
dividends -- Note B............... 138 138 138 138 138 138
------- ------ ------ ------ ------ ------
Shares used in calculation of net
income (loss) per Common Share.... 1,039 1,388 2,163 3,083 3,087 3,077
====== ====== ====== ====== ====== ======
Net income (loss) per Common Share
-- Note C......................... $ (0.24) $(0.25) $(0.10) $(0.24) $(0.04) $ 0.02
====== ====== ====== ====== ====== ======
<FN>
NOTE A -- Common Share options and warrants granted within a twelve-month period
preceding the proposed filing date of the Company's initial public
offering are included as if they were outstanding for all periods
presented. The dilutive effect of all options outstanding was
calculated using the treasury stock method and the anticipated initial
public offering price.
NOTE B -- Preferred Share dividends declared within a twelve-month period
preceding the proposed filing date of the Company's initial public
offering, including the declaration and issuance of additional
Preferred Share dividends through May 31, 1996, are included as if
they were outstanding for all periods presented. Preferred Shares are
automatically convertible into Common Shares upon completion of the
initial public offering.
NOTE C -- Fully diluted net loss per Common Share has not been presented because
it is not applicable.
</TABLE>
E-3
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated
January 31, 1996 (except the first paragraph in Note 6 and Note 11, as to which
the date is June , 1996), on the financial statements of Collaborative Clinical
Research, Inc.; and our report dated January 31, 1996 on the balance sheets and
related statements of income and cash flows of GFI Pharmaceutical Services,
Inc., in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-2140)
and related Prospectus of Collaborative Clinical Research, Inc. for the
registration of 2,300,000 of its Common Shares.
ERNST & YOUNG LLP
Cleveland, Ohio
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the transactions described in the first paragraph in Note 6 and
Note 11 to the financial statements of Collaborative Clinical Research, Inc.
ERNST & YOUNG LLP
Cleveland, Ohio
May 10, 1996
II-7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1996 CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 406,361
<SECURITIES> 0
<RECEIVABLES> 5,130,159
<ALLOWANCES> 165,500
<INVENTORY> 0
<CURRENT-ASSETS> 6,323,742
<PP&E> 1,246,286
<DEPRECIATION> 191,120
<TOTAL-ASSETS> 13,384,346
<CURRENT-LIABILITIES> 9,995,521
<BONDS> 0
<COMMON> 93,579
0
2,182
<OTHER-SE> 3,293,064
<TOTAL-LIABILITY-AND-EQUITY> 13,384,346
<SALES> 0
<TOTAL-REVENUES> 5,302,216
<CGS> 0
<TOTAL-COSTS> 4,012,607
<OTHER-EXPENSES> 1,180,070
<LOSS-PROVISION> 16,500
<INTEREST-EXPENSE> 36,267
<INCOME-PRETAX> 74,665
<INCOME-TAX> 18,700
<INCOME-CONTINUING> 55,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,965
<EPS-PRIMARY> 0.018
<EPS-DILUTED> 0.018
</TABLE>
