<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996
REGISTRATION NO. 333-2140
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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)
------------------------
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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
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
- -----------------------------------------------------
Common Shares, without par value..................... $40,250,000 $13,880(2)
</TABLE>
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(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) Registration fees in the aggregate amount of $10,311 were paid in connection
with prior filings of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
COLLABORATIVE CLINICAL RESEARCH, INC.
------------------------
FORM S-1
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501(B) OF REGULATION S-K
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REGISTRATION STATEMENT
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
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<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 JUNE 10, 1996
PROSPECTUS
2,500,000 SHARES
LOGO COLLABORATIVE
CLINICAL RESEARCH, INC.
COMMON SHARES
All of the 2,500,000 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 $12.00 and $14.00 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.
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UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share......................................... $ $ $
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Total(3).......................................... $ $ $
</TABLE>
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(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 $770,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 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."
------------------------
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
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Common Shares offered.............................. 2,500,000 shares
Common Shares to be outstanding after the
Offering......................................... 5,404,237 shares(1)
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)... $(0.23) $(0.25) $(0.10) $ (0.24) $ (0.33) $(0.04) $ 0.02 $(0.01)
Shares used in the
computation(3)................. 1,052 1,402 2,177 3,097 3,251 3,101 3,091 3,245
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents........................................................................... $ 406 $ 27,712
Working capital (deficit)........................................................................... (3,672) 28,667
Total assets........................................................................................ 13,385 40,691
Accumulated deficit................................................................................. (1,555) (1,555)
Total shareholders' equity.......................................................................... 3,389 35,728
</TABLE>
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(1) Excludes 487,075 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 2,500,000 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 $13.00 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 (153,846
Common Shares at an assumed initial public offering price of $13.00 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) reflects the issuance of 136,000 Common
Shares issued 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 fees 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 52% 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 $3.25 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, 5,557,078 Common Shares will be issued and
outstanding or reserved for issuance pursuant to the exercise of presently
exercisable stock options. Of these 5,557,078 Common Shares, the 2,500,000
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 1,019,925 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 2,037,153 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 487,075 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 487,075 Common Shares reserved for
issuance upon exercise of outstanding options and the 199,667 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,
2,133,280 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 3,093,562 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 2,500,000 Common
Shares offered hereby at an assumed initial public offering price of $13.00 per
share are estimated to be $29.5 million ($36.7 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 $1.25 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 May 31, 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 May 31, 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 (153,846 Common Shares at an assumed
initial public offering price of $13.00 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, issued upon exercise of certain
outstanding warrants; and (v) the sale of 2,500,000 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 $13.00 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; 5,404,237 shares issued and outstanding, as adjusted(1)............. 94 37,283
Accumulated deficit........................................................... (1,555) (1,555)
------- -----------
Total shareholders' equity.................................................. 3,389 35,728
------- -----------
Total capitalization...................................................... $ 8,389 $35,728
======= =============
</TABLE>
- ---------------
(1) Excludes 487,075 Common Shares reserved for issuance upon the exercise of
outstanding options at a weighted average exercise price of $2.07 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 2,904,237 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 2,500,000 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 $30.0 million or $5.55 per share. This
represents an immediate increase in pro forma net tangible book value of $5.37
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value of $7.45 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................... $13.00
Pro forma net tangible book value per share at March 31,
1996........................................................ $0.18
Increase per share attributable to new investors............. 5.37
------
Pro forma net tangible book value per share after the Offering.... 5.55
------
Dilution per share to new investors............................... $ 7.45
======
</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 $13.00 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......... 2,904,237 54% $ 7,826,892 19% $ 2.69
New investors................. 2,500,000 46 32,500,000 81 13.00
--------- ------- ----------- -------
Total.................... 5,404,237 100% $40,326,892 100%
======== ======= ========== =======
</TABLE>
The foregoing computations exclude options to purchase 487,075 Common
Shares at a weighted average exercise price of $2.07 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)............... $(0.23) $(0.25) $(0.10) $ (0.24) $(0.04) $ 0.02
====== ====== ====== ======= ====== ======
Shares used in the computation(1)............ 1,052 1,402 2,177 3,097 3,101 3,091
</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 (153,846 Common Shares at an assumed initial
public offering price of $13.00 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 81.0% 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 $1.25 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 May 31, 1996). Amounts outstanding under the line of credit are
collateralized by substantially all of the Company's assets and are payable on
demand. At May 31, 1996, $1.25 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 Affiliated 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
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<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
non-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 approximately 1,500 square feet of
office space in Gaithersburg, Maryland for its regulatory affairs and data
management operations. The Company's GFI subsidiary leases approximately 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 approximately 900 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 Associate 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. On
February 29, 1996, options to purchase an aggregate of 9,000 Common Shares were
granted to Eligible Directors at an exercise price of $9.60 per share.
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
</TABLE>
- ---------------
(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 $4.15 per share, 25% of which become exercisable on each of July 1,
1996, July 1, 1997, July 1, 1998 and July 1, 1999.
OPTION GRANTS IN 1995
Shown below is information relating to grants of stock options pursuant to
the 1992 Stock Incentive Plan of the Company during the year ended December 31,
1995 to the Named Executive Officers. Such grants are reflected in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NO. OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(3)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) YEAR(2) ($/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
</TABLE>
- ---------------
(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.
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
</TABLE>
- ---------------
(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 $13.00 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; $221,250
unexercisable; for Mr. Messinger: $192,750 exercisable; $861,100
unexercisable.
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 and the former shareholders of
GFI. Under the terms of this agreement, the holders of an aggregate of 2,133,280
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
769,771 Common Shares (including 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.
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<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 2,500,000 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% 7.5%
Timothy G. Biro (3)........................................... 744,219 27.0 14.2
Seth B. Harris................................................ 59,634 2.2 1.1
Alan Mendelson (4)............................................ 655,586 23.8 12.5
Dr. Robert M. Stote........................................... 19,474 * *
James A. Terwoord (5)......................................... 80,467 2.9 1.5
Nathan F. Messinger........................................... 36,000 1.3 *
Dr. Alan G. Walton (6)........................................ 655,585 23.8 12.5
c/o Oxford BioScience Funds
315 Post Road West
Westport, Connecticut 06880
Brantley Venture Partners II, L.P. (7)........................ 744,219 27.0 14.2
20600 Chagrin Boulevard, Suite 1150
Cleveland, Ohio 44122
Axiom Venture Partners Limited Partnership (8)................ 655,586 23.8 12.5
242 Trumbull Street
Hartford, Connecticut 06103
Oxford BioScience Funds (6)................................... 655,585 23.8 12.5
315 Post Road West
Westport, Connecticut 06880
All directors and executive officers as a group (14
persons).................................................... 2,889,084 95.0 52.1
</TABLE>
- ---------------
* Less than one percent.
(1) Gives effect to the conversion of the Preferred Shares (including additional
Preferred Shares issued 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 (291,679 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.
47
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation, as amended (the "Articles")
authorized 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 were amended and restated (the "Amended Articles"). Upon
the automatic conversion of outstanding Preferred Shares, subsequent to the
Offering, 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 entitled PMSI 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. On June 7, 1996, PMSI exercised the Warrants at an aggregate exercise
price of $884,000 for 136,000 Common Shares. 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.
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,
48
<PAGE> 51
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 52% 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, 5,557,078 Common Shares will be outstanding or reserved for issuance
pursuant to the exercise of exercisable stock options. Of these 5,557,078 Common
Shares, the 2,500,000 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 1,019,925 Common Shares may
be sold pursuant to Rule 144 under the Securities Act in compliance with the
resale volume limitations of Rule 144 beginning 90 days after the Offering.
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 2,037,153 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 2,037,153 Common Shares were issued
between July 15, 1994 and the date of this Prospectus.
The 487,075 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 487,075 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 and the former Shareholders of GFI. Under the terms of
this agreement, these shareholders and the former Shareholders of GFI 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 3,093,562 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..................................................... 2,500,000
==============
</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 375,000 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
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 June 10, 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 2,614,391 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...... 1,401,556 2,176,897 3,096,833 3,101,206 3,090,843
========== ========== ========== ========= =========
</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
----------
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
$13.00 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 492,333 Common Shares
(700,000 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 four 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.
The 1996 Outside Directors' Stock Option Plan ("1996 Director Plan"), was
established by the Company in February 1996. The 1996 Director Plan provides for
the granting of a maximum of 25,000 options to purchase Common Shares to outside
directors of the Company. 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 one year
and one day from the date of grant, and all options granted under the 1996
Director Plan expire ten years after the grant date.
The 1996 Key Employees and Consultants Stock Option Plan ("1996 Plan"), was
established by the Company in February 1996. The 1996 Plan provides for the
granting of a maximum of 182,667 options
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)
to purchase Common Shares to key employees and consultants of the Company and
its affiliates. Vesting of options awarded under the plan is determined by the
Company's Compensation Committee, as appointed by the Board of Directors, and
all options granted under the 1996 Plan expire ten years after the grant date.
Information regarding the Company's share option plan is summarized below:
<TABLE>
<CAPTION>
1996
1992 DIRECTOR 1996 DIRECTOR
PLAN PLAN PLAN PLAN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares under option:
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 -- 9,000
Exercised...................................... (10,758) -- -- --
Canceled....................................... -- -- -- --
-------- ------- ------- -------
Outstanding at March 31, 1996 (unaudited)......... 468,075 10,000 -- 9,000
======== ======= ======= =======
Options available to grant at:
March 31, 1996 (unaudited)........................ -- 1,000 182,667 16,000
======== ======= ======= =======
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 3.85 -- 9.60
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, MARCH 31,
1995 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 June 10, 1996, the Board authorized the sale of up to 2,875,000 Common
Shares to the public. On May 31, 1996, the Board declared and issued 18,780
Preferred Shares for stock dividends accrued since December 31, 1995. 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 $13.00 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 $27,306(2,3) $27,712
Accounts receivable, net............................. 4,965 -- 4,965
Prepaid expenses..................................... 953 -- 953
------- ------- -------
Total current assets................................... 6,324 27,306 33,630
Property and equipment, net............................ 1,055 -- 1,055
Goodwill and other assets, net......................... 6,006 -- 6,006
------- ------- -------
Total assets.................................. $ 13,385 $27,306 $40,691
======= ======= =======
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 37,189(1,2,3,4) 37,283
Retained earnings (deficit).......................... (1,555) -- (1,555)
------- ------- -------
Total shareholders' equity.................... 3,389 32,339 35,728
------- ------- -------
Total liabilities and shareholders' equity.... $ 13,385 $27,306 $40,691
======= ======= =======
</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 on May 31, 1996 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 2,500,000 Common Shares offered by the Company hereby
at an assumed initial public offering price of $13.00 per share and the use
of the proceeds therefrom as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from the offering................................. $ 32,500
Underwriting discounts and commissions........................... (2,275)
Estimated expenses of the offering............................... (770)
--------------
Net proceeds..................................................... 29,455
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........................ $ 26,422
===============
</TABLE>
(4) Reflects the issuance of 153,846 Common Shares (assuming an initial public
offering price of $13.00 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....... 3,097 3,251 3,473
======== ========== ============
</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....... 3,091 3,245 5,813
======== ========== ============
</TABLE>
(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.
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.
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
2,500,000 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............ $ 13,880
National Association of Securities Dealers, Inc. Filing Fee.... 4,525
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.................................................. 48,988
--------
Total..................................................... $770,000
========
</TABLE>
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 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.
II-1
<PAGE> 85
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 24,000 Common Shares to certain
Directors of the Company pursuant to the terms of three 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.
(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
II-2
<PAGE> 86
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 $13.00 per share, the
Company will issue 153,846 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
(n) On June 7, 1996, PMSI exercised warrants to purchase an aggregate
of 136,000 Common Shares at an aggregate exercise price of $884,000.
Exemption from registration is claimed under Section 4(2) of the Act.
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. 2 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 June 10, 1996.
COLLABORATIVE CLINICAL RESEARCH, INC.
By: /s/ WILLIAM H. STIGELMAN, JR.
William H. Stigelman, Jr.
Vice President of Affiliated Site
Relations
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 June, 1996.
<TABLE>
<CAPTION>
SIGNATURE
- ----------------------------------------
<S> <C>
* President and Chief Executive Officer and a
Jeffrey A. Green Director
(Principal Executive Officer)
* 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. 2 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/ William H. Stigelman, Jr.
----------------------------------------------
William H. Stigelman, Jr.
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, 1996, 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 5, 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.............................................................
<C> <S> <C>
**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...................................................................
+10.19 Lease Agreement between St. Mary's Medical Center of Evansville, Inc.
and GFI Pharmaceutical Services Inc., dated January 5, 1996............
+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 Binder........................
</TABLE>
- ---------------
** Previously filed.
+ Filed herewith.
E-2
<PAGE> 1
EXHIBIT 4.10
SECOND AMENDED AND RESTATED REGISTRATION AGREEMENT
--------------------------------------------------
THIS SECOND AMENDED AND RESTATED REGISTRATION AGREEMENT (this "Agreement")
is made as of this 25 day of July, 1994, by and among COLLABORATIVE CLINICAL
RESEARCH, INC., an Ohio corporation (the "Company"), OXFORD BIOSCIENCE PARTNERS,
L.P., a Delaware limited partnership ("Oxford-Delaware"), OXFORD BIOSCIENCE
PARTNERS (BERMUDA) LIMITED PARTNERSHIP, a Bermuda limited partnership
("Oxford-Bermuda"), OXFORD BIOSCIENCE PARTNERS (ADJUNCT) L.P., a Delaware
limited partnership ("Oxford-Adjunct") (Oxford-Delaware, Oxford-Bermuda and
Oxford-Adjunct are collectively referred to as "Oxford"), AXIOM VENTURE PARTNERS
LIMITED PARTNERSHIP, a Connecticut limited partnership ("Axiom"), BRANTLEY
VENTURE PARTNERS II, L.P., a Delaware limited partnership ("Brantley"), (Oxford,
Axiom, and Brantley, collectively, the "Investors"), DR. JEFFREY A. GREEN, an
individual ("Green"), RICHARD J. KASMER, an individual ("Kasmer"), DR. WILLIAM
H. STIGELMAN, JR. an individual ("Stigelman"), DR. ROBERT M. STOTE, an
individual ("Stote"), SETH HARRIS, an individual ("Harris"), DELAWARE CHARTER
GUARANTEE & TRUST COMPANY, TRUSTEE FBO JAMES A. TERWOORD INDIVIDUAL RETIREMENT
ACCOUNT NO. 450-39040-1-5 ("Terwoord"), and DR. BARRY M. BLOOM, an individual
("Bloom") (Green, Kasmer, Stigelman, Stote, Harris, Terwoord, and Bloom,
collectively, the "Individual Shareholders").
WITNESSETH:
-----------
WHEREAS, the Company, Brantley and Green entered into a Registration
Agreement dated as of March 25,1992 (the "Original Registration Agreement"), in
connection with the purchase by Brantley of Series A Preferred Shares, $.001 par
value per share, of the Company (the "Series A Shares");
WHEREAS, the Company, Brantley, Terwoord and Harris entered into an Amended
and Restated Registration Agreement dated as of November, 1992 (the "Amended
Registration Agreement"), in connection with the purchase by Terwoord and Harris
of Series B Preferred Shares, $.001 par value per share, of the Company (the
"Series B Shares");
WHEREAS, pursuant to that certain Share Purchase Agreement of even date
herewith, by and among the Company, the Investors and certain of the Individual
Shareholders (the "Purchase Agreement"), the Investors and the Individual
Shareholders have agreed to purchase certain shares of the Company's Series C
Preferred Shares, $.001 par value per share (the "Series C Shares"), on certain
terms and conditions;
WHEREAS, from and after the Closing (as defined in the Purchase Agreement)
the Investors and the Individual Shareholders will hold the number of Common
Shares, without par value (the "Common Shares"), of the Company, the number of
Series A Shares,
<PAGE> 2
the number of Series B Shares, and the number of Series C Shares set forth
opposite their respective names on Schedule A attached hereto (the Series A
Shares, Series B Shares and Series C Shares being collectively the "Preferred
Shares"); and
WHEREAS, in connection with the execution of the Purchase Agreement and the
consummation of the transactions contemplated thereby, the parties desire to
execute this Agreement for the purpose of, among other things, amending and
restating the Amended Registration Agreement in its entirety;
NOW, THEREFORE, in consideration of the foregoing and the covenants
contained herein, the parties agree as follows:
1. DEMAND REGISTRATIONS.
(a) REQUESTS FOR REGISTRATION. Subject to the terms and conditions hereof,
the holders of at least 40% of the Registrable Securities may request
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of (i) at least 20% of their Registrable Securities (or any lesser
percentage if the anticipated aggregate offering price would exceed $5,000,000)
on Form S-1 or any similar long-form registration ("Long-Form Registrations"),
and (ii) all or part of their Registrable Securities, on Form S-2 or S-3 or any
similar short-form registration ("Short-Form Registrations"), if available,
which requests shall specify the approximate number of Registrable Securities,
requested to be registered and the anticipated per share price range for such
offering. In the case of any such request, the Company will give written notice
of such requested registration within ten days of receiving the request therefor
to all holders of Registrable Securities and will include in such registration
all Registrable Securities with respect to which the Company has received
written requests for inclusion therein within 15 days after the receipt of the
Company's notice. All registrations requested pursuant to this paragraph 1(a)
are referred to herein as "Demand Registrations."
(b) CERTAIN EXPENSES OF REGISTRATIONS. (i) The holders of Registrable
Securities will be entitled to request two Demand Registrations which are
Long-Form Registrations, and (ii) the holders of Registrable Securities will be
entitled to request unlimited Demand Registrations which are Short-Form
Registrations in which the Company will pay all Registration Expenses
(collectively, "Company-paid Demand Registrations"). In addition, the holders of
Registrable Securities will be entitled to request an unlimited number of Demand
Registrations which are Long-Form Registrations in which the holders of the
shares to be registered will pay their portion of the Registration Expenses as
set forth in paragraph 5 hereof; provided, that the aggregate offering value of
the Registrable Securities requested to be registered in any Long-Form
Registration must equal at least $10,000,000 if the registration is the
Company's initial registered public offering and at least $5,000,000 in all
other Long-Form Registrations, and shall equal at least $1,000,000 in any
Short-Form Registration. A Demand Registration which is a Long-Form Registration
will not constitute one of the permitted Company-paid Demand Registrations until
it has become effective; and no Demand Registration which is a Long-Form
Registration will constitute one of the permitted Company-paid Demand
Registrations unless the holders of Registrable Securities are able to register
and
2
<PAGE> 3
sell at least 67% of the Registrable Securities requested to be included in such
registration; provided, that in any event the Company will pay all Registration
Expenses (as defined below) in connection with any registration initiated as a
Company-paid Demand Registration whether or not it has become effective.
Notwithstanding anything to the contrary set forth in this subparagraph 1(b)
above, any Demand Registration which is a Long-Form Registration which does not
become effective solely as a result of such registration's being withdrawn at
the written request of the Investors (and not at the request, or on the advice,
of the Company or the managing underwriters) will constitute one of the
permitted Long-Form Registrations unless the Investors pay all Registration
Expenses in connection with such withdrawn registration, in which case, such
withdrawn registration will not constitute one of the permitted Long-Form
Registrations. Demand Registrations will be Short-Form Registrations whenever
the Company is permitted to use any applicable short form. After the Company has
become subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "1934 Act"), the Company will use its best efforts to make
Short-Form Registrations available for the sale of Registrable Securities.
(c) PRIORITY ON DEMAND REGISTRATIONS. The Company shall be permitted to
include in any Demand Registration securities which are not Registrable
Securities, subject to the priority on inclusion set forth in the following
sentence of this subparagraph 1(c) below. If a Demand Registration requested by
holders of Registrable Securities is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering, exceeds the number of securities which can be
sold in an orderly manner in such offering within a price range acceptable to
the holders of a majority of the Registrable Securities, the Company will
include in such registration (i) first, the Registrable Securities requested to
be included in such registration, pro rata among the respective holders thereof
on the basis of the amount of Registrable Securities owned by each such holder,
(ii) second, the Related Shares requested by the holders thereof to be included
in such registration, pro rata in relative proportion to the total number of
fully diluted shares of the Company then held by such holders, and (iii) third,
other securities requested to be included in such registration. Any Persons
other than holders of Registrable Securities who participate in Demand
Registrations which are not at the Company's expense must pay their share of the
Registration Expenses as provided in paragraph 5 hereof.
(d) RESTRICTIONS ON REGISTRATIONS. The Company will not be obligated to
effect any Demand Registration within six months after the effective date of a
previous Demand Registration or a registration in which the holders of
Registrable Securities were given piggyback rights pursuant to paragraph 2. The
Company may postpone for up to ninety (90) days the filing or effectiveness of a
registration statement for a Demand Registration if the Company and the holders
of a majority of the Registrable Securities agree that such filing or
effectiveness will be substantially disadvantageous to the Company. In such
event, the holders of Registrable Securities initially requesting such Demand
Registration will be entitled to withdraw such request, and, if such request is
withdrawn, such Demand Registration will not constitute one of the permitted
Demand Registrations hereunder and the Company will pay all
3
<PAGE> 4
Registration Expenses in connection with such registration; provided that the
Company may exercise its right to postpone filings only once within any 18-month
period.
(e) SELECTION OF UNDERWRITERS. The holders of a majority of the Registrable
Securities initially requesting registration shall have the right to select the
investment banker(s) and manager(s) to administer the offering, subject to the
Company's approval, which approval shall to be unreasonably withheld or delayed.
2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register any of
its securities under the Securities Act and the registration form to be used may
be used for the registration of Registrable Securities or Related Shares (a
"Piggyback Registration"), the Company will give prompt written notice (in any
event within five business days after its receipt of notice of any exercise of
demand registration rights other than under this Agreement) to all holders of
Registrable Securities and Related Shares of its intention to effect such a
registration, and subject to subparagraphs 2(b) and 2(c) hereof, will include in
such registration all Registrable Securities and Related Shares with respect to
which the Company has received written requests for inclusion therein within 15
days after the receipt of the Company's notice.
(b) PIGGYBACK EXPENSES. The Registration Expenses of the holders of
Registrable Securities and the holders of the Related Shares will be paid by the
Company, in all Piggyback Registrations.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the Company, the Company will include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares
owned by each such holder, (iii) third, the Related Shares requested by the
holders thereof to be included in such registration, pro rata in relative
proportion to the total number of fully diluted shares of the Company then held
by such holders, and (iv) fourth, other securities requested to be included in
such registration; provided that, in any event, after the initial public
offering of the Company's Common Shares, the holders of the Registrable
Securities shall be entitled to register at least 33% of the Registrable
Securities to be included in any such registration.
(d) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is an
underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holders initially
4
<PAGE> 5
requesting such registration, the Company will include in such registration (i)
first, the securities requested to be included therein by the holders requesting
such registration and the Registrable Securities requested to be included in
such registration, pro rata among the holders of such securities on the basis of
the number of securities owned by each such holder, (ii) second, the Related
Shares requested by the holders thereof to be included such registration, pro
rata in relative proportion to the total number of fully diluted shares of the
Company then held by such holders, and (iii) third, other securities requested
to be included in such registration; provided that, in any event, after the
initial public offering of the Company's Common Shares, the holders of the
Registrable Securities shall be entitled to register at least 33% of the
Registrable Securities to be included in any such registration.
(e) SELECTION OF UNDERWRITERS. If any Piggyback Registration is an
underwritten offering, the selection of investment banker(s) and manager(s) for
the offering must be approved by the holders of a majority of the Registrable
Securities included in such Piggyback Registration, which approval shall not be
unreasonably withheld.
(f) OTHER REGISTRATIONS. If the Company has previously filed a registration
statement with respect to Registrable Securities pursuant to paragraph 1 or
pursuant to this paragraph 2, and if such previous registration has not been
withdrawn or abandoned, the Company will not file or cause to be effected any
other registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Form S-8 or any successor form), whether on its own behalf or at
the request of any holder or holders of such securities, until a period of at
least six months has elapsed from the effective date of such previous
registration.
3. HOLDBACK AGREEMENTS.
(a) Each holder of Registrable Securities and Related Shares agrees not to
effect any public sale or distribution (including sales pursuant to Rule 144
promulgated pursuant to the Securities Act) of equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 90-day period beginning on
the effective date of any underwritten Demand Registration or underwritten
Piggyback Registration in which Registrable Securities or Related Shares are
included (except for sales of such securities as part of such underwritten
registered offering and as otherwise permitted under Rule 144(k)), unless the
underwriters managing the registered public offering otherwise agree.
(b) The Company agrees (i) not to effect any public sale or distribution of
its equity securities, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
90-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) to cause each holder of its equity securities, or any
securities
5
<PAGE> 6
convertible into or exchangeable or exercisable for its equity securities,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such period (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
4. REGISTRATION PROCEDURES. Whenever the holders of Registrable Securities
or Related Shares, as the case may be, have requested that any Registrable
Securities or Related Shares, as the case may be, be registered pursuant to this
Agreement, the Company will use its best efforts to effect the registration and
the sale of such Registrable Securities or Related Shares in accordance with the
intended method of disposition thereof (including the registration of warrants
held by a holder of Registrable Securities requesting registration as to which
the Company has received reasonable assurances that only Registrable Securities
will be distributed to the public), and pursuant thereto the Company will as
expeditiously as possible:
(a) Prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and Related
Shares and use its reasonable efforts to cause such registration statement to
become effective and remain effective until the earlier of (i) the date when all
Registrable Securities and Related Shares covered by the registration statement
have been sold, or (ii) 180 days from the effective date of the registration
statement; provided that, before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company will furnish to the
counsel selected by the holders of a majority of the Registrable Securities
covered by such registration or the holders of a majority of the Related Shares
covered by such registration statement, as the case may be, copies of all such
documents proposed to be filed including documents that are to be incorporated
by reference into such registration statement, amendment or supplement, which
documents will be subject to the review of such counsel, and which proposed
registration statement or amendment or supplement thereto shall not be filed by
the Company if the holders of a majority of the Registrable Securities or
Related Shares covered by such statement, amendment or supplement reasonably
objects to such filing;
(b) Prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for the period referred to in paragraph 4(a) and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) Furnish to each holder of Registrable Securities or Related Shares, as
the case may be, such number of copies of such registration statement, each
amendment and supplement thereto, the prospectus included in such registration
statement (including each preliminary prospectus) and such other documents as
such holder may reasonably request in
6
<PAGE> 7
order to facilitate the disposition of the Registrable Securities or Related
Shares owned by such holder;
(d) Use its best efforts to register or qualify such Registrable Securities
or Related Shares under such other securities or blue sky laws of such
jurisdictions as any holder thereof reasonably requests and do any and all other
acts and things which may be reasonably necessary or advisable to enable such
holder to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such holder; provided, however, that the Company shall not
be required to qualify to do business or file a general consent to service of
process in any such jurisdiction unless such qualification or registration is
required to qualify such securities therein;
(e) Notify each holder of such Registrable Securities or Related Shares, as
the case may be, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such holder, the
Company will prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities or Related
Shares, as the case may be, such prospectus will not contain an untrue statement
of a material fact or omit to state any fact necessary to make the statements
therein not misleading;
(f) Promptly notify the holders of Registrable Securities or Related
Shares, as the case may be, and the underwriters, if any, of the following
events and (if requested by any such person) confirm such notification in
writing: (i) the filing of the prospectus or any prospectus supplement and the
registration statement and any amendment or post-effective amendment thereto
and, with respect to the registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such documents, (ii) any
requests by the Securities and Exchange Commission for amendments or supplements
to the registration statement or the prospectus or for additional information,
(iii) the issuance or threat of issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, and (iv) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the Registrable Securities or Related Shares for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding for
such purpose;
(g) Cause all such Registrable Securities to be listed on each securities
exchange on which similar securities issued by the Company are then listed and,
if not so listed, to be listed on the NASD automated quotation system and, if
listed on the NASD automated quotation system, use its best efforts to secure
designation of all such Registrable Securities or Related Shares covered by such
registration statement as a NASDAQ "national market system security" within the
meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing
that, to secure NASDAQ authorization for such Registrable Securities or Related
Shares and, without limiting the generality of the foregoing, to arrange for at
least
7
<PAGE> 8
two market makers to register as such with respect to such Registrable
Securities with the NASD;
(h) Provide a transfer agent and registrar for all such Registrable
Securities or Related Shares not later than the effective date of such
registration statement;
(i) Enter into such customary agreements (including, without limitation,
underwriting agreements in customary form) and take all such other actions as
the holders of a majority of the Registrable Securities or Related Shares being
sold or the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities or Related Shares
(including, without limitation, effecting a stock split or a combination of
shares);
(j) Make available for inspection by any holder of Registrable Securities
or Related Shares, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent retained
by any such holder or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such holder, underwriter, attorney,
accountant or agent in connection with such registration statement;
(k) Otherwise use its best efforts to comply with all applicable rules and
regulations of the Securities and Exchange Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(l) Permit any holder of Registrable Securities or Related Shares to
participate in the preparation of such registration or comparable statement and
to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included, provided that such material shall be furnished under such
circumstances as shall cause it to be subject to the indemnification provisions
provided pursuant to paragraph 6(b) hereof;
(m) Make every reasonable effort to prevent the entry of any order
suspending the effectiveness of the registration statement and, in the event of
the issuance of any such stop order, or of any order suspending or preventing
the use of any related prospectus or suspending the qualification of any
security included in such registration statement for sale in any jurisdiction,
the Company will use its best efforts promptly to obtain the withdrawal of such
order;
(n) Use its best efforts to cause such Registrable Securities or Related
Shares covered by such registration statement to be registered with or approved
by such other
8
<PAGE> 9
governmental agencies or authorities as may be necessary to enable the holders
thereof to consummate the disposition of such Registrable Securities or Related
Shares;
(o) Cooperate with the selling holders of Registrable Securities or Related
Shares and the underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities or Related Shares
to be sold and not bearing any restrictive legends, and enable such Registrable
Securities to be in such lots and registered in such names as the underwriters
may request at least two business days prior to any delivery of Registrable
Securities or Related Shares to the underwriters;
(p) Provide a CUSIP number for all Registrable Securities or Related Shares
not later than the effective date of the registration statement; and
(q) Prior to the effectiveness of the registration statement and any
post-effective amendment thereto and at each closing of an underwritten
offering, (i) make such representations and warranties to the selling holders of
such Registrable Securities or Related Shares and the underwriters, if any, with
respect to the Registrable Securities or Related Shares and the registration
statement as are customarily made by issuers to underwriters in primary
underwritten offerings, (ii) obtain opinions of counsel to the Company and
updates thereof (which counsel and which opinions shall be reasonably
satisfactory to the underwriters, if any, and to the holders of a majority of
the Registrable Securities or Related Shares being sold) addressed to each
selling holder and the underwriters, if any, covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by such holders and underwriters or their
counsel, (iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
holders of Registrable Securities or Related Shares and the underwriters, if
any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in connection with
primary underwritten offerings, and (iv) deliver such documents and certificates
as may be reasonably requested by the holders of a majority of the Registrable
Securities or Related Shares being sold and by the underwriters, if any, to
evidence compliance with clause (i) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company.
5. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of counsel
for the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other Persons retained by the Company
(all such expenses being herein called "Registration Expenses"), will be borne
as provided in this Agreement, except that the Company will, in any event, pay
its internal expenses (including without limitation all salaries and expenses of
its officers and employees performing legal or accounting duties), the expense
of any annual audit
9
<PAGE> 10
or quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed or on the NASD
automated quotation system.
(b) In connection with each Company-paid Demand Registration and each
Piggyback Registration, the Company will reimburse the holders of Registrable
Securities and Related Shares covered by such registration for the reasonable
fees and disbursements of one counsel chosen by the holders of a majority of the
Registrable Securities initially requesting such registration and approved by
the Company, which approval shall not be unreasonably withheld or delayed.
(c) To the extent Registration Expenses are not required to be paid by the
Company, each holder of securities included in any registration hereunder will
pay those Registration Expenses allocable to the registration of such holder's
securities so included, and any Registration Expenses not so allocable will be
borne by all sellers of securities included in such registration in proportion
to the aggregate selling price of the securities to be so registered.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent permitted by law, each
holder of Registrable Securities and Related Shares and their respective
officers, directors and partners, successors and assigns, as the case may be,
and each Person who controls any of the foregoing Persons (within the meaning of
the Securities Act) against all losses, claims, damages, liabilities and
expenses caused by any untrue or alleged untrue statement of material fact
contained in any registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are caused by or
contained in any information furnished in writing to the Company by such Person
expressly for use therein or by such Person's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Company has furnished such holder with a sufficient number of copies
of the same. In connection with an underwritten offering, the Company will
indemnify such underwriters, their officers, directors and partners, as the case
may be, and each Person who controls such underwriters (within the meaning of
the Securities Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities and Related Shares.
(b) In connection with any registration statement in which a holder of
Registrable Securities or Related Shares is participating, each such holder will
furnish to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, will indemnify the Company,
its directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or
10
<PAGE> 11
any amendment thereof or supplement thereto or any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in any information or affidavit so furnished
in writing by such Person expressly for use in such registration statement,
prospectus or preliminary prospectus or amendment thereof; provided that the
obligation to indemnify will be individual to each holder and will be limited to
the net amount of proceeds received by such holder from the sale of securities
by such holder pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give prompt
written notice to the indemnifying party of any claim with respect to which it
seeks indemnification and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party will not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent will not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain in
full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Person may participate
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements, and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that, no
holder of Registrable Securities or Related Shares included in any underwritten
registration shall be required to make any representations or warranties to the
Company or the underwriters other than representations and warranties regarding
such holder and such holder's intended method of distribution.
8. REPORTS UNDER THE SECURITIES LAWS. With a view to making available to
the holders of Registrable Securities and Related Shares the benefits of Rule
144 promulgated under the Securities Act and any other rule or regulation of the
Securities and Exchange
11
<PAGE> 12
Commission that may at any time permit such holder to sell securities of the
Company to the public without registration, the Company agrees to use its best
efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144, at all times subsequent to 90 days after the
effective date of any registration statement covering an underwritten public
offering filed under the Securities Act by the Company;
(b) File with the Securities and Exchange Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the 1934 Act at any time after it is subject to such registration requirements;
and
(c) Furnish to any such holder, so long as such holder owns any of the
Registrable Securities or Related Shares, forthwith upon request a written
statement by the Company that it has complied with the reporting requirements of
Rule 144 (at any time after 90 days after the effective date of such
registration statement filed by the Company), and of the Securities Act and the
1934 Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as may be
reasonably requested by any such holder in availing any such holder of any rule
or regulation of the Securities and Exchange Commission permitting the selling
of any such securities without registration.
9. CERTAIN LIMITATIONS IN CONNECTION WITH FUTURE GRANTS OF REGISTRATION
RIGHTS. From and after the date of this Agreement, the Company shall not enter
into any agreement with any holder or prospective holder of any securities of
the Company providing for the granting to such holder of registration rights,
without the consent of the holders of a majority of the Registrable Securities
then outstanding.
10. TRANSFER OF CERTAIN REGISTRATION RIGHTS. The rights of a holder of
Registrable Securities or Related Shares, as the case may be, under this
Agreement may be transferred in whole or in part at any time, provided that (i)
the holder of Registrable Securities or Related Shares, as the case may be,
transferring such rights shall at the time of such transfer have provided
written notice to the Company, stating the name and address of the transferee
and identifying the securities with respect to which the rights under this
Agreement are being assigned, and (ii) any relevant transfer of securities shall
be in accordance with all applicable state and federal securities laws and
regulations.
11. DEFINITIONS.
"Affiliate" means any Person controlling, controlled by or under common
control with another Person.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated
12
<PAGE> 13
organization and a governmental entity or any department, agency or political
subdivision thereof.
"Registrable Securities" means (i) any equity securities of the Company (A)
issued or issuable upon conversion of the Series A Shares of the Company now
held by Brantley, or (B) issued or issuable upon conversion of the Series C
Shares of the Company held by the Investors, Bloom, Terwoord, Harris, Stote,
Stigelman or Kasmer, (ii) any other shares of equity securities of the Company
held as of the date hereof or acquired hereafter by any of the Investors, (iii)
any equity securities of the Company issued or issuable to any Investor or any
Affiliate of an Investor upon exercise of director options granted in accordance
with Section 4C of the Purchase Agreement (the "Directors Options") or upon
conversion of equity securities issued upon exercise of Directors Options, and
(iv) any equity securities of the Company issued or issuable with respect to the
securities referred to in clauses (i), (ii) and (iii) by way of a stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular Registrable
Securities, such securities will cease to be Registrable Securities when they
have been distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force). For purposes of this Agreement, a Person will also be deemed to be a
holder of Registrable Securities whenever such Person has the right to acquire
directly or indirectly such Registrable Securities (upon conversion or exercise
in connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected. For purposes of this Agreement, a
Purchaser will also be deemed to be a holder of Registerable Securities if such
person shall have acquired Registrable Securities, and registration rights
hereunder shall have been transferred, as contemplated in Section 10 above.
"Related Shares" means (i) any equity securities of the Company issued or
issuable upon conversion of the Series B Shares held by Terwoord or Harris, (ii)
Common Shares held by Green, (iii) Common Shares held by Kasmer, (iv) any Common
Shares issued upon the exercise of options granted pursuant to any stock option
plan adopted by the Company (other than Directors Options), and (v) any equity
securities of the Company issued or issuable with respect to the securities
referred to in clauses (i), (ii), (iii) and (iv) by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular Related
Shares, such securities will cease to be Related Shares when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any similar rule then in
force). For purposes of this Agreement, a Person will also be deemed to be a
holder of Related Shares whenever such Person has the right to acquire directly
or indirectly such Related Shares (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
13
<PAGE> 14
12. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter into
any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not take
any action or permit any change to occur, with respect to its securities, which
would materially and adversely affect the ability of the holders of Registrable
Securities to include such Registrable Securities in a registration undertaken
pursuant to this Agreement or which would materially and adversely affect the
marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) REMEDIES. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and the holders of at least 66 2/3% of the
Registrable Securities (excluding all Registrable Securities held by the
Company, or, to the extent purchased pursuant to paragraphs 3 or 4 of the
Shareholders Agreement (as defined in the Purchase Agreement), by any Individual
Shareholders (as defined in the Shareholders Agreement)); provided, however,
that amendments or waivers of the provisions of this Agreement which directly
relate to the rights of holders of Related Shares require, in addition to the
foregoing consents, the prior written consent of the holders of at least 66 2/3%
of the Related Shares calculated on a fully diluted basis.
(e) SUCCESSORS AND ASSIGNS. All covenants and agreements in this Agreement
by or on behalf of any of the parties hereto will bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not. In addition, whether or not any express assignment has been
made, the provisions of this Agreement which are for the benefit of purchasers
or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) SEVERABILITY. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such
14
<PAGE> 15
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
(g) COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together shall constitute one and the
same Agreement.
(h) DESCRIPTIVE HEADINGS; INTERPRETATION. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a paragraph of
this Agreement. The use of the word "including" in this Agreement shall be by
way of example rather than by limitation.
(i) GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Ohio.
(j) NOTICES. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid) or mailed to the recipient by certified or registered mall, return
receipt requested and postage prepaid, to the party at the address indicated
below:
If to the Company: Collaborative Clinical Research, Inc.
----------------- 20600 Chagrin Boulevard, Suite 520
Cleveland, Ohio 44122
Attn: Jeffrey A. Green, Pharm. D.
with a copy to: James B. Griswold, Esq.
Baker & Hostetler
3200 National City Center
1900 Fast Ninth Street
Cleveland, Ohio 44114
If to Brantley: Brantley Venture Partners II, L.P.
-------------- 20600 Chagrin Blvd. Suite 1150
Cleveland, Ohio 44122
Attn: Timothy G. Biro
with a copy to: William E. Kelly, Esq.
Cuddy Bixby
One Financial Center
Boston, Massachusetts 02111
If to Oxford: Oxford Bioscience Partners, L.P.
------------ 1266 Main Street
15
<PAGE> 16
Soundview Plaza
Stamford, Connecticut 06902
Attn: Alan G. Walton
with a copy to: William E. Kelly, Esq.
Cuddy Bixby
One Financial Center
Boston, Massachusetts 02111
If to Axiom Axiom Venture Partners
----------- 242 Trumbull Street, 8th Floor
Hartford, Connecticut 06103
Attn: Alan Mendelson
with a copy to: William E. Kelly, Esq.
Cuddy Bixby
One Financial Center
Boston, Massachusetts 02111
If to Bloom: Dr. Barry M. Bloom
----------- 43 McIntosh Road
Lyme, Connecticut 06371
with a copy to: William E. Kelly, Esq.
Cuddy Bixby
One Financial Center
Boston, Massachusetts 02111
If to Green: Dr. Jeffrey A. Green
----------- Collaborative Clinical Research, Inc.
20600 Chagrin Boulevard, Suite 520
Cleveland, Ohio 44122
with a copy to: Thomas F. McKee, Esq.
Calfee, Halter & Griswold
800 Superior Avenue, Suite 800
Cleveland, Ohio 44116
If to Kasmer: Dr. Richard J. Kasmer
------------ Collaborative Clinical Research, Inc.
20600 Chagrin Boulevard, Suite 520
Cleveland, Ohio 44122
with a copy to: Thomas F. McKee, Esq.
Calfee, Halter & Griswold
16
<PAGE> 17
800 Superior Avenue, Suite 800
Cleveland, Ohio 44116
If to Stigelman: Dr. William H. Stigelman, Jr.
--------------- Collaborative Clinical Research, Inc.
20600 Chagrin Boulevard, Suite 520
Cleveland, Ohio 44122
with a copy to: Thomas F. McKee, Esq.
Calfee, Halter & Griswold
800 Superior Avenue, Suite 800
Cleveland, Ohio 44116
If to Stote: Dr. Robert M. Stote
----------- 3210 Pasadena Point Boulevard
Gulfport, Florida 33707
If to Harris: Seth Harris
------------ 3467 Kersdale Road
Pepper Pike, Ohio 44124
If to Terwoord: James A. Terwoord
-------------- 5113 Lansdowne Drive
Solon, Ohio 44139
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(k) ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this
document embodies the complete agreement and understanding among the parties
hereto with respect to the subject matter hereof and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
Without limiting the generality of the foregoing, this Agreement supersedes the
Amended Registration Agreement in its entirety.
(l) ADDITIONAL PARTIES. Any Person who receives Options under the Directors
Plan (as such term is defined in Section 4C of the Purchase Agreement) may, by
execution of a counterpart of this Agreement (without any action by any party to
this Agreement), become a party hereto, whereupon the term "Investors" shall,
for all purposes of this Agreement, be deemed to include such Person.
* * * * *
17
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
COLLABORATIVE CLINICAL RESEARCH, INC:
By: /s/ Jeffrey A. Green
-----------------------------------------
Jeffrey A. Green, President
BRANTLEY VENTURE PARTNERS II, L.P.
By: BRANTLEY VENTURE MANAGEMENT II, L.P.,
its general partner
By: /s/ Timothy G. Biro
-----------------------------------------
Timothy G. Biro, a general partner
OXFORD BIOSCIENCE PARTNERS L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Watson
-----------------------------------------
Alan G. Walton
OXFORD BIOSCIENCE PARTNERS
(BERMUDA) LIMITED PARTNERSHIP
By: OBP MANAGEMENT (BERMUDA)
LIMITED PARTNERSHIP,
its General Partner
By: /s/ Alan G. Watson
-----------------------------------------
Alan G. Walton
-18-
<PAGE> 19
OXFORD BIOSCIENCE PARTNERS
(ADJUNCT) L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Walton
-------------------------------
Alan G. Walton
AXIOM VENTURE PARTNERS LIMITED
PARTNERSHIP
By: AXIOM VENTURE ASSOCIATES LIMITED
PARTNERSHIP,
its General Partner
By: /s/ Samuel F. McKay
-------------------------------
Samuel F. McKay
/s/ Barry M. Bloom
-----------------------------------
BARRY M. BLOOM
/s/ Jeffrey A. Green
-----------------------------------
JEFFREY A. GREEN
/s/ Richard J. Kasmer
-----------------------------------
RICHARD J. KASMER
/s/ William H. Stigelman
-----------------------------------
WILLIAM H. STIGELMAN
/s/ Robert Stote
-----------------------------------
ROBERT STOTE
/s/ Seth Harris
-----------------------------------
SETH HARRIS
-----------------------------------
JAMES A. TERWOORD
DELAWARE CHARTER GUARANTEE & TRUST COMPANY,
TRUSTEE FBO JAMES A. TERWOORD INDIVIDUAL
RETIREMENT ACCOUNT NO. 450-39040-1-5
BY: /s/ Delaware Charter Guarantee & Trust
--------------------------------------
Delaware Charter Guarantee & Trust
19
<PAGE> 20
JUNE 1, 1995 AMENDMENT TO SECOND
AMENDED AND RESTATED REGISTRATION AGREEMENT
-------------------------------------------
THIS JUNE 1, 1995 AMENDMENT TO SECOND AMENDED AND RESTATED
REGISTRATION AGREEMENT ("Amendment") is made and entered into as of the 1st day
of June, 1995, by and among COLLABORATIVE CLINICAL RESEARCH, INC., an Ohio
corporation (the "Company"), OXFORD BIOSCIENCE PARTNERS, L.P., a Delaware
limited partnership ("Oxford-Delaware"), OXFORD BIOSCIENCE PARTNERS (BERMUDA)
LIMITED PARTNERSHIP, a Bermuda limited partnership ("Oxford-Bermuda"), OXFORD
BIOSCIENCE PARTNERS (ADJUNCT) L.P., a Delaware limited partnership
("Oxford-Adjunct") (Oxford-Delaware, Oxford-Bermuda and Oxford-Adjunct are
collectively referred to as "Oxford"), AXIOM VENTURE PARTNERS LIMITED
PARTNERSHIP, a Connecticut limited partnership ("Axiom"), BRANTLEY VENTURE
PARTNERS II, L.P., a Delaware limited partnership ("Brantley"), (Oxford, Axiom,
and Brantley, collectively, the "Investors"), DR. JEFFREY A. GREEN, an
individual ("Green"), DR. RICHARD J. KASMER, an individual ("Kasmer"), DR.
WILLIAM H. STIGELMAN, JR., an individual ("Stigelman"), DR. ROBERT M. STOTE, an
individual ("Stote"), SETH HARRIS, an individual ("Harris"), DELAWARE CHARTER
GUARANTEE & TRUST COMPANY, TRUSTEE FBO JAMES A. TERWOORD INDIVIDUAL RETIREMENT
ACCOUNT NO. 450-39040-1-5 ("Terwoord"), DR. BARRY M. BLOOM, an individual
("Bloom"), and PMSI HOLDINGS LIMITED, a Delaware corporation ("PMSI") (Green,
Kasmer, Stigelman, Stote, Harris, Terwoord, Bloom and PMSI, each an "Individual
Shareholder," and, collectively, the "Individual Shareholders") (the Investors
and the Individual Shareholders, collectively, the "Shareholders"). Capitalized
terms used but not defined herein shall have the meanings ascribed to them in
the Second Amended and Restated Registration Agreement, dated July 25, 1994, as
amended (the "Registration Agreement"), among the Company and the Shareholders.
W I T N E S S E T H:
--------------------
WHEREAS, the Company and Pharmaceutical Marketing Services,
Inc. have organized Health Research Innovations, L.L.C., a Delaware limited
liability company (the "Joint Venture"), as of this date for the purpose of
creating, marketing, selling and distributing health economics and market
research services to the healthcare industry, and in connection with such
organization have entered into a Limited Liability Company Agreement, dated as
of June 1, 1995, to govern the internal affairs and operations of the Joint
Venture (the "Joint Venture Agreement"); and
<PAGE> 21
WHEREAS, in order to induce Pharmaceutical Marketing Services,
Inc. to organize the Joint Venture and enter into the Joint Venture Agreement,
the Company has agreed to issue to PMSI, pursuant to the terms of a Warrant
Agreement, dated as of June 1, 1995 (the "Warrant Agreement"), by and between
the Company and PMSI (i) Warrant "D" initially exercisable for 68,000 Common
Shares at an exercise price of $5.50 per share (subject to an adjustment as
provided in Warrant "D") ("Warrant 'D'"), and (ii) Warrant "E" initially
exercisable for 68,000 Common Shares at an exercise price of $7.50 per share
(subject to adjustment as provided in Warrant "E") ("Warrant 'E'");
WHEREAS, PMSI is required to execute and deliver this
Amendment pursuant to the terms of the Warrant Agreement;
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth and other good and valuable consideration had and
received, the parties hereby agree as follows:
1. The Company, the Investors and the other Individual
Shareholders agree that PMSI shall be entitled to become a party to the
Registration Agreement with respect to the Common Shares issued to PMSI upon
exercise of Warrant "D" and Warrant "E." In furtherance hereof, PMSI shall be
entitled to all of the rights of and be subject to all of the limitations on an
Individual Shareholder under the Registration Agreement. All references to
"Individual Shareholders" in the Registration Agreement shall from and after the
date hereof include PMSI so long as it is the record or beneficial owner of
Warrant "D," Warrant "E," Common Shares or other shares of capital stock subject
to the Registration
2
<PAGE> 22
Agreement. PMSI agrees that any Common Shares issued upon the exercise of
Warrant "D" and Warrant "E" shall be deemed to be "Related Shares" under the
Registration Agreement with all rights and subject to all limitations associated
therewith, as such rights and limitations are modified by this June 1, 1995
Amendment. All parties agree that PMSI's execution of this June 1, 1995
Amendment shall be deemed for all purposes to be its execution of a counterpart
of the Registration Agreement, as modified hereby.
2. Paragraph (c) of Section 2 of the Registration Agreement
is hereby amended to read as follows:
(c) Priority on Primary Registrations. If a
---------------------------------
Piggyback Registration is an underwritten primary
registration on behalf of the Company, and the
managing underwriters advise the Company in writing
that in their opinion the number of securities
requested to be included in such registration
exceeds the number which can be sold in an orderly
manner in such offering within a price range
acceptable to the Company, the Company will include
in such registration (i) first, the securities the
Company proposes to sell, (ii) second, the
Registrable Securities requested to be included in
such registration, pro rata among the holders of
such Registrable Securities on the basis of the
number of shares owned by each such holder,
(iii) third, the Related Shares held by all holders
of Related Shares other than PMSI and requested by
such holders to be included in such registration,
pro rata in relative proportion to the total number
of fully diluted shares of the Company then held by
such holders, (iv) fourth, the Related Shares held
by PMSI and requested by PMSI to be included in
such registration, and (v) fifth, other securities
requested to be included in such registration;
provided that, in any event, after the initial
public offering of the Company's Common Shares, the
holders of the Registrable Securities shall be
entitled to register at least 33% of the
Registrable Securities to be included in any such
registration.
3
<PAGE> 23
3. Paragraph (d) of Section 2 of the Registration Agreement
is hereby amended to read as follows:
(d) Priority on Secondary Registrations. If
-----------------------------------
a Piggyback Registration is an underwritten
secondary registration on behalf of holders of the
Company's securities, and the managing underwriters
advise the Company in writing that in their opinion
the number of securities requested to be included
in such registration exceeds the number which can
be sold in an orderly manner in such offering
within a price range acceptable to the holders
initially requesting such registration, the Company
will include in such registration (i) first, the
securities requested to be included therein by the
holders requesting such registration and the
Registrable Securities requested to be included in
such registration, pro rata among the holders of
such securities on the basis of the number of
securities owned by each such holder, (ii) second,
the Related Shares held by all holders of Related
Shares other than PMSI and requested by such
holders to be included in such registration, pro
rata in relative proportion to the total number of
fully diluted shares of the Company then held by
such holders, (iii) third, the Related Shares held
by PMSI and requested by PMSI to be included in
such registration, and (iv) fourth, other
securities requested to be included in such
registration; provided that, in any event, after
the initial public offering of the Company's Common
Shares, the holders of the Registrable Securities
shall be entitled to register at least 33% of the
Registrable Securities to be included in any such
registration.
4. In Section 11 of the Registration Agreement the definition
of "Related Shares" is hereby amended to read as follows:
"Related Shares" means (i) any equity securities of
the Company issued or issuable upon conversion of the Series B
Shares held by Terwoord or Harris, (ii) Common Shares held by
Green, (iii) Common Shares held by Kasmer, (iv) any Common
Shares issued upon the exercise of options granted pursuant to
any stock option plan adopted by the Company (other than
Directors Options), (v) any Common Shares issued or issuable
upon the exercise of Warrant "D" and Warrant "E," and (vi) any
equity
4
<PAGE> 24
securities of the Company issued or issuable with respect to
the securities referred to in clauses (i), (ii), (iii), (iv)
and (v) by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any
particular Related Shares, such securities will cease to be
Related Shares when they have been distributed to the public
pursuant to an offering registered under the Securities Act or
sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any
similar rule then in force). For purposes of this Agreement, a
Person will also be deemed to be a holder of Related Shares
whenever such Person has the right to acquire directly or
indirectly such Related Shares (upon conversion or exercise in
connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise
of such right), whether or not such acquisition has actually
been effected.
5. Paragraph (e) of Section 12 of the Registration Agreement
is hereby amended to read as follows:
(e) Successors and Assigns. All covenants and
----------------------
agreements in this Agreement by or on behalf of any of the
parties hereto will bind and inure to the benefit of the
respective successors and assigns of the parties hereto
whether so expressed or not. The provisions of this Agreement
which are for the benefit of purchasers or holders of the
Related Shares held by PMSI are also for the benefit of, and
enforceable by, any subsequent holder of the Related Shares
held by PMSI. In addition, whether or not any express
assignment has been made, the provisions of this Agreement
which are for the benefit of purchasers or holders of
Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable
Securities.
6. Paragraph (j) of Section 12 of the Registration Agreement
is hereby amended to add the following notice provision after Terwoord's notice
provision:
5
<PAGE> 25
"If to PMSI: Pharmaceutical Marketing Services Inc.
----------- 2394 East Camelback Road
Phoenix, Arizona 85106
Attn: _____________________"
7. This June 1, 1995 Amendment will become effective when it
is executed by (a) the Company, (b) the holders of at least 66-2/3% of the
Registrable Securities, (c) the holders of at least 66-2/3% of the Related
Shares calculated on a fully diluted basis, and (d) PMSI.
8. Except as set forth above, the Registration Agreement
shall remain in full force and effect without modification or amendment.
9. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which shall together
constitute one and the same instrument.
[Signature page follows.]
6
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed, or
caused their duly authorized officers or representatives to execute, this
Amendment as of the day and year first above written.
COLLABORATIVE CLINICAL RESEARCH,
INC.
By:
--------------------------------
Jeffrey A. Green, President
("Company")
OXFORD BIOSCIENCE PARTNERS, L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Walton
--------------------------------
Alan G. Walton
("Oxford-Delaware")
OXFORD BIOSCIENCE PARTNERS (BERMUDA)
LIMITED PARTNERSHIP
By: OBP MANAGEMENT (BERMUDA) LIMITED
PARTNERSHIP,
its General Partner
By: /s/ Alan G. Walton
--------------------------------
Alan G. Walton
("Oxford-Bermuda")
OXFORD BIOSCIENCE PARTNERS (ADJUNCT)
L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Walton
--------------------------------
Alan G. Walton
("Oxford-Adjunct")
7
<PAGE> 27
AXIOM VENTURE PARTNERS LIMITED
PARTNERSHIP
By: AXIOM VENTURE ASSOCIATES LIMITED
PARTNERSHIP,
its General Partner
By: /s/ Samuel F. McKay
--------------------------------
Samuel F. McKay
("Axiom")
BRANTLEY VENTURE PARTNERS II, L.P.
By: BRANTLEY VENTURE MANAGEMENT II,
L.P.,
its General Partner
By: /s/ Timothy G. Biro
--------------------------------
Timothy G. Biro, a general
partner
("Brantley")
--------------------------------
JEFFREY A. GREEN
("Green")
/s/ Richard J. Kasmer
--------------------------------
RICHARD J. KASMER
("Kasmer")
/s/ William H. Stigelman
--------------------------------
WILLIAM H. STIGELMAN, JR.
("Stigelman")
/s/ Robert M. Stote
--------------------------------
ROBERT M. STOTE
("Stote")
8
<PAGE> 28
/s/ Seth Harris
--------------------------------
SETH HARRIS
("Harris")
DELAWARE CHARTER GUARANTEE & TRUST
COMPANY, TRUSTEE FBO JAMES A.
TERWOORD INDIVIDUAL RETIREMENT
ACCOUNT NO. 450-39040-1-5
By:
--------------------------------
Its:
------------------------------
Approved: /s/ James A. Terwoord
--------------------------
James A. Terwoord
("Terwoord")
--------------------------------
BARRY M. BLOOM
("Bloom")
PMSI HOLDINGS LIMITED
By:
--------------------------------
Its:
------------------------------
("PMSI")
9
<PAGE> 29
FEBRUARY 5, 1996 AMENDMENT TO SECOND
AMENDED AND RESTATED REGISTRATION AGREEMENT
-------------------------------------------
THIS FEBRUARY 5, 1996 AMENDMENT TO SECOND AMENDED AND RESTATED
REGISTRATION AGREEMENT ("Amendment") is made and entered into as of the 5th day
of February, 1996, by and among COLLABORATIVE CLINICAL RESEARCH, INC., an Ohio
corporation (the "Company"), OXFORD BIOSCIENCE PARTNERS, L.P., a Delaware
limited partnership ("Oxford-Delaware"), OXFORD BIOSCIENCE PARTNERS (BERMUDA)
LIMITED PARTNERSHIP, a Bermuda limited partnership ("Oxford-Bermuda"), OXFORD
BIOSCIENCE PARTNERS (ADJUNCT) L.P., a Delaware limited partnership
("Oxford-Adjunct") (Oxford-Delaware, Oxford-Bermuda and Oxford-Adjunct are
collectively referred to as "Oxford"), AXIOM VENTURE PARTNERS LIMITED
PARTNERSHIP, a Connecticut limited partnership ("Axiom"), BRANTLEY VENTURE
PARTNERS II, L.P., a Delaware limited partnership ("Brantley"), (Oxford, Axiom,
and Brantley, collectively, the "Investors"), DR. JEFFREY A. GREEN, an
individual ("Green"), DR. RICHARD J. KASMER, an individual ("Kasmer"), DR.
WILLIAM H. STIGELMAN, JR., an individual ("Stigelman"), DR. ROBERT M. STOTE, an
individual ("Stote"), SETH HARRIS, an individual ("Harris"), DELAWARE CHARTER
GUARANTEE & TRUST COMPANY, TRUSTEE FBO JAMES A. TERWOORD INDIVIDUAL RETIREMENT
ACCOUNT NO. 450-39040-1-5 ("Terwoord"), DR. BARRY M. BLOOM, an individual
("Bloom"), PHARMACEUTICAL MARKETING SERVICES INC., a New Jersey corporation
("PMSI"), DEBRA ADAMSON, Trustee under the provisions of the Revocable Trust of
Debra S. Adamson ("Adamson"), and MARY L. WESTRICK ("Westrick") (Green, Kasmer,
Stigelman, Stote, Harris, Terwoord, Bloom, PMSI, Adamson and Westrick, each an
"Individual Shareholder," and, collectively, the "Individual Shareholders") (the
Investors and the Individual Shareholders, collectively, the "Shareholders").
Capitalized terms used but not defined herein shall have the meanings ascribed
to them in the Second Amended and Restated Registration Agreement, dated July
25, 1994, as amended (the "Registration Agreement"), among the Company and the
Shareholders.
W I T N E S S E T H:
--------------------
WHEREAS, the Company has agreed to acquire all of the issued
and outstanding capital stock of GFI Pharmaceutical Services, Inc. and Ohio
Valley Institutional Review Board, Inc., both Indiana corporations ("GFI" and
"OVIRB"), pursuant to the terms of a Stock Purchase Agreement of even date
herewith and as part of the consideration therefor has agreed to issue Common
Shares to Adamson and Westrick; and
<PAGE> 30
WHEREAS, Adamson and Westrick are required to execute and
deliver this Amendment pursuant to the terms of the Stock Purchase Agreement;
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth and other good and valuable consideration had and
received, the parties hereby agree as follows:
1. The Company, the Investors and the other Individual
Shareholders agree that Adamson and Westrick each shall be entitled to become a
party to the Registration Agreement with respect to the Common Shares issued to
each of them pursuant to the Stock Purchase Agreement. In furtherance hereof,
each of Adamson and Westrick shall be entitled to all of the rights of and be
subject to all of the limitations on an Individual Shareholder under the
Registration Agreement. All references to "Individual Shareholders" in the
Registration Agreement shall from and after the date hereof include Adamson and
Westrick so long as either of them is the record or beneficial owner of Common
Shares or other shares of capital stock subject to the Registration Agreement.
All parties agree that Adamson's and Westrick's execution of this February 5,
1996 Amendment shall be deemed for all purposes to be its execution of a
counterpart of the Registration Agreement, as modified hereby.
2. In Section 11 of the Registration Agreement the
definition of "Related Shares" is hereby amended to read as follows:
"Related Shares" means (i) any equity securities of
the Company issued or issuable upon conversion of the Series B
Shares held by Terwoord or Harris, (ii) Common Shares held by
Green, (iii) Common Shares held by Kasmer, (iv) Common
2
<PAGE> 31
Shares held by Adamson and Westrick, (v) any Common Shares
issued upon the exercise of options granted pursuant to any
stock option plan adopted by the Company (other than Directors
Options), (vi) any Common Shares issued or issuable upon the
exercise of Warrant "D" and Warrant "E," and (vii) any equity
securities of the Company issued or issuable with respect to
the securities referred to in clauses (i), (ii), (iii), (iv),
(v) and (vi) by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any
particular Related Shares, such securities will cease to be
Related Shares when they have been distributed to the public
pursuant to an offering registered under the Securities Act or
sold to the public through a broker, dealer or market maker in
compliance with Rule 144 under the Securities Act (or any
similar rule then in force). For purposes of this Agreement, a
Person will also be deemed to be a holder of Related Shares
whenever such Person has the right to acquire directly or
indirectly such Related Shares (upon conversion or exercise in
connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise
of such right), whether or not such acquisition has actually
been effected.
3. Paragraph (j) of Section 12 of the Registration
Agreement is hereby amended to add the following notice provision after PMSI's
notice provision:
<TABLE>
<CAPTION>
<S> <C>
"If to Adamson: The Revocable Trust of Debra S.
------------- Adamson
c/o GFI Pharmaceutical Services, Inc.
800 St. Mary's Drive
Evansville, IN 47714
Attn: Debra S. Adamson
Facsimile: 812-474-6539
Telephone: 812-474-6530"
"If to Westrick: Mary L. Westrick
------------- c/o GFI Pharmaceutical Services, Inc.
800 St. Mary's Drive
Evansville, IN 47714
Facsimile: 812-474-6539
Telephone: 812-474-6530"
</TABLE>
3
<PAGE> 32
4. This February 5, 1996 Amendment will become effective when
it is executed by (a) the Company, (b) the holders of at least 66-2/3% of the
Registrable Securities, and (c) the holders of at least 66-2/3% of the Related
Shares calculated on a fully diluted basis.
5. Except as set forth above, the Registration Agreement
shall remain in full force and effect without modification or amendment.
6. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which shall together
constitute one and the same instrument.
[Signature page follows.]
4
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have executed, or
caused their duly authorized officers or representatives to execute, this
Amendment as of the day and year first above written.
COLLABORATIVE CLINICAL RESEARCH,
INC.
By: /s/ Jeffrey A. Green
--------------------------------
Jeffrey A. Green, President
("Company")
OXFORD BIOSCIENCE PARTNERS, L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Walton
-------------------------------
Alan G. Walton
("Oxford-Delaware")
OXFORD BIOSCIENCE PARTNERS (BERMUDA)
LIMITED PARTNERSHIP
By: OBP MANAGEMENT (BERMUDA) LIMITED
PARTNERSHIP,
its General Partner
By: /s/ Alan G. Walton
--------------------------------
Alan G. Walton
("Oxford-Bermuda")
OXFORD BIOSCIENCE PARTNERS (ADJUNCT)
L.P.
By: OBP MANAGEMENT L.P.,
its General Partner
By: /s/ Alan G. Walton
--------------------------------
Alan G. Walton
("Oxford-Adjunct")
5
<PAGE> 34
AXIOM VENTURE PARTNERS LIMITED
PARTNERSHIP
By: AXIOM VENTURE ASSOCIATES LIMITED
PARTNERSHIP,
its General Partner
By:
--------------------------------
Alan Mendelsen
("Axiom")
BRANTLEY VENTURE PARTNERS II, L.P.
By: BRANTLEY VENTURE MANAGEMENT II,
L.P.,
its General Partner
By: /s/ Timothy G. Biro
--------------------------------
Timothy G. Biro, a general
partner
("Brantley")
/s/ Jeffrey A. Green
--------------------------------
JEFFREY A. GREEN
("Green")
/s/ Richard J. Kasmer
--------------------------------
RICHARD J. KASMER
("Kasmer")
--------------------------------
WILLIAM H. STIGELMAN, JR.
("Stigelman")
6
<PAGE> 35
/s/ Robert M. Stote
--------------------------------
ROBERT M. STOTE
("Stote")
/s/ Seth Harris
--------------------------------
SETH HARRIS
("Harris")
DELAWARE CHARTER GUARANTEE & TRUST
COMPANY, TRUSTEE FBO JAMES A.
TERWOORD INDIVIDUAL RETIREMENT
ACCOUNT NO. 450-39040-1-5
By:
--------------------------------
Its:
------------------------------
Approved: /s/ James A. Terwoord
--------------------------
James A. Terwoord
("Terwoord")
--------------------------------
BARRY M. BLOOM
("Bloom")
7
<PAGE> 36
PHARMACEUTICAL MARKETING SERVICES
INC.
By:
--------------------------------
Its:
------------------------------
("PMSI")
REVOCABLE TRUST OF DEBRA S. ADAMSON
By: /s/ Debra S. Adamson
--------------------------------
Debra S. Adamson, Trustee
("Adamson")
/s/ Mary L. Westrick
-------------------------------
MARY L. WESTRICK
("Westrick")
8
<PAGE> 1
Exhibit 10.19
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT is made and entered into by and between ST. MARY'S
MEDICAL CENTER OF EVANSVILLE, INC., an Indiana not-for-profit corporation with
its principal place of business in Evansville, Indiana (herein the "Lessor"),
and GFI PHARMACEUTICAL SERVICES, INC., an Indiana corporation with its
principal place of business in Evansville, Indiana (herein the "Tenant").
In consideration of the mutual covenants herein contained, and of each
and every act performed or to be performed by the parties under the terms of
this Agreement, Lessor and Tenant agree as follows:
SECTION 1. THE LEASED PREMISES. The Lessor hereby lets and demises to
the Tenant, and the Tenant hereby leases from the Lessor, part of the second
floor (consisting of 10,372 square feet of space), the third floor (consisting
of 10,522 square feet of space) and the fourth floor (consisting of 10,522
square feet of space) of the building commonly known as The Manor, 800 St.
Mary's Drive, Evansville, Indiana (the "Building"), as set forth on the floor
plans, a copy of which is attached hereto and marked Exhibit "A" (the "Leased
Premises"). The Leased Premises are leased together with the right of the
Tenant to use in common with others the lobby, public entrances, public
stairways, public elevators and other public portions of the Building.
SECTION 2. THE LEASE TERM. The term of this Lease Agreement shall
commence on December 1, 1995, (hereinafter referred to as the "Commencement
Date") and terminate on November 30, 2000. Such period is hereinafter referred
to as the "Lease Term" or the "Term of this Lease". The Lease Term, however,
may be terminated in accordance with Sections 11 and 13 hereof.
<PAGE> 2
SECTION 3. RENT. Tenant agrees to pay to Lessor, without demand, at 3700
Washington Avenue, Evansville, Indiana, annual rental during the Term of this
Lease payable in monthly installments in advance on the first day of each
calendar month as follows:
A. For and during the first nineteen (19) months of the
Lease Term (December 1, 1995 through June 30, 1997), monthly
installments of rent in the amount of Twenty-Seven Thousand Four
Hundred Eighty-Nine Dollars ($27,489.00) per month [based on an annual
rental of Three Hundred Twenty-Nine Thousand Eight Hundred Sixty-Eight
Dollars ($329,868.00) arrived at by multiplying 31,416 square feet of
space in the Leased Premises times Ten Dollars and Fifty Cents ($10.50)
per square foot], the first of which monthly installments shall be due
on the Commencement Date.
B. The annual rental for the Leased Premises for the
twelve month period from July 1, 1997 to June 30, 1998 and each twelve
month period (July 1 through June 30) thereafter during the Lease Term
and any extension of the Lease Term shall be recomputed by multiplying
the annual rental for the immediately preceding twelve month period
(July 1 through June 30) of the Lease Term or any extension of the
Lease Term by a fraction, the denominator of which is the Consumer
Price Index (as hereinafter defined) for the month of July of the
immediately preceding twelve month period (July 1 through June 30) of
the Lease Term or any extension of the Lease Term and the numerator of
which is the Consumer Price Index for the first month of the twelve
month period (July 1 though June 30) of the Lease Term or any extension
of the Lease Term for which the annual rental is being recomputed. The
resulting annual rental for the applicable twelve month period (July 1
through June 30) shall be paid in the same manner and subject to all
the same terms and provisions as set forth
2
<PAGE> 3
above for the payment of annual rental during the first nineteen months of
the Lease Term. The annual rental as so computed for the twelve month period
commencing July 1, 2000 (or July 1, 2005, if the Tenant exercises its option
to extend the Lease Term) shall be the basis for determining the amount of
monthly installments of rent for the last five months of the Lease Term (or,
if applicable, the last five months of the extension of the Lease Term).
C. As used herein, the term "Consumer Price Index" is the Consumer Price
Index published by the United States Department of Labor - Bureau of Labor
Statistics for "All Urban Consumers (CPIU), 1982-84=100." In the event that
Consumer Price Index ceases to incorporate a significant number of items now
incorporated therein, or if a substantial change is made in the method of
establishing the Consumer Price Index, then the parties agree to replace the
Consumer Price Index with a reasonable substitute used by Landlords and
Tenants in the State of Indiana for such purposes.
D. Notwithstanding any provision of this Section 3 to the contrary, the
annual rental to be paid by the Tenant to the Lessor for the twelve month
period from July 1, 1997 to June 30, 1998 and each subsequent twelve month
period (July I through June 30) of the Lease Term and any extension of the
Lease Term shall never be less than the annual rental during the first nineteen
(19) months of the Lease Term, and the annual rental for the twelve month
period from July 1, 1997 to June 30, 1998 and each subsequent twelve month
period (July 1 through June 30) of the Lease Term or any extension of the Lease
Term shall not be increased by more than Seventy Five Cents (75 cents) per
square foot of space in the Leased Premises per year.
3
<PAGE> 4
SECTION 4. TAXES, ASSESSMENTS AND UTILITIES. In addition to the
rent set forth in Section 3 hereof, Tenant shall pay all taxes and assessments,
including, but not limited to ad valorem real estate taxes, imposed in respect
of Tenant's occupancy of the Leased Premises beginning with the first
installment of real estate taxes for 1995 due and payable in May, 1996, and
ending with the last installment of such taxes that are payable in the calendar
year in which the end of this Lease occurs. The ad valorem real estate taxes to
be paid by Tenant shall be the product of (i) the total of such taxes assessed
against the Building, multiplied by (ii) the percentage of square feet in the
Building occupied by Tenant on the date each installment is due and payable.
Upon request, Tenant shall furnish Lessor with written evidence of payment of
all such taxes and assessments required to be paid under this Section 4. In the
event that Tenant should fail to pay any such taxes and assessments when due,
Lessor may pay such taxes and assessments, and the amount thereof shall be
payable by Tenant upon demand, with interest thereon at the legal rate.
Lessor shall pay all sewer charges imposed by reason of Tenant's
occupancy of the Leased Premises during the Lease Term and all charges for
utilities (water, gas and electric charges) furnished to the Leased Premises
during the Lease Term.
SECTION 5. PURPOSE AND USE. The Tenant shall comply, at its sole
expense, with all applicable federal, state, county and municipal laws and
regulations. Tenant shall use the Leased Premises in a careful and proper
manner and for lawful purposes only.
SECTION 6. INSURANCE. At its sole cost, Tenant shall obtain and
maintain the following insurance coverages during the Lease Term:
(1) General public liability insurance against claims for
personal injury, death or property damage, occurring in, on or about
the Leased Premises, such insurance to afford
4
<PAGE> 5
protection to the limit of not less than One Million Dollars
($1,000,000.00) each occurrence for bodily injury and One Million Dollars
($1,000,000.00) each occurrence for property damage. Such risks may be
covered by the general blanket policy or policies kept in force by the
Tenant governing such risks, and the Tenant shall deliver to the Lessor
certificates issued by the respective insurance carriers evidencing such
coverages.
Tenant shall not by any act or conduct impair the validity of any
policy of insurance taken out upon the Leased Premises by Lessor. Tenant shall
comply with any recommendation of Lessor in order than an excess charge or
increase in rate of insurance caused by Tenant's tenancy may be removed. If
Tenant's tenancy cannot for some reason permit compliance with such
recommendation, Tenant shall pay Lessor as additional rent the increased or
additional cost of such insurance.
Lessor, at no additional expense to Tenant, shall at all times during
this Lease, maintain in full force and effect fire and extended coverage
insurance on the Building, including the Leased Premises (but not any personal
property or fixtures of the Tenant thereon or therein), in an amount not less
than ninety percent (90%) of the full insurable value of the Building,
excluding lot, foundations, and costs of excavation.
Lessor, at Lessor's own cost and expense, shall maintain insurance
protecting Lessor and Tenant against any and all claims for injury or damage to
persons or property or for the loss of life or of property occurring upon, in
or about the public portions of the Building; such insurance to afford minimum
protection during the Term of this Lease, of not less than One Million Dollars
($1,000,000.00) each occurrence for bodily injury and One Million Dollars
($1,000,000.00) each occurrence for property damage. Such risks may be covered
by self-insurance of the Lessor if Lessor provides evidence to the reasonable
satisfaction of the Tenant that it is self-insured for such risks.
5
<PAGE> 6
All insurance or self-insurance required hereunder shall be effected
under valid and enforceable policies or evidence of self-insurance and shall be
issued by insurers of recognized responsibility. Each policy or certificate of
self-insurance shall name the Lessor, or the Tenant, as applicable, as an
additional insured party thereunder. Each such policy or certificate of
self-insurance shall also contain a requirement for thirty (30) days' written
notice prior to cancellation or material changes in the coverage evidenced by
such policies or certificates of self-insurance.
SECTION 7. MAINTENANCE AND REPAIRS. Provided that Tenant shall not
be in default hereunder and subject to the provisions elsewhere herein
contained, Lessor agrees to make all reasonable and good faith efforts to
assure that water, electricity, gas, elevator service, janitorial service and
year around air conditioning, as are in Lessor's judgment reasonably necessary
for the comfortable use and occupation of the Leased Premises are available on
a constant basis. Lessor will do nothing to interfere with the provision of
such utilities to the Leased Premises except as is reasonably necessary for the
safe and efficient operation of the Building and the Leased Premises. No
failure to furnish any of the foregoing utilities or services, except as the
result of willful neglect of Lessor, shall be construed as an eviction of
Tenant, or work an abatement of rent, or in any way render Lessor liable for
damages either to person or property suffered by Tenant, its employees,
licensees or invitees, by reason of any such failure, or release Tenant from
the prompt fulfillment of any of its covenants under this Lease. Relative to
janitorial services, the Lessor agrees to provide one full-time equivalent
Project Specialist who will be responsible for maintaining the trash chute
room, floor maintenance (waxing, stripping, buffing, carpet extraction), wall
washing, assistance in furniture moves, mopping corridors and lobbies and all
other major assignments generally associated with the Project Specialist
position. The Project Specialist will perform all such duties in a
6
<PAGE> 7
competent and workmanlike manner. The Lessor will also perform an annual
exterior window cleaning during the month of July or August of each year
during the term hereof. Pest control will be the responsibility of Lessor and
will be performed by its current contract vendor. The Lessor will handle all
of the trash removal including sharps containers. Tenant will furnish at its
own expense all sharps containers and trash bags. The Lessor will provide the
cleaning materials for the Project Specialist. Routine cleaning will be
performed by the Tenant using cleaning materials purchased at its own expense.
Routine cleaning to be provided by Tenant shall include such cleaning on
weekends and during the evening and night shift operations of the Tenant.
Lessor reserves the right to suspend service of the heating, elevators,
plumbing, electrical, air conditioning, and other mechanical systems when
necessary by reason of government regulation, civil commotion or riots,
accident or emergency, or for repairs, alterations, or improvements which are
in the reasonable judgment of Lessor desirable or necessary or for any other
reason beyond the power or control of Lessor without liability and damages
therefor.
The exercise of such right by Lessor shall not constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent or relieve Tenant from any of Tenant's obligations under
this Lease or impose any liability upon Lessor or its agents by reason of
inconvenience or annoyance to Tenant or injury to or interruption of Tenant's
business or otherwise.
Unless required to be repaired by the Tenant under Section 12 of this
Lease, Lessor shall keep the exterior of the Building, including but not
limited to, the foundation, exterior walls, windows, doors, window and door
frames, plate glass, roof, gutters, downspouts, landscaping and
7
<PAGE> 8
the parking are in good condition and repair and make such modifications or
replacements thereof as may be necessary or required by law or ordinance.
Lessor shall not be obligated to make any alterations, additions,
repairs, improvements or decorations to the Leased Premises except as
specifically agreed in writing by and between Lessor and Tenant. Further,
except for repairs to be made by Tenant, at Tenant's sole cost and expense as
required under the last paragraph of this Section 7, Tenant shall make no
alterations, additions or improvements without the expressed written consent of
the Lessor, and such consent shall not be unreasonably withheld. In the event
any such alterations, additions or improvements are requested to be made by
Tenant and consented to by Lessor, such shall be made by the Tenant (under and
pursuant to plans and specifications approved in writing by Lessor), at the
sole expense of Tenant. The foregoing shall not prevent the Tenant from
wallpapering, painting, hanging pictures and otherwise decorating the Leased
Premises without the consent of the Lessor. Tenant shall not affix or cause to
be affixed to the Building or Leased Premises, including the windows, any sign,
advertisement or notice without the specific written consent of Lessor, and
such consent shall not be unreasonably withheld. In this regard, the Tenant
recognizes that signage on the Building and on the campus of the Lessor is
regulated by ordinances of the City of Evansville, Indiana, and regulated by
the Metropolitan Evansville Area Plan Commission. Accordingly, on being advised
of the signage requirements of the Tenant, the Lessor will attempt to obtain
approval for such signage and will cooperate with Tenant in establishing the
design and location of such signage in accordance with such approvals. Any
expense incurred by the Lessor in this regard, including, but not limited to
construction and/or purchase of such signage (if, on the request of Tenant, the
Lessor elects to do such construction or make such purchase) shall be
reimbursed by the Tenant to the
8
<PAGE> 9
Lessor together with the next payment of rental due from Tenant to Lessor under
the terms hereof. In the absence of a written agreement to the contrary, any
alterations, repairs or improvements, except unattached moveable trade
fixtures, office furniture and equipment of Tenant, shall be and remain the
property of Lessor.
Tenant shall, at all times at Tenant's sole cost and expense, keep the
Leased Premises and every part thereof in good condition and repair, ordinary
wear and tear excepted, except as otherwise provided in this Lease.
SECTION 8. ASSIGNMENT SUBLETTING, MORTGAGING. Tenant shall not
assign this Lease without Lessor's prior written consent, and such consent
shall not be unreasonably withheld. Each permitted assignee or transferee shall
assume and be deemed to have assumed this Lease and shall be and remain liable
jointly and severally with Tenant for the payment of the rent and for the due
performance of all of the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed.
Tenant shall not mortgage or encumber this Lease, and shall not sublet
or permit the Leased Premises to be used by others, without Lessor's prior
written consent. If Lessor permits the Leased Premises or any part thereof to
be sublet or occupied by any person or persons other than Tenant, Lessor may,
after default by Tenant, collect rent from the subtenant or occupant and apply
the net amount collected to the rent herein reserved.
Tenant agrees and acknowledges its understanding that, in no event shall
any subletting or mortgaging of the Leased Premises by the Tenant, with or
without the consent of the Landlord, release the Tenant from liability under
this Lease and that notwithstanding any such subletting or mortgaging, the
Tenant shall continue to be fully liable under this Lease.
9
<PAGE> 10
SECTION 9. MECHANIC'S LIENS AND OTHER LIENS. The Tenant shall
promptly pay and discharge all bills for work done or materials furnished on
the Leased Premises at the request of the Tenant. The Tenant shall not permit
the imposition or assertion or any mechanic's, materialman's or other lien
against the Leased Premises with respect to any labor done or materials
furnished on the Leased Premises at the request of the Tenant. If such a lien
is imposed or asserted, the Tenant shall either (1) within sixty (60) days
after the filing of such lien pay the claim on such lien; or (2) within
sixty (60) days after the filing of such lien notify the Lessor in writing that
Tenant has a valid defense to such claim and such lien, which defense will be
promptly asserted, and furnish the Lessor with a bond, with adequate surety
thereon, fully indemnifying it against the foreclosure of such lien.
SECTION 10. LITIGATION. In the event that Lessor becomes involved,
through or on account of the terms of this Lease, or through or on account of
the occupancy of the Leased Premises by the Tenant, or the conduct of the
Tenant's business upon the Leased Premised, in any controversy or litigation in
which it is included as defendant solely by reason of its ownership of the
Leased Premises (the "Litigation"), the Tenant shall, upon notice from Lessor or
its agent, immediately use its best efforts to remove Lessor's connection with,
or liability under, the Litigation, if such Litigation throws any cloud or
encumbrance upon the title to the Leased Premises; provided, however, if Tenant
believes it has a good and valid defense or claim in such Litigation which
Tenant desires to set up and maintain, the Tenant shall have the right to do
so, provided it indemnifies the Lessor and its agents in all respects against
all loss, cost or damage resulting from such Litigation. The Tenant shall
immediately pay and discharge any and all obligations of Lessor whatsoever, in,
or arising out of, such Litigation involving the Lessor or its agents, in
protecting their interest or
10
<PAGE> 11
defending themselves in such Litigation, if Tenant fails to protect
Lessor's interest as above provided.
SECTION 11. DAMAGE OR DESTRUCTION. If, during the term of this
Lease, Leased Premises is so damaged by fire or other casualty, not occurring
through Tenant's fault, or a part or all of the Building is taken by eminent
domain proceedings so that it or the Leased Premises is rendered wholly unfit
for occupancy, as determined by Lessor, and Lessor gives Tenant Thirty (30)
days' written notice to that effect, then this Lease shall cease and terminate
from the date of such damage or taking. In such case, Tenant shall pay rent
pro-rated through the date of such damage or taking, shall immediately
surrender the Leased Premises to the Lessor upon request therefor and,
thereafter, Tenant shall have no obligation for payment of rent under this
Lease. If, following such damage, for cause other than by Tenant's acts or
omission to act, Lessor gives Tenant written notice that it has determined that
such damage can be repaired within Ninety (90) days from the date of damage,
Lessor, if it so elects, may enter and repair and this Lease shall not be
affected except that the rent shall be proportionally reduced or suspended
while such repairs are being made until the same are again suitable for full
occupancy. Any such repair shall be of the same or better quality as existed
prior to to such damage, and shall be made in a prompt and workmanlike fashion
calculated to interrupt Tenant's work as little as possible. If, however,
such damage is caused by Tenant's acts or failure to act, and Lessor elects, in
accordance with this paragraph, to repair, then Tenant's obligations to pay
rent shall not be suspended, nor shall such rent be pro-rated, but Tenant shall
be obligated to pay the full rent reserved in accordance with the terms of
this Lease during such period of repair.
11
<PAGE> 12
SECTION 12. INDEMNITY.
A. Tenant will protect, indemnify and save harmless Lessor and
Lessor's agents and employees from and against all liabilities, obligations,
claims, demands, damages, penalties, causes of action, costs and expenses
(including without limitation, reasonable attorneys' fees and expenses) imposed
upon or incurred by or asserted against Lessor or its agents or employees by
reason of (1) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Leased Premises, the public portions of
the Building or the adjacent or related sidewalks and driveways which result
from acts or omissions of Tenant, its agents or employees; (2) any failure on
the part of Tenant to perform or comply with any of the terms of this Lease; or
(3) performance of any labor or service or the furnishing of materials or other
property in respect of the Leased Premises or any part thereof by or at the
request of Tenant. If any action, suit or proceeding is brought against Lessor
and/or Lessor's agents or employees by reason of any such occurrence, Tenant
will, at its expense, resist and defend such action, suit or proceeding, or
cause the same to be resisted and defended by counsel satisfactory to Lessor.
B. Lessor will protect, indemnify and save harmless Tenant and
Tenant's agents and employees from and against all liabilities, obligations,
claims, demands, damages, penalties, causes of action, costs and expenses
(including without limitation, reasonable attorneys' fees and expenses) imposed
upon or incurred by or asserted against Tenant or its agents or employees by
reason of (1) any accident, injury to or death of persons or loss of or damage
to property occurring on or about the Leased Premises, the public portions of
the Building or the adjacent or related sidewalks and driveways which result
from acts or
12
<PAGE> 13
omissions of Lessor, its agents or employees; or (2) any failure on the
part of Lessor to perform or comply with any of the terms of this
Lease. If any action, suit or proceeding is brought against Tenant
and/or Tenant's agents or employees by reason of any such occurrence,
Lessor will, at its expense, resist and defend such action, suit or
proceeding, or cause the same to be resisted and defended by counsel
satisfactory to Tenant.
C. Any action or cause of action arising under the terms
and provisions of this Agreement permitted to be brought hereunder or
otherwise by either of the parties hereto may be brought only in the
Superior or Circuit Courts of Vanderburgh County, Indiana. The parties
hereby submit to personal jurisdiction in each such forum. The
prevailing party in any such action shall be entitled to recover its
attorney fees, court costs and expenses reasonably incurred in
connection with any such action.
SECTION 13. DEFAULTS AND REMEDIES OF LESSOR
EVENTS OF DEFAULT. Tenant stipulates and agrees that any one or more of
the following events shall constitute a default under this Agreement: (i)
Tenant shall default in keeping, observing or performing any of the covenants
or agreements of this Lease herein contained to be kept, observed and performed
by Tenant; (ii) Tenant shall default in any payment of rent, property taxes,
assessments or other charges required to be paid by Tenant hereunder when due
as herein provided; (iii) Tenant shall make an assignment for the benefit of
creditors or shall apply for or consent to the appointment of a receiver for
the Tenant or any of the property of Tenant; (iv) the institution of any
bankruptcy proceedings by or against the Tenant or his successors in interest,
assignees, agents, or subsidiaries; (v) due to an obligation of the Tenant, a
decree or any order appointing a receiver of the property of Tenant shall be
made and such decree or order shall not have been vacated, stayed
13
<PAGE> 14
or set aside within sixty (60) days from the date of entry or granting thereof;
(vi) the Leased Premises, or any part thereof, is levied upon by any revenue
officer or similar officer; or (vii) any representation, statement or warranty
at any time furnished to the Lessor shall prove to be untrue in any material
respect as of the date said statement was made or furnished.
If Tenant shall default in the payment of rent and such default shall
continue for ten (10) days, or if Tenant shall default in any manner as
specified above, and if such default shall continue for thirty (30) days after
notice thereof from Lessor, specifying in what manner Tenant has defaulted
(except that if such default cannot be cured within said 30 day period, this
period shall be extended for a reasonable additional time, provided that Tenant
commences to cure such default within the 30 day period and proceeds diligently
thereafter to effect such cure), then, in addition to any other rights or
remedies which Lessor may have by law or otherwise, Lessor may take possession
of the Leased Premises pursuant to legal proceedings or pursuant to any notice
provided for by law. Lessor may either terminate this Lease or may, from time
to time, without terminating this Lease, re-let said Leased Premises or any
part thereof for such term or terms (which may be for a term extending beyond
the Term of this Lease) and at such rental and rentals and upon such other terms
and conditions as Lessor in the exercise of Lessor's sole discretion may deem
advisable. lessor shall also have the right to make alterations and repairs to
the Leased Premises which are necessary to re-let the Leased Premises. Upon
each such re-letting:
(1) Tenant shall be immediately liable to pay the Lessor in
addition to any indebtedness other than rent due hereunder, the cost and
expense of re-letting and of such alterations and repairs incurred by
Lessor, and the amount, if any, by which the rent reserved in the Lease
for the period such re-letting (up to but not beyond the term of this
Lease)
14
<PAGE> 15
exceeds the amount received as rent for the Leased Premises for such
period of such re-letting or letting; or,
(2) At the option of Lessor, rents received by Lessor from such
re-letting shall be applied as follows: first, to the payment of any
indebtedness, other than the rent due hereunder from Tenant to Lessor;
second, to the payment of any costs and expenses of such re-letting and
such alteration and repairs; third, to the payment of rent due and
unpaid hereunder; and the residue, if any, shall be held by Lessor and
applied in payment of future rent as the same become due and payable
hereunder.
Nothing contained herein shall obviate lessor's obligation to mitigate its
damages.
SECTION 14. LESSOR'S RIGHT TO ENTER THE LEASED PREMISES. Lessor
reserves the right to enter the Leased Premises at any reasonable time in such a
way as to limit any interference with Tenant's operations as much as possible,
to examine the same, or to alter, improve or repair said Leased Premises and
any portion of the Building, the exercise of said right to be without abatement
of rent. Tenant hereby waives as against Lessor any claim for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Leased Premises and any other loss
occasioned thereby. Lessor shall also have the right at any time, without the
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor, to change the arrangement and/or location of
public entrances of passageways, tunnels, public doors and doorways and public
corridors, elevators, mechanical areas in rooms, stairs, toilets and other
public portions of the Building and to change the name, number or designation
by which the Building is commonly known.
15
<PAGE> 16
SECTION 14. MISCELLANEOUS LEASE PROVISIONS.
(a) WAIVER. The waiver of any term, covenant, or condition herein
contained shall not be deemed to be a waiver of such term, covenant, or
condition or any subsequent breach of the same or any other term, covenant or
condition herein contained.
(b) NOTICES. All notices and demands which may or are required to be
given by either party to the other hereunder shall be in writing and shall be
sent by United States certified or registered mail, postage prepaid, addressed
as follows:
If to Lessor: President
St. Mary's Medical Center of Evansville, Inc.
3700 Washington Avenue
Evansville, Indiana 47750
If to Tenant: GFI Pharmaceutical Services, Inc.
800 St. Mary's Drive
Evansville, Indiana 47714
or to such other place as Lessor or Tenant may from time to time designate in
writing.
(c) GOVERNING LAW. This Lease shall be governed by the laws of the
State of Indiana.
(d) WRITING CONTROLS. The parties hereto have not made any statement,
promise or agreement or taken upon themselves any engagement whatever verbally
or in writing in conflict with this Lease or that in any way modifies, varies,
alters, enlarges or invalidates any of its provisions. No obligations shall be
implied in addition to the obligations herein stated.
(e) AMENDMENTS MUST BE IN WRITING. None of the covenants, terms or
conditions of this Lease, to be kept and performed by either party, shall in
any manner be altered, waived, modified, changed or abandoned except by a
written instrument, duly signed, acknowledged and delivered by the other party.
16
<PAGE> 17
(f) RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed
or construed by the parties hereto, nor by any third party, as creating the
relationship of principal and agent or of partnership, or of joint venture by
the parties hereto, it being understood and agreed that no provision contained
in this Lease nor any acts of the parties hereto shall be deemed to create any
relationship other than the relationship of landlord and tenant.
(g) TIME OF ESSENCE. Time is of the essence of this Lease, and all
provisions herein relating thereto shall be strictly construed.
(h) CAPTIONS. The captions of this Lease are for convenience only and
are not to be construed as part of this Lease and shall not be construed as
defining or limiting in any way the scope of intent of the provisions hereof.
(i) SEVERABILITY. If any term or provision of this Lease shall to any
extent be held invalid or unenforceable, the remaining terms and provisions of
this Lease shall not be affected thereby, but each term and provision of this
Lease shall be valid and shall be enforced to the fullest extent permitted by
law.
(j) COVENANTS BINDING ON SUCCESSORS. All of the covenants, agreements,
conditions and undertakings contained in this Lease shall extend and inure to
and be binding upon the successors and assigns of both parties hereto, the same
as if they were in every case specifically named, and wherever in this Lease
reference is made to either of the parties hereto, it shall be held to include
and apply to wherever applicable, the successors and assigns of the party.
Nothing herein contained shall be construed to grant or confer upon any other
person or persons, firm, corporation or governmental authority, other than the
parties hereto, their successors and assigns, any right, claim or privilege by
virtue of any covenant, agreement, condition or undertaking in this Lease
contained.
17
<PAGE> 18
(k) ETHICAL AND RELIGIOUS DIRECTIVES. The parties acknowledge that
Lessor is a member of the Daughters of Charity Health System and that the
operation of Lessor, in accordance with the Ethical and Religious Directives and
the principles and beliefs of the Roman Catholic Church, is a matter of
conscience to the Lessor. It is the intent and agreement of the parties that
neither this Agreement nor any part hereof shall be construed to require or
permit Lessor or Tenant to violate said Ethical and Religious Directives in
operating their respective businesses under the terms and provisions of this
Agreement and all parts of this Agreement must be interpreted in a manner that
is consistent with said Ethical and Religious Directives. Ethical and Religious
Directives shall be defined as Ethical and Religious Directives for Catholic
Health Care Facilities as promulgated, from time to time, by the National
Conference of Catholic Bishops, Washington, D.C. of the Roman Catholic Church
and as adopted by the Bishop of the Catholic Dioceses of Evansville. In the
event that the National Conference of Catholic Bishops shall cease to exist,
"Ethical and Religious Directives" shall mean such similar directives
promulgated by the Roman Catholic Church, and in the event the Diocese of
Evansville shall cease to exist so that there is not then an individual bearing
the title of Bishop of the Catholic Dioceses of Evansville, such "Ethical and
Religious Directives" shall be as are adopted by the individual or organization
then exercising the power, duties and authority of the Bishop of the Catholic
Dioceses of Evansville.
SECTION 16. OPTION TO RENEW LEASE. The Lessor grants to the Tenant an
option to extend the term of this Lease for an additional period of five (5)
years under the terms and conditions of this Agreement, including the
recomputation of annual rental, payment of rental and other Tenant as provided
for in this Agreement. The Option to Renew must be exercised by Tenant by
18
<PAGE> 19
giving written notice to Lessor no later than sixty (60) days prior to the end
of the original Lease Term.
SECTION 17. ANCILLARY SERVICE. The Tenant, in the course of its
business, will require certain ancillary services from the Lessor, in the
Lessor's capacity as a medical center with facilities for provision of such
ancillary services. The Lessor agrees to provide such ancillary services to the
Tenant. The description o such ancillary services and the fees to be charged by
the Lessor to the Tenant for the provisions of such ancillary services is set
forth on Exhibit "B" which is attached hereto and made a part hereof. The Lessor
reserves the right to increase the fees for such services but that for any year
of the Lease Term or any extension of the Lease Term such fees will not increase
by more than twelve percent (12%) of the amount thereof for the immediately
preceding year.
SECTION 18. PARKING. The Lessor agrees to provide the Tenant with
designed parking spaces, consisting of all of the parking spaces in Lot R (as
shown on the Lessor's parking lot drawings, with is attached hereto and parked
Exhibit "C"), except two (2) parking spaces in said Lot R, which are designated
for use by Home Health Care Service/DME personnel. Any additional parking
required by the Tenant shall be in parking spaces designated by blue "bumpers"
in the Medical Arts Building parking lot. Customers, licensees, guests and
employees of tenant who park in any other spaces on the campus of Lessor will be
ticked according to the Medical Center Parking Policy No.101.217-2, the Tenant
understanding that the procedure under such policy could result in the towing of
improperly parked vehicles at the expense of Tenant.
SECTION 19. MEMORANDUM OF LEASE. This Lease Agreement shall not be
recorded. Tenant and Lessor shall, at the option of Tenant, execute and deliver
a Memorandum of this Lease
19
<PAGE> 20
Agreement in proper form for the purpose of recording, but said Memorandum of
this Lease Agreement shall not in any circumstance be deemed to modify or change
any of the provisions of this Lease Agreement, the provisions of which shall in
all instances prevail.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Lease Agreement to be executed as of JANUARY 5, 1996.
ST.MARY'S MEDICAL CENTER
OF EVANSVILLE,INC,
By: /s/ Richard C. Breon
------------------------------------
Richard C. Breon
Its: President/CEO
------------------------------------
"Lessor"
GFI PHARMACEUTICALS SERVICES,INC.
By: /s/ Mary L. Westrich Ph.D
------------------------------------
Its: President
------------------------------------
"Tenant"
20
<PAGE> 21
EXHIBIT "A"
FLOOR PLANS
-----------
<PAGE> 22
[EXHIBIT A - DIAGRAM 1 DEPICTING SECOND FLOOR
COMPOSITE FLOOR PLAN OF LEASED PREMISES]
<PAGE> 23
[EXHIBIT A - DIAGRAM 2 DEPICTING THIRD FLOOR
COMPOSITE FLOOR PLAN OF LEASED PREMISES]
<PAGE> 24
[EXHIBIT A - DIAGRAM 3 DEPICTING FOURTH FLOOR
COMPOSITE FLOOR PLANS OF LEASED PREMISES]
<PAGE> 25
EXHIBIT "B"
ANCILLARY SERVICES AND FEES
---------------------------
<PAGE> 26
EXHIBIT B - PAGE 1 OF 8
GFI PHARMACEUTICAL SERVICES, INC.
- ----------------------------------------
For Services through June 30, 1996
<TABLE>
<CAPTION>
LABORATORY SERVICES SCHEDULE A
<S> <C>
CBC W DIFF $9.00
CBC W/O DIFF 5.40
URIN 4.60
HEPAT B AG 9.00
HTLVIII 14.50
CL CT/CULT 22.10
DRSCWMARIJ 38.90
CARDIAC RISK 19.50
SMAC 27 11.10
GLUCOSE 7.30
STAT CHG 5.20
GRAM STAINS 7.50
PHLEBOTOMY CHG 5.40
</TABLE>
<PAGE> 27
EXHIBIT B-PAGE 2 of 8
GFI PHARMACEUTICAL SERVICES, INC.
=========================================
For Services through June 30, 1996
<TABLE>
<CAPTION>
RADIOLOGY SERVICES (TECHNICAL COMPONENT ONLY) SCHEDULE B
<S> <C>
ANKLE $56.70
HAND 70.80
WRIST 70.80
CHEST PA & LAT 38.20
CHEST PA 32.00
BONE SCAN LIMITED 293.30
LIVER SPLEEN SCAN 187.20
LUMBAR SPINE X-RAY 89.10
</TABLE>
<PAGE> 28
EXHIBIT B-PAGE 3 of 8
GFI PHARMACEUTICAL SERVICES, INC
==========================================
For Services through June 30, 1996
PULMONARY SERVICES SCHEDULE C
<TABLE>
<CAPTION>
Technical Professional Total
Component Component Charge
--------- ------------ ------
<S> <C> <C> <C>
COMPLETE TEST 146.70 93.40 $240.10
BASIC SPIROMETRY 35.00 23.40 58.40
SCREENING PULMON FUNC TEST 15.50 0.00 15.50
2-D ECHOCARDIOGRAPHY 201.10 142.70 343.80
2-D M-MODE ECHOCARDIOGRAPHY 251.70 189.40 441.10
CARDIAC STRESS TEST 162.20 64.90 227.10
OPHTHALMOLOGY ROOM 63.70 0.00 63.70
</TABLE>
<PAGE> 29
EXHIBIT B-PAGE 4 of 8
GFI PHARMACEUTICAL SERVICES, INC.
===========================================
For Services through June 30, 1996
PRESCRIPTION SERVICES SCHEDULE D
PRESCRIPTION SERVICES THROUGH ST. MARY'S APOTHECARY Employee pricing
<PAGE> 30
EXHIBIT B - PAGE 5 OF 8
GFI PHARMACEUTICAL SERVICES, INC.
- --------------------------------------
For Services through June 30, 1996
<TABLE>
<CAPTION>
DIETARY SERVICES SCHEDULE E
<S> <C>
BREAKFAST $5.10
LUNCH 6.30
DINNER 6.30
DIETICIAN SERVICES - Per Hour 25.00
CATERING PER EVENT
Deviations from meal, i.e., snack meal, heavy snack, etc., are to be costed on
a case-by-case basis.
</TABLE>
<PAGE> 31
EXHIBIT B - PAGE 6 OF 8
GFI PHARMACEUTICAL SERVICES, INC.
- --------------------------------------
For Services through June 30, 1996
<TABLE>
<CAPTION>
LAUNDRY SERVICES SCHEDULE F
<S> <C>
PRICE PER POUND $0.45
</TABLE>
<PAGE> 32
EXHIBIT B - PAGE 7 of 8
GFI PHARMACEUTICAL SERVICES, INC.
- --------------------------------------
For Services through June 30, 1996
<TABLE>
<CAPTION>
IV THERAPY SERVICES SCHEDULE G
<S> <C>
RATE PER 15-MINUTE INCREMENT $14.00
$25.00 minimum charge
Does NOT include supplies
</TABLE>
<PAGE> 33
EXHIBIT "C"
PARKING LOT DRAWINGS
--------------------
[MAP AND CORRESPONDING LEGEND DEPICTING HOSPITAL CAMPUS
AND ASSOCIATED PARKING LOTS]
33
<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....................... 699 967 1,621 2,464 2,463 2,475
Net effect of dilutive Common Share
options and dilutive Common Share
warrants -- Note A................ 215 297 418 495 500 478
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.... 1,052 1,402 2,177 3,097 3,101 3,091
====== ====== ====== ====== ====== ======
Net income (loss) per Common Share
-- Note C......................... $ (0.23) $(0.25) $(0.10) $(0.24) $(0.04) $ 0.02
====== ====== ====== ====== ====== ======
</TABLE>
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 income (loss) per Common Share has not been
presented because it is not applicable.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
GFI Pharmaceuticals, Inc.
Ohio Valley IRB, Inc.
DataTRAK, Inc.
Collaborative Holdings, Inc.
<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 10, 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. 2 to the Registration Statement (Form S-1 No.
333-2140) and related Prospectus of Collaborative Clinical Research, Inc. for
the registration of 2,875,000 of its Common Shares.
ERNST & YOUNG LLP
Cleveland, Ohio
June 10, 1996
<PAGE> 1
EXHIBIT 99.1
ADVICE OF INSURANCE
-------------------
HOFFMAN INSURANCE AGENCY, INC.
2 Berea Commons Berea, Ohio 44017
Phone 826-0700
INSURED: Collaborative Clinical Research, Inc.
20600 Chagrin Blvd., Cleveland, OH 44122
LOCATION OR OTHER SCHEDULE:
INSURANCE COMPANY: National Union Fire Insurance Company of Pittsburgh, PA
COVERAGE: Directors, Officers and Corporate Liability Insurance Policy
Limit of Liability - $5,000,000
Retention/Deductible: $100,000/$200,000 Coinsurance (Security Claims) 0%
Continuity Dates: Cov. A and B - 5/14/93 Cov. B(i) - 5/14/96
SPECIAL CONDITIONS:
PREMIUM: $360,559
Coverage, as specified above, has been confirmed placed effective May 14, 1996
------------
by: National Union Fire Insurance Company of Pittsburgh, PA
-------------------------------------------------------
and evidence of such placement has been received by the undersigned.
LOSS PAYEE/MORTGAGEE:
ISSUANCE DATE: June 6, 1996
SIGNED: /s/ Ellen Barge
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