-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWvpSW4X1mE6tYCbQtwgRzFe934ZQKiEm7xkEaH0hT8sd3AWI3ux155Ja7XV/ejo Ip0ZXsYCH7oSX5Rr3zPpmA== 0000950168-99-000652.txt : 19990305 0000950168-99-000652.hdr.sgml : 19990305 ACCESSION NUMBER: 0000950168-99-000652 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHARMACEUTICAL PRODUCT DEVELOPMENT INC CENTRAL INDEX KEY: 0001003124 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561640186 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27570 FILM NUMBER: 99557124 BUSINESS ADDRESS: STREET 1: 3151 17TH ST EXTENSION CITY: WILMINGTON STATE: NC ZIP: 28401 BUSINESS PHONE: 9102510081 10-K 1 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 0-27570 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. (Exact name of registrant as specified in its charter) North Carolina 56-1640186 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 3151 South Seventeenth Street Wilmington, North Carolina 28412 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (910) 251-0081 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common stock held by non-affiliates of the registrant was $606,797,458 as of February 16, 1999, based upon the closing price of the Common Stock on that date on the NASDAQ National Market System. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status may not be conclusive for other purposes. The number of shares outstanding of the registrant's class of Common Stock, par value $0.10 per share, was 23,536,413 as of February 16, 1999. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders (certain parts as indicated herein Part III). PART I STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH HEREIN AND IN THE COMPANY'S OTHER SEC FILINGS, AND INCLUDING, IN PARTICULAR, RISKS RELATING TO GOVERNMENT REGULATION, DEPENDENCE ON CERTAIN INDUSTRIES, FIXED PRICE NATURE OF CONTRACTS, DEPENDENCE ON PERSONNEL, MANAGEMENT OF GROWTH AND COMPETITION. ITEM 1. BUSINESS Company Overview Pharmaceutical Product Development, Inc. ("PPD" or "the Company") provides a broad range of research and development and consulting services in the life and discovery sciences. PPD Pharmaco, Inc. is the Company's life sciences subsidiary. The Company believes that PPD Pharmaco is the fourth largest contract research organization ("CRO") in the world, providing integrated product development resources on a global basis to complement the research and development activities of companies in the pharmaceutical and biotechnology industries. PPD Discovery, Inc., the Company's discovery sciences subsidiary, focuses on the discovery segment of the research and development outsourcing market. LIFE SCIENCES GROUP The Company's Life Sciences Group provides services through PPD Pharmaco, Inc. and its wholly owned subsidiaries (collectively "PPD Pharmaco") in the Americas (United States, Canada, South America), Africa, Asia, Europe and the Pacific Rim. PPD Informatics, a division of PPD Pharmaco, provides software development and system integration services to the pharmaceutical and biotechnology industries. PPD PHARMACO provides its clients high quality services designed to reduce drug development time. Reduced development time allows the client to get its products into the market faster and to maximize the period of marketing exclusivity and the economic return for such products. In addition, PPD Pharmaco's integrated services offer its clients a variable cost alternative to the fixed costs associated with internal drug development. PPD Pharmaco's professional CRO services include Phase I clinical testing, laboratory services, patient and investigator recruitment, Phase II-IV clinical trial monitoring and management, clinical data management and biostatistical analysis, regulatory consulting and submissions, medical writing, pharmacovigilance, and healthcare economics and outcomes research. The Company believes that it is one of a few CROs in the world capable of providing such a broad range of clinical development services. PPD INFORMATICS became a division of the Company through the Company's acquisition of Belmont Research, Inc., in March 1997. PPD Informatics clients include international and domestic pharmaceutical and biotechnology companies, scientific software vendors and government agencies including the FDA. PPD Informatics develops specialized software products to support different aspects of the pharmaceutical research and development process, including drug discovery, clinical trials and regulatory review. Current PPD Informatics software products include RESOLVE(TM), which manages data queries to investigator sites, TABLETRANS(R), which enables ease of data transformation, and CROSSGRAPHS(R) which is used for exploration and presentation of research data. During 1998, the Life Sciences Group also included Intek Labs, Inc. ("Intek") which was acquired in November 1997. Intek provides molecular genotyping, phenotyping and large-scale genomic DNA purification and archiving services through its Good Laboratory Practice (GLP)-certified laboratories. Intek also furnishes pharmaco-genetic services for clinical trials. In February 1999, Intek became a subsidiary of PPGx, Inc. ("PPGx"), the Company's pharmacogenomics joint venture with Axys Pharmaceuticals, Inc. PPGx provides comprehensive pharmacogenomics products and services to pharmaceutical and biotechnology companies. Pharmacogenomics is the use of genetic information to predict the safety, toxicity and/or efficacy of drugs in individual patients or groups of patients. Pharmacogenomics is becoming widely adopted as an essential drug discovery and development tool and increasingly important as part of an individual's diagnosis and treatment regimen. The Company has exclusive marketing rights to PPGx pharmacogenomics products and services. The Company also owns a minority position in PPGx with the option to increase its ownership share. During the first two months of 1998, the Life Sciences Group also included Clinix International, Inc., which owned the business and substantially all of the assets of Chicago Center for Clinical Research ("CCCR"), a nationally recognized organization which conducts clinical trials in the pharmaceutical, food and nutrition industries. The Company sold substantially all of the assets of CCCR in February 1998. 1 DISCOVERY SCIENCES GROUP PPD DISCOVERY, INC. ("PPD DISCOVERY") was established in June 1997 when the Company acquired SARCO, Inc. ("SARCO"), a combinational chemistry company, and the GSX System, a functional genomics platform technology. PPD Discovery focuses on the discovery research segment of the research and development outsourcing market. In May 1998, the Company created GenuPro, Inc. ("GenuPro"), a wholly owned subsidiary, which holds licenses to a number of compounds in the genitourinary field. GenuPro manages the research and development of these compounds. ENVIRONMENTAL SCIENCES GROUP During 1998, the Company also owned an environmental sciences consulting and management subsidiary, APBI Environmental Sciences Group, Inc., which operated under the trade name ENVIRON. ENVIRON was acquired by the Company in September 1996 as part of the Applied Bioscience International Inc. acquisition. ENVIRON provides a broad range of scientific, technical and strategic management consulting services that address a wide variety of public health and environmental issues related to the presence of chemicals in foods, drugs, medical devices, consumer products, the workplace and the environment. ENVIRON's services are concentrated in the assessment and management of chemical risk and are characterized by engagements supporting private sector clients with complex, potentially high liability concerns. The Company sold ENVIRON to the management of ENVIRON effective January 1999. Industry Overview LIFE SCIENCES GROUP The CRO industry provides independent product development services to the pharmaceutical and biotechnology industries and derives substantially all of its revenue from the research and development expenditures of these companies. The CRO industry has evolved from providing limited clinical services in the 1970s to a full-service industry today that encompasses the clinical research process (including pre-clinical evaluations), study design, clinical trial management, data collection, biostatistical analysis and product registration support. All of these services are provided in accordance with applicable government regulations covering clinical trials and the drug approval process in the jurisdictions where the services are provided, including the regulations of the United States Food and Drug Administration ("FDA"), the European Medicines Evaluation Agency ("EMEA") and other regulatory authorities. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the pharmaceutical and biotechnology industries. Implementation of government healthcare reform may adversely affect research and development expenditures by pharmaceutical and biotechnology companies, which could decrease the business opportunities available to the Company. The Company is unable to predict the likelihood of such or similar legislation being enacted into law or the effects such legislation would have on the Company. As a general matter, the clinical CRO industry is not capital intensive and the financial costs of entry into the industry are relatively low. The CRO industry is highly fragmented, with several hundred small, limited-service providers, several medium-sized CROs and a few full-service CROs with international capabilities. Although there are few barriers to entry for small, limited-service providers, the Company believes that there are significant barriers to becoming a full-service CRO with international capabilities. Some of these barriers include the cost and experience necessary to develop broad therapeutic expertise, the ability to manage large, complex clinical trials, the experience to prepare regulatory submissions, and the infrastructure and experience to respond to the international needs of clients. Historically, pharmaceutical companies, through use of internal programming resources, produced much of the software used in the drug discovery, clinical development and regulatory compliance processes. Now, these companies are also seeking external sources, including the Company's PPD Informatics division, to meet these automation needs both through custom application development and through proprietary packaged software. While many companies have the computer expertise to provide these products and services, the Company believes that detailed knowledge of the pharmaceutical industry drug discovery and development process forms a barrier to entry. 2 DISCOVERY SCIENCES GROUP Drugs are chemical compounds that interact with biological targets in the body. Discovering and developing new drugs is an extremely expensive and time-consuming process. Pharmaceutical Research and Manufacturers of American Association (PhRMA) estimates that the average cost of bringing a drug to market exceeds $359 million and takes approximately 10-15 years. Recent figures from the PhRMA, Vector Securities, Inc. and Lehman Brothers analysts' reports indicate that global research-based pharmaceutical and biotechnology companies invested approximately $39 billion in R&D activities in 1998. On average, these companies allocate over 40% of their R&D budget to pre-clinical R&D functions. Pre-clinical R&D functions include identification and validation of target chemical compounds, screening to identify lead compounds, chemical optimization of those leads, toxicology and safety testing in animals, and formulation and stability testing for the new experimental drug. SARCO is a chemical technology company that provides chemical compounds to the pharmaceutical, biotechnology, agrochemical and animal health industries. SARCO's core expertise includes the rapid synthesis of large numbers of compounds for use in the pre-clinical drug discovery and development process as well as the chemical optimization of those compounds found to have beneficial biological activity. The GSX System identifies targets for drug discovery by the selective inhibition of genes responsible for key steps in a disease process. The system is based on the finding that a gene fragment, when introduced into cells, sometimes specifically inhibits the function of the whole gene from which the fragment was obtained. PPD Discovery markets its products and services to those research-based companies looking for outsource research support. The Company believes that this outsourcing trend will continue over the next decade. The Drug Development Process Before a new drug is marketed, the drug must undergo extensive testing and regulatory review in order to determine that it is safe and effective. The development process consists of two stages: pre-clinical and clinical. The first stage is pre-clinical research, in which the new drug is tested IN VITRO (test tube) and IN VIVO (in animals) generally over a one- to three-year period, in order to determine the basic biological activity and safety of the drug. The Company provides Investigational New Drug ("IND") submission preparation and compilation but does not provide animal-based services in this stage of development. If the drug is perceived to be safe for human testing, the drug then enters the clinical stage. During the clinical stage, one of the most time-consuming and expensive parts of the drug development process, the drug undergoes a series of tests in humans, including healthy volunteers as well as patients with the targeted disease or condition. The Company provides full development services for the clinical stage. Prior to commencing human clinical trials in the United States, the sponsor must file an IND application with the FDA. In order to receive IND status, the sponsor of the new drug must provide available manufacturing data, pre-clinical data, information about any use of the drug in humans for other purposes and a detailed plan for the conduct of the proposed clinical trials. The design of these trials, also referred to as the study protocols, is essential to the success of the drug development effort, because the protocols must correctly anticipate the nature of the data to be generated and results that the FDA will require before approving the drug. In the absence of any FDA comments within 30 days after the IND filing, human clinical trials may begin. Although there is no statutory definition of the structure or design of clinical trials, human trials usually start on a small scale to assess safety and then expand to larger trials to test efficacy. These trials are usually grouped into the following three phases, with multiple trials generally conducted within each phase: o PHASE I. Phase I trials involve testing the drug on a limited number of healthy individuals, typically 20 to 80 persons, to determine the drug's basic safety data relating to tolerance, absorption, metabolism and excretion as well as other pharmacological indications and actions. This phase lasts an average of six months to one year. o PHASE II. Phase II trials involve testing a small number of volunteer patients, typically 100 to 200 persons who suffer from the targeted disease or condition, to determine the drug's effectiveness and dose response relationship. This phase lasts an average of one to two years. o PHASE III. Phase III trials involve testing large numbers of patients, typically several hundred to several thousand persons, to verify efficacy on a large scale, as well as long-term safety. These trials involve numerous sites and generally last two to three years. 3 After the successful completion of all three clinical phases, the sponsor of a new drug in the United States submits a New Drug Application ("NDA") to the FDA requesting that the product be approved for marketing. The NDA is a comprehensive, multi-volume filing that includes, among other things, the results of all pre-clinical and clinical studies, information about the drug's composition and the sponsor's plans for producing, packaging and labeling the drug. In addition, while the FDA does not use price as a criterion for approving a new drug, advisory panels of scientists that help the FDA evaluate new types of therapies have started taking cost into consideration. The FDA's review of an NDA can last from a few months (for drugs related to life-threatening circumstances) to many years, with the average review lasting 18 months. Drugs that successfully complete this review may be marketed in the United States, subject to any conditions imposed by the FDA. As a condition to its approval of a drug, the FDA may require that the sponsor conduct additional clinical trials following receipt of NDA approval to monitor long-term risks and benefits, study different dosage levels or evaluate different safety and efficacy parameters in target patient populations. In recent years, the FDA has increased its reliance on these trials, known as Phase IV trials, which allow new drugs that show early promise to reach patients without the delay associated with the conventional review process. Phase IV trials usually involve thousands of patients. Phase IV trials also are initiated by pharmaceutical manufacturers to gain longer market value for an approved product. For example, large-scale trials would be used to prove efficacy and safety of new dosage administration forms for approved drugs, such as inhalation form versus tablets or a sustained-release form versus capsules taken multiple times per day. Regulatory Environment The market for the services offered by the Company's CRO operations has developed as a result of significant laws and regulations governing the development and testing of certain drugs and chemicals as well as the impact of chemicals on the environment. Many countries require safety testing prior to obtaining governmental approval to market pharmaceutical products. The results of clinical tests conducted upon pharmaceutical products must be submitted to appropriate government agencies, such as the FDA in the United States, the EMEA and national regulatory agencies in Europe, and the Ministry of Health and Welfare in Japan, as part of the relevant pre-market approval process in individual countries. The Company's business depends on its ability to comply with these strict and ever-changing laws and regulations. Trends Affecting the CRO Industry In 1998, worldwide expenditures on research and development by pharmaceutical and biotechnology companies are estimated to have been $39 billion, of which the Company estimates $8 to $10 billion was spent on drug development activities of the type offered by the CRO industry. The Company believes that approximately $4 billion of such spending was outsourced to CROs. The Company believes that the outsourcing of drug development activities by pharmaceutical and biotechnology companies has been increasing and will continue to increase for the following reasons: COST CONTAINMENT PRESSURES Market forces and governmental initiatives have placed significant pressure on pharmaceutical and biotechnology companies to reduce drug prices. Pressures on profit margins have arisen from increased competition as a result of patent expiration, market acceptance of generic drugs, and governmental and private efforts to reduce healthcare costs. In addition, private managed care organizations are beginning to limit the selection of drugs from which affiliated physicians may prescribe, thereby further increasing competition among pharmaceutical and biotechnology companies. The Company believes that the pharmaceutical industry is responding to these pressures by downsizing operations, decentralizing the internal research and development process, and converting the fixed costs of maintaining a research and development infrastructure to variable costs by outsourcing drug development activities to CROs. The downsizing of research and development activities also creates demand for CROs as internal development bottlenecks arise when a large number of compounds emerge from the research process and need to be pushed through the development pipeline. In addition, increased pressure to differentiate products and to generate support for product pricing serves as the foundation for growth in the area of healthcare economics, both with respect to drugs under development and to products already on the market. 4 REVENUE ENHANCEMENT THROUGH FASTER DRUG DEVELOPMENT Pharmaceutical and biotechnology companies face increased pressure to bring innovative, patent-protected medicines to market in the shortest possible time, while following good scientific practices and adhering to government regulations. Pharmaceutical and biotechnology companies are attempting to increase the speed of new product development, and thereby maximize the period of marketing exclusivity and economic returns for their products, by outsourcing development activities to CROs. The Company believes that CROs, by providing specialized development services, are often able to perform the needed services with a higher level of expertise or specialization, and therefore more quickly than a pharmaceutical or biotechnology company could perform such services internally. In addition, some pharmaceutical and biotechnology companies are beginning to contract with large full-service CROs to conduct all phases of clinical trials for new product programs lasting several years, rather than separately contracting specific phases of drug development to several different CROs, an approach which the Company believes may result in shorter overall development times. This trend may favor large full-service CROs like the Company, but could also increase competitive pressures and risks. BIOTECHNOLOGY INDUSTRY GROWTH The United States biotechnology industry has grown rapidly over the last ten years and is developing significant numbers of new drug candidates that will require regulatory approval. Many of these new drug candidates are now moving into clinical development and many biotechnology companies do not have the necessary staff, expertise or financial resources to conduct clinical trials on their own. Accordingly, many of these companies have chosen to outsource the product development process rather than expend significant time and resources to develop an internal clinical development capability. Further, PPD Pharmaco's experience suggests that biotechnology companies are increasingly turning to CROs for their sophisticated regulatory expertise to provide assistance in the generation of the ideal development plan. Moreover, the biotechnology industry is expanding into and within Europe, providing growth opportunities for CROs with international capabilities. NEED FOR INTERNATIONAL SUPPORT More pharmaceutical and biotechnology companies are attempting simultaneous filings of registration packages in several major jurisdictions rather than following the past practice of sequential filings. The studies to support such registration packages may include a combination of multinational and domestic trials. Pharmaceutical and biotechnology companies may turn to CROs for assistance with such trials, as well as collecting, analyzing, integrating and reporting the data. The Company believes that CROs with an international presence and management experience in the simultaneous filing of multiple applications may benefit from these trends. CONSOLIDATION IN THE CRO INDUSTRY As a result of competitive pressures, the CRO industry is consolidating. Mergers and acquisitions have resulted in the emergence of several large, full-service CROs that have the capital, technical and financial resources to conduct all phases of clinical trials on behalf of pharmaceutical and biotechnology companies. As pharmaceutical and biotechnology companies increasingly outsource development, they may increasingly turn to larger CROs that provide a broad range of clinical services, while at the same time they may also limit the number of CROs they choose to provide such services. The Company believes that these trends will further concentrate market share among larger CROs with a track record of speed, flexibility, responsiveness and overall development experience and expertise. Company Strategy The Company's fundamental strategy is to distinguish its services on the basis of superior performance to maximize its clients' return on their R&D investments. The Company strives to deliver to its clients efficient and innovative services that accelerate the rate of new product development. The Company intends to continue to expand the depth and breadth of its services by (i) capitalizing on its managerial and operational strengths, (ii) focusing on hiring and training its staff, (iii) focusing on its strategic marketing initiatives, (iv) developing its services in healthcare economics and communications consulting, (v) pursuing strategic acquisitions to enhance discovery and development services, (vi) expanding geographically, (vii) pursuing opportunities provided by technological advances, and (viii) expanding on its vertical expertise in five core therapeutic areas. The Company differentiates itself from competitors by providing a continuum of high-quality services, from discovery through aftermarket support. The Company intends to be a leader in integrating pharmacogenomics in drug development and research. 5 MANAGERIAL AND OPERATIONAL STRENGTH The Company is guided by senior management who have spent much of their careers as research or development experts within major pharmaceutical companies and who have a record of success bringing drugs to market both nationally and internationally. PPD Pharmaco concentrates on its core operational strengths in all phases of clinical studies and other critical path studies such as treatment INDs. Timely performance is based on parallel drug development processes and leveraging the knowledge and experience of management and investigators. Basic medical, scientific and regulatory services continue to be integrated with and streamlined through various technological advances, all directed toward a reduction in overall development times. PPD Pharmaco emphasizes efficiencies in each phase of clinical trials initiation and management, data acquisition, data management and analysis, and report writing and filing, in order to reduce the time and cost of obtaining regulatory approval for its clients' products. As a means of differentiating itself from its competitors, PPD Pharmaco emphasizes therapeutic area specialization, in particular in the areas of virology/infectious diseases, cardiopulmonary diseases, neuropyschiatric disorders, oncology and immunology. HIRING AND TRAINING The Company believes that its success is based on the quality and dedication of its employees. The Company strives to hire the best available people in terms of ability, experience, attitude and fit with the Company's performance philosophy. New employees are trained extensively, and the Company believes that it is an industry leader in the thoroughness of its training programs. In addition, employees are encouraged to continually upgrade and broaden their skills through internal and external training programs. As new technologies develop, employees are equipped with and trained to make use of such technological innovations. GLOBAL STRATEGIC MARKETING INITIATIVES PPD Pharmaco focuses its integrated marketing and sales efforts on high volume clients with needs in the service segments and therapeutic areas in which the Company specializes. Direct salespeople concentrate on a group of assigned clients, marketing across service segments. PPD Pharmaco's business development personnel consult with potential clients early in the bidding process in order to determine their needs. The business development personnel and PPD Pharmaco's project managers then invest significant time to determine the optimal way to design and carry out the potential client's proposal. PPD Pharmaco's recommendations to the potential client with respect to study design and implementation are an integral part of PPD Pharmaco's bids and an important aspect of the integrated services that PPD Pharmaco offers to its clients. PPD Pharmaco believes that its preliminary efforts relating to the evaluation of a potential client's proposed clinical protocol and implementation plan allows accelerated commencement of the clinical trial after the contract has been awarded to PPD Pharmaco. Discovery services are marketed through centralized PPD corporate marketing efforts to supplement localized marketing by scientists to scientists, with support from appropriate outside consultants. The functional genomics technology (GSX) is marketed primarily to large pharmaceutical companies, while combinatorial chemistry is directed more toward biotechnology and virtual companies. The Company sponsors and encourages the participation by its personnel in a variety of scientific endeavors, including the presentation of papers by its professional staff at meetings of professional societies and major conferences, and the publication of scientific articles in respected journals. The Company believes such activities enhance its reputation for professional excellence. The Company's core marketing and communications efforts include advertising in trade journals, participation at scientific conferences, speakers' bureaus, direct mail, presentation materials and media relations. HEALTHCARE ECONOMICS AND OUTCOMES RESEARCH The healthcare market in the United States is evolving from a fragmented system of individual providers with little incentive to control costs to a managed care system in which large organizations attempt to lower the cost of healthcare through a number of means. The Company believes that such market dynamics support the need for healthcare economics analysis and outcomes research. PPD Pharmaco offers programs integrating such analysis in clinical development programs to support regulatory approval, as well as pricing, marketing and reimbursement strategies. While PPD Pharmaco's current focus in this area is on its traditional client base within the pharmaceutical and biotechnology industries, both with respect to drugs under development and products already on the market, PPD Pharmaco expects to extend such services to payers and providers as well. 6 ACQUISITIONS The Company will continue to actively seek strategic acquisitions, both within and outside current CRO service segments. Acquisition candidates must provide opportunities for innovation, synergy and growth. The Company's criteria for acquisitions may include complementary client lists, ability to increase market share within and across clients, complementary therapeutic area and service segment strengths, strategic geographic capabilities or particular process expertise. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and services of the acquired companies, the expenses incurred in connection with attempted or successful acquisitions and in connection with subsequent assimilation of operations and products, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired company. If the Company consummates any acquisitions in the future, there can be no assurance that such acquisitions will be successfully integrated into the Company's operations. GEOGRAPHICAL EXPANSION PPD Pharmaco currently has operations in the Americas (the United States, Canada, South America), Europe (including Eastern Europe), South Africa, Asia and the Pacific Rim. PPD Pharmaco has identified certain strategic areas of promise where CROs currently have limited or no presence and intends to selectively pursue these and other strategic opportunities internationally. Geographic expansion involves numerous risks, including up-front expenses, potential political or economic instability, assimilation of staff and cultural differences. TECHNOLOGICAL ADVANCES PPD Pharmaco believes that optimizing the use of information technology can accelerate the drug development process and yield valuable marketing information. PPD Pharmaco has experience in the use of information technology in clinical trial management and offers a wide range of technology-based services, including initial market research and study design, remote monitoring and data acquisition, ongoing study management, outcomes research, patient and disease management, and the filing of Computer Assisted New Drug Applications and Product License Applications. The Company believes that the use of third-party systems and selected internally developed software allows it to offer its clients advanced technology for expediting the drug development process. Services Offered LIFE SCIENCES GROUP PPD Pharmaco has designed its various global services to be flexible and integrated in order to assist its clients in optimizing their research and development spending through the clinical stages of the drug development process. PPD Pharmaco provides Phase I clinical testing, laboratory services, patient and investigator recruitment, Phase II-IV clinical trial monitoring and management, clinical data management and biostatistical analysis, regulatory consulting and submission, medical writing, pharmacovigilance, and healthcare economics and outcomes research for its clients. These resources are provided individually or as an integrated package of services to meet the client's needs. PPD Informatics provides innovative software development and system integration services and creates a data link between discovery and development. PHASE I CLINICAL TESTING After an Investigational New Drug Application has been filed with the FDA, human testing of a new drug can begin. The drug is typically first administered to healthy volunteers to determine the drug's basic safety data based on tolerance, absorption, metabolism, excretion and other pharmacological actions. Later, special studies are conducted in volunteers and special patient populations to further define the drug's overall pharmacological profile. The Company believes that PPD Pharmaco is one of the industry's largest Phase I providers with clinical testing services conducted in its 212-bed unit in Austin, Texas, its 64-bed unit located near Research Triangle Park, North Carolina and its 52-bed unit in Leicester, England. The Company's professional nursing staff administers general Phase I safety tests, special population studies, and bioavailability and bioequivalence testing. Special population studies may involve the elderly, women or patients with specific diagnoses, such as renal failure or asymptomatic HIV disease. The Austin, Texas site also has a Dental Research Center to evaluate new analgesic compounds used in molar extractions for safety and effectiveness. The Company's clinical research studies rely upon the ready accessibility and willing participation of volunteer subjects. These subjects generally include volunteers from the communities in which the studies are conducted, including the Phase I centers in Austin, Research Triangle Park and Leicester, which to date have provided a substantial pool of potential subjects for research studies. However, the Company's business could be adversely affected if the Company were unable to attract suitable and willing volunteers. 7 The Company also provides bioavailability and bioequivalence testing services. This testing is generally conducted each time the dosage, form or formulation of the drug is modified. It involves administration of the test compounds and obtaining biological fluids sequentially over time to measure absorption, distribution, metabolization and excretion of the drug. PPD Pharmaco attempts to manage its Phase I services to maximize scheduling flexibility and efficiency. The services also can integrate with PPD Pharmaco's other service segments such as laboratory, pharmacokinetic and biostatistical services. PPD Pharmaco is one of the few full-service CROs offering Phase I clinical testing in the United States and Europe. LABORATORY SERVICES PPD Pharmaco provides biodiscovery, bioanalytical and product analysis services through its Good Laboratory Practice (GLP)-certified laboratories in Richmond, Virginia and Middleton, Wisconsin. PPD Pharmaco's laboratories analyze biological fluid samples from animal and human clinical studies. The latter includes those conducted by PPD Pharmaco's Phase I units for drug and metabolite content and concentration. PPD Pharmaco currently has over 800 validated assays available for its clients' use in conducting laboratory analyses, qualifying PPD Pharmaco for a wide range of assignments. PPD Pharmaco's laboratories also process fluid samples for pre-clinical studies. The Company's biodiscovery group links drug discovery to development by providing rapid IN VIVO screening of new chemical entities, producing pharmacokinetic and enzyme-kinetic profiles to assess stability, metabolism and bioavailability of compounds. This non-GLP, high throughput proof-of-principle method of screening provides companies with a lower-cost way to quickly assess viability of multiple lead compounds. Product analysis services include dissolution and stability studies, which are necessary to characterize dosage form release patterns and stability under various environmental conditions in the intended package for marketing. These studies must be carried out over the commercial life of products, beginning at the clinical trial stage. New formulations require the same set of studies as the original dosage form. Comprehensive measurement services include Gas Chromatography/Mass Spectrometry, Liquid Chromatography/Mass Spectrometry (LC/MS and LC/MSMS), High Performance Liquid Chromatography, Gas Chromatography, Radioimmunoassay and Enzyme Linked Immunosorbent Assay. Support services include HIV-positive sample handling, sample/data management for kinetic studies from multi-center trials and sample/data archiving. PPD Pharmaco is one of a few full-service CROs able to offer its clients the advantages of both bioanalytical and product analysis, as well as Phase I clinical testing. 8 PHASE II-IV CLINICAL TRIAL MANAGEMENT The core of PPD Pharmaco's business is a comprehensive package of services for the conduct of Phase II-IV clinical trials, which, in concert with its other analytical and Phase I testing services, pharmacogenomics and informatics, allows PPD Pharmaco to offer its clients an integrated package of clinical management services. The Company has significant clinical trials experience in the areas of: AIDS Primary disease and treatment/prophylaxis of opportunistic infections Analgesia Acute and chronic pain modeling Biotechnology Growth hormone, multiple sclerosis, sepsis, wound healing Cardiovascular disease Hypertension, angina pectoris Central nervous system Schizophrenia, depression, epilepsy, chronic pain, anxiety, obsessive-disease compulsive disorders, panic disorders Dermatology Wound healing, acne, hair loss, psoriasis Gastroenterology Duodenal ulcer, gastric ulcer, gastro-esophageal reflux disease H. PYLORI, nonsteroidal anti-inflammatory drug-induced ulcers, inflammatory bowel disease Infectious disease Acute and chronic bacterial and fungal diseases, including pneumonia, influenza and sinusitis Metabolic disease Diabetes, hormone replacement therapy Oncology Prostate, colorectal, breast and lung cancer Pulmonary/Allergy Asthma, allergic rhinitis, community acquired pneumonia, Acute Respiratory Distress Syndrome Rheumatology Rheumatoid and osteoarthritis Virology AIDS, herpes simplex, hepatitis B, chronic hepatitis C Women's health Osteoporosis, oral contraception Clients' needs are served by conducting clinical trials through a dedicated project team. A project manager supervises all aspects of the conduct of the clinical trial, while PPD Pharmaco's clinical research associates are in the field monitoring the trial at the various investigational sites where it is being conducted. Within this project-oriented structure, PPD Pharmaco can manage every aspect of the clinical trial in Phases II through IV of the drug development process, including protocol development, case report form ("CRF") design, feasibility studies, investigator selection, recruitment and training, site initiation and monitoring, accelerated patient enrollment, development of training materials for investigators and training of clients' staff. PPD Pharmaco monitors its clinical trials in compliance with government regulations. PPD Pharmaco has adopted global standard operating procedures ("SOPs") which are intended to satisfy regulatory requirements and serve as a tool for controlling and enhancing the quality of its clinical trials. All PPD Pharmaco SOPs are in compliance with Good Clinical Practice ("GCP") requirements and the International Conference on Harmonization ("ICH") standards. The FDA has adopted the ICH's standards, and, the European Community has agreed to conduct all studies in accordance with the standards from ICH, which sets global clinical study standards based on GCP. Data generated during clinical trials are compiled, analyzed, interpreted and submitted in report form to the FDA or other relevant regulatory agencies for purposes of obtaining regulatory approval. The Company provides expert consulting on conducting clinical trials for simultaneous regulatory submissions to multiple countries. PPD Pharmaco provides its clients with one or more of the following core Phase II-IV clinical trials management services using parallel processing to accelerate the development process: STUDY DESIGN PPD Pharmaco serves its clients in the critical area of study design by applying its wide development experience in the preparation of study protocols and CRFs. A study protocol defines the medical issues to be examined in evaluating the safety and efficacy of a drug, the number of patients required to produce statistically valid results, the clinical tests to be performed, the time period over which the study will be conducted, the frequency and dosage of drug administration, and the exact patient criteria. The success of the study depends not only on the ability of the protocol to correctly predict requirements of regulatory authorities, but also on the ability of the protocol to fit coherently with the other aspects of the development process and the ultimate marketing strategy for the drug. This process includes healthcare economic components to support rational pricing and positioning. 9 Once the study protocol has been finalized, CRFs must be developed to record the information to be obtained from the clinical studies. The various other disciplines involved in the drug development process, including data management, must work closely with the clinical trial management project team to assure that the data are recorded in a form that is efficient for subsequent data entry, management and reporting. Proper CRF design is critical to allowing investigators and field monitors to conduct their respective jobs quickly, accurately and effectively. INVESTIGATOR RECRUITMENT During clinical trials, physicians (also referred to as investigators) at hospitals, clinics or other locations (also referred to as investigational sites) supervise administration of the drug to patients. PPD Pharmaco recruits investigators who contract directly with either the Company or its client. For large scale trials, or trials with a short start-up timeline, PPD Pharmaco's Telecommunications Center (TCC) is utilized for investigator recruitment. The TCC integrates telephony, relational databases, computerized scripts, and customized tracking software to provide high-speed results and to manage high volumes of inbound and outbound calls for investigator recruitment. Recently, the TCC staff recruited and obtained IRB approval for over 900 investigators in 12 weeks. The successful rapid identification and recruitment of investigators who have the appropriate expertise and an adequate base of patients who satisfy the requirements of the study protocol are critical to the timely completion of the trial. PPD Pharmaco maintains and constantly expands and refines its computerized database of over 20,500 investigators. Information regarding PPD Pharmaco's experience with these investigators, including factors relevant to rapid study initiation, are contained in the database. This information allows project managers to efficiently choose the appropriate investigators for a particular study. STUDY MONITORING PPD Pharmaco provides study-monitoring services, which include investigational site initiation, patient enrollment assistance and data collection through subsequent site visits. These visits also serve to assure that data is gathered according to GCP, according to the requirements of the client and applicable regulatory authorities, and as specified in the study protocol. Project management and field-monitoring services are the operational heart of Phase II and III clinical studies. In many instances, a project's timely completion is based on meeting deadlines during the first few months of study initiation. Therefore, PPD Pharmaco focuses at an early stage on identifying and quickly completing the critical rate-limiting steps of screening and selecting qualified investigators, processing pre-study regulatory paperwork, obtaining investigative review board approvals and scheduling investigational site initiation visits. Drugs under study cannot be released to the investigational sites, and thus the study cannot begin, until these activities have been completed. Following study initiation, PPD Pharmaco utilizes a number of appropriate methods of accelerating patient recruitment. This may involve PPD Pharmaco's integrated systems of telephone recruitment, telefaxing and media advertising. As with Phase I clinical trials, rapid patient recruitment is critical to the Company's success in providing services to maximize clients' return on R&D investments. Patient data must be obtained from the field efficiently, quickly and accurately to speed subsequent data entry, management and analysis, and report writing. PPD Pharmaco reviews data through visits by its field monitors to investigative sites. Field monitors receive orientation training and routine updates on changes in federal study regulations and new company SOPs for quality trial monitoring and reporting. These monitors are equipped with laptop computers for the purpose of SOP and regulatory information updates as well as report generation. PPD Pharmaco has monitored many clinical trials, including a number of very large studies. For example, PPD Pharmaco is in its second five-year contract with the National Institutes of Health ("NIH") to monitor investigational sites for AIDS treatment related trials sponsored by the NIH. This project involves approximately 250 investigational sites and total enrollment of approximately 60,000 patients. PPD Pharmaco has monitored 33,000 patients in 233 protocols since the beginning of the project in 1990. There has also been over 1,900 pharmacy, regulatory and operational audits at the sites. 10 CLINICAL DATA MANAGEMENT AND BIOSTATISTICAL ANALYSIS The professionals who manage PPD Pharmaco's data management and biostatistical analysis operations have extensive pharmaceutical and biotechnology industry experience in the design and construction of local and multinational clinical trial databases. PPD Pharmaco provides clients with assistance in such areas as study design, sample size determination, CRF design and production, fax based monitoring, database design and construction, New Drug Application preparation and production (including electronic submissions to the FDA, known as Computer Assisted New Drug Applications), and FDA presentations and defense. The Company offers data management and biostatistical analysis services both separately and as part of an integrated drug development program. During the design of development plans and protocols, PPD Pharmaco offers consulting services relating to sample size parameters for patient enrollment, development of data analysis plans and randomization schemes. During clinical trials, PPD Pharmaco assists in the rapid acquisition of clean and accurate data. Following completion of the clinical trials, PPD Pharmaco assists in report preparation and FDA presentations. PPD Pharmaco's biostatisticians may participate with clients in meetings with the FDA to present and defend biostatistical analyses. PPD Pharmaco has expertise in electronically capturing and integrating geographically diverse data. PPD Pharmaco uses SAS(R), Clintrace(TM), Oracle(R), BBN Clintrial(TM) and other third party software, as specified by clients, combined with customized programs developed by PPD Pharmaco. Performing data management and biostatistical analysis activities in parallel with other drug development activities where possible can reduce drug development time. For example, data management personnel work with clinical program managers and field monitors to continuously enter data, program output tables and listings, and validate the database so that there is a rapid progression to final tables, listing preparation and biostatistical analyses. Similarly, there is a close working relationship with medical writing and regulatory service personnel. TREATMENT INVESTIGATIONAL NEW DRUG APPLICATION A treatment Investigational New Drug ("IND") application includes a procedure to allow patients to receive a new drug not yet approved for a serious or immediate life-threatening disease, such as AIDS or multiple sclerosis, for which no comparable or satisfactory therapy is available. This treatment is provided during the clinical trial phase of development, but outside the controlled clinical trial. The treatment IND application process has the advantage of getting a new drug into an expanded patient base early, as well as allowing earlier publicity about the potential success of the drug. PPD Pharmaco's involvement in a treatment IND application may range from simply monitoring the treatment to providing an integrated set of services involving full investigational site management, data management, biostatistical analysis and report writing. MEDICAL WRITING AND REGULATORY SERVICES PPD Pharmaco provides full planning services for product development including pre-clinical review, CMC consulting and clinical protocol development. These activities are complemented by report writing, program management and regulatory services designed to reduce overall development time. Strategic planning and program management provided over the course of a product development life-cycle helps to ensure that regulatory dossiers are assembled in a minimum of time and are focused on obtaining the desired labeling for the compound. These development services are integrated with PPD Pharmaco's other services to speed the process consistent with good service and regulatory compliance. PPD Pharmaco maintains a large internal compliance and quality assurance department to provide in-process monitoring of GCP performance. PPD Pharmaco also offers these services to clients to assess trials conducted by the client or another CRO. HEALTHCARE ECONOMICS, OUTCOMES AND MARKETING RESEARCH PPD Pharmaco offers a number of services in the healthcare economics area to pharmaceutical and biotechnology companies as well as managed care payers and providers. These services include prospective and retrospective clinicoeconomics analysis, quality of life and drug therapy evaluation, large sample market research, clinical hypothesis testing for product marketing, enhanced patient, investigator and managed care plan recruiting, managed care consulting, patient therapeutic support systems and disease management consulting. This research helps clients demonstrate the value of their products in cost-sensitive markets without costly delays from designing and implementing new randomized clinical trials. DISCOVERY SCIENCES GROUP PPD Discovery consists of SARCO, a combinatorial chemistry company, and the GSX System, a functional genomics platform technology for target discovery. GSX is a proprietary whole-cell-based system that facilitates the rapid identification, validation and functional analysis of novel targets. 11 GSX identifies targets for drug discovery by the selective inhibition of genes responsible for key steps in a disease process. The system is based on the finding that a gene fragment, when introduced into cells, sometimes specifically inhibits the function of the whole gene from which the fragment was obtained. Effective inhibitory fragments are obtained by breaking the DNA containing the genes of interest into many different random pieces, inserting these fragments into a population of tester cells and identifying the rare individual cells that acquire a selected new property as a consequence of the inhibitory action. Examples of desirable cellular properties that can be selected include increased resistance to a virus or increased sensitivity to a drug. The "winning" DNA fragments are then recovered from the selected cells and analyzed to determine what genes, and thereby targets, they represent. Activities surrounding the GSX technology are conducted in Research Triangle Park, North Carolina and Menlo Park, California. SARCO is a chemical technology company that provides proprietary combinatorial chemistry and unique, drug-like small molecule combinatorial libraries to pharmaceutical, biotechnology, agrochemical and animal health industries. SARCO's core expertise includes the rapid synthesis of large numbers of compounds for use in the pre-clinical drug discovery and development process as well as the chemical optimization of those compounds found to have beneficial biological activity. SARCO is located in the Park Research Center, a high-technology campus in Research Triangle Park, North Carolina. SARCO's research facility is fully equipped to perform solid and solution-phase combinatorial chemistry, custom monomer synthesis and solution-phase medicinal chemistry. SARCO maintains full analytical and computational capabilities in support of its combinatorial and medicinal chemistry activities. Products include the SARCO base libraries, which are chemical compounds designed for high throughput biological screening, and the SARCO Focus Libraries, which are custom designed chemical libraries provided exclusively to a client. Services include research collaborations and partnerships with research-based discovery companies. These collaborations and partnerships are typically structured for a fixed period of time or around discrete client projects. Clients and Marketing The Company's Life Sciences Group provides services primarily to pharmaceutical and biotechnology companies. For the year ended December 31, 1998, approximately 87% of the Company's Life Sciences Group's net revenue was attributable to clinical services and 13.0% to laboratory services. For the year ended December 31, 1998, net revenue of the Life Sciences Group was derived approximately as follows: Percentage of Source Net Revenue ------ ----------- Pharmaceutical 82.05% Biotechnology 7.97 Government 1.92 Other 8.06 During 1998, the Company provided services to 40 of the top 50 pharmaceutical companies in the world as ranked by 1997 healthcare research and development spending. The Company provides services to the pharmaceutical and biotechnology industries and its revenue is highly dependent on expenditures on research and development by clients in these industries. Accordingly, the Company's operations could be materially and adversely affected by general economic downturns in these industries, the current trend toward consolidation in these industries or other factors resulting in a decrease in research and development expenditures. Furthermore, the Company has benefited to date from the increasing tendency of pharmaceutical and biotechnology companies to outsource large clinical research projects. Should this trend be reversed, the revenue of the Company could be materially and adversely affected. The Company believes that concentration of business among certain large customers is not uncommon in the CRO industry. The Company has experienced such concentration in the past and may experience such concentration in the future. However, during 1998 and 1997, no single client contributed more than 10% of the Company's total net revenue. In 1998, the Company's ten largest clients accounted for approximately 39.5% of the Company's total net revenue and approximately 24% of the Company's total 1998 net revenue was derived from clients located outside the U.S., in particular in Europe and Japan. 12 Contractual Arrangements Many of PPD Pharmaco's contracts are fixed price, with some variable components, and range in duration from a few months to several years. In other contracts, PPD Pharmaco is paid based on applying agreed upon hourly rates to hours worked. Generally, for multi-year contracts involving clinical trials, a portion of the contract fee is paid at the time the trial is initiated, with the balance of the contract fee payable in installments over the trial duration. The installment payments are typically performance-based, relating payment to pre-established events or milestones, such as investigator recruitment, patient enrollment or database delivery. For fixed-price contracts, PPD Pharmaco bears the risk of cost overruns, but benefits if costs are lower than anticipated. Underpricing of such contracts or significant cost overruns could have a material adverse effect on the Company. Most of PPD Pharmaco's contracts for the provision of its services, including contracts with government agencies, are terminable by the client upon 30- to 90-days' notice under certain circumstances, including the client's unilateral decision to terminate the development of the product or end the study. Contracts may be terminated for a variety of reasons, including the failure of a product to satisfy safety requirements, unexpected or undesired results of the product, the client's decision to forego a particular study, or insufficient patient enrollment or investigator recruitment. Although the contracts typically require payment of certain fees for winding down the study and, in some cases, a termination fee, the loss of a single large contract or of multiple contracts could materially and adversely affect the Company. Backlog Backlog consists of anticipated net revenue from letters of intent, verbal commitments, and contracts that have not been completed. Net revenue is defined as professional fee income (gross revenue) less reimbursed costs, consisting principally of investigator fees and travel. Once contracted work begins, net revenue is recognized over the life of the contract. In certain cases, PPD Pharmaco begins work for a client before a contract is signed. The backlog of the Life Sciences Group for the services described above under written agreements, including signed letters of intent, was $291.7 million in net revenue at December 31, 1998, compared to $205.7 million in net revenue at December 31, 1997. PPD Pharmaco believes that its backlog as of any date is not necessarily a meaningful predictor of future results, because backlog can be affected by a number of factors, including variable size and duration of contracts, many of which are performed over several years. Additionally, contracts generally are subject to early termination by the client or delay for many reasons, including unexpected test results. Moreover, the scope of a contract can change during the course of a study. There can be no assurances that PPD Pharmaco will be able to fully realize all of its backlog as net revenue. Competition The CRO industry consists of several hundred small, limited-service providers, several medium-sized CROs and a few full-service global drug development companies. The CRO industry is consolidating and, in recent years, a few large, full-service competitors have emerged. This trend of industry consolidation will likely result in greater competition among the larger CROs for clients and acquisition candidates. PPD Pharmaco's large competitors include Covance, Inc., Kendle International, Inc., Parexel International Corporation, IBAH, ICON, Phoenix International, AAI and Quintiles Transnational Corporation. PPD Pharmaco also competes against certain medium-sized companies, in-house research and development departments of pharmaceutical and biotechnology companies, as well as universities and teaching hospitals. In addition, the CRO industry has few barriers to entry. Newer, smaller entities may compete aggressively against larger CROs for clients. Furthermore, the CRO industry has attracted the attention of the investment community, which could lead to increased competition by increasing the availability of financial resources for CROs. Increased competition may lead to price and other forms of competition that may adversely affect PPD Pharmaco's operating results. CROs compete on the basis of several factors, including reputation for on-time quality performance, expertise and experience in specific therapeutic areas, scope of service offerings, strengths in various geographic markets, technological expertise and systems, ability to acquire, process, analyze and report data in a time-saving accurate manner, ability to manage large-scale clinical trials both domestically and internationally, expertise and experience in healthcare economics and client communication. Although there can be no assurance that it will continue to do so, the Company believes that it competes favorably in these areas. 13 PPD Informatic's competitors for its packaged software include major vendors of software used in pharmaceutical applications, such as Domain Solutions, Oracle and SAS, as well as a variety of smaller, specialized software companies. Competitors for PPD Informatic's application development services include major consulting companies with pharmaceutical industry groups (e.g., Andersen Consulting, EDS, PricewaterhouseCoopers) and smaller companies with a pharmaceutical industry focus (e.g. DataCeutics, Netforce, ISCG). The outsource chemistry research industry consists of several dominant providers and numerous smaller niche companies. SARCO faces significant competition from these companies as well as competition from research teams funded internally by pharmaceutical and biotechnology companies. While the trend to outsource research is increasing, the vast majority of research spending by these companies is for their own internal research personnel. SARCO competes principally on the basis of reputation, scientific and technical expertise, experience and qualifications of professional staff, quality of services, and ability to delivery quality products to the client's specifications. As such, SARCO's ability to attract and retain qualified technical personnel is a key component in its ability to successfully compete in the outsource contract research market. Potential Liability and Insurance Clinical research services involve the testing of new drugs on human volunteers pursuant to a study protocol. Such testing exposes the Company to the risk of liability for personal injury or death to patients resulting from, among other things, possible unforeseen adverse side effects or improper administration of the new drug. Many of these patients are already seriously ill and are at risk of further illness or death. The Company attempts to manage its risk of liability for personal injury or death to patients from administration of products under study through measures such as contractual indemnification provisions with clients and through insurance maintained by clients. The contractual indemnifications generally do not protect the Company against certain of its own actions, such as negligence. The contractual arrangements are subject to negotiation with clients and the terms and scope of such indemnification vary from client to client and from trial to trial. Although most of PPD Pharmaco's clients are large, well-capitalized companies, the financial performance of these indemnities is not secured. Therefore, the Company bears the risk that the indemnifying party may refuse, or not have the financial ability, to fulfill its indemnification obligations. The Company could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is beyond the scope of an indemnity provision or beyond the scope or level of insurance coverage or where the indemnifying party does not fulfill its indemnification obligations. Until September 1996, the Company did not maintain liability insurance with respect to these risks. The Company currently maintains professional liability insurance coverage of up to $5.0 million per claim, with an annual aggregate policy limit of $5.0 million. Liability claims might exceed the limits of such coverage and such insurance might not continue to be available on commercially reasonable terms or at all. Government Regulation The laboratory services performed by PPD Pharmaco are subject to various regulatory requirements designed to ensure the quality and integrity of the testing process. The industry standards for conducting laboratory testing are embodied in the regulations for Good Laboratory Practice ("GLP") and Good Manufacturing Practice ("GMP"). GLP and GMP have been adopted by the FDA, by the Department of Health in the United Kingdom and by similar regulatory authorities in other parts of the world. GLP and GMP stipulate requirements for facilities, equipment and professional staff. The regulations require standardization procedures for studies, for recording and reporting data, and for retaining appropriate records. To help ensure compliance, PPD Pharmaco has established quality assurance controls at its laboratory facilities that monitor ongoing compliance with GLP and GMP regulations by auditing test data and conducting regular inspections of testing procedures. The industry standard for the conduct of clinical research and development studies is embodied in the ICH regulations for GCP. As a matter of practice, the FDA and many other regulatory authorities require that test results submitted to such authorities be based on studies conducted in accordance with GCP. These regulations include (i) complying with regulations governing the selection of qualified investigators, (ii) obtaining specific written commitments from the investigators, (iii) verifying that informed consent is obtained from patients, (iv) monitoring the validity and accuracy of data, (v) verifying drug or device accountability, and (vi) instructing investigators to maintain records and reports. For specified periods PPD Pharmaco must also maintain reports for each study for inspection by the study sponsor and governmental authorities during audits. Noncompliance with GCP can result in the disqualification of data collected during the clinical trial. PPD Pharmaco's Global Standard Operating Procedures ("SOPs") are written in accordance with the Code of Federal Regulations and ICH guidelines agreed upon by the United States, certain European and the Japanese governments. This enables our work to be conducted locally, regionally and globally to standards that exceed all currently applicable regulatory requirements. 14 PPD Pharmaco's business depends on the continued government regulation of the drug development process, especially in the United States. Changes in regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could materially and adversely affect the demand for the services offered by the Company. The failure on the part of PPD Pharmaco to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. Furthermore, the issuance of a notice of finding by a governmental authority against either PPD Pharmaco or its clients based upon a material violation by the Company of GCP, GLP or GMP requirements could materially and adversely affect the Company. Intellectual Property The Company has rights in certain trademarks such as PPD(TM), PPD Pharmaco(R), The Power of Selection(TM), CLASSIFYTM, RESOLVETM, CROSS GRAPHS(R), TABLETRANS(R) and others. In addition, the Company holds certain licensing privileges related to the GSX technology. PPD Pharmaco also has developed certain computer software and technically derived procedures intended to maximize the quality and efficiency of its services. In addition to its rights to certain intellectual property, the Company believes that other factors such as the technical expertise, knowledge, ability and experience of the Company's professionals provide significant benefits to its clients. Employees At December 31, 1998, the Company had approximately 3,100 full-time equivalent employees, of whom 2,500 were employed in the Life Sciences Group, 340 were employed in the Environmental Sciences Group (which was sold in January 1999), 50 were employed in the Discovery Sciences Group and the remainder were in the Company's corporate headquarters. Of the Company's employees, approximately 130 hold Ph.D., M.D., Pharm.D. or D.V.M. degrees and approximately 390 hold other masters or other postgraduate degrees. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. The Company's performance depends on its ability to attract and retain qualified professional, scientific and technical staff. The level of competition among employers for such skilled personnel is high. The Company believes that its employee benefit plans enhance employee morale, professional commitment and work productivity and provide an incentive for employees to remain with the Company. The Company, like many of its competitors, also relies on a number of key executives. The loss of services of any of the Company's key executives could have a material and adverse effect on the Company. While to date the Company has not experienced any significant problems in attracting or retaining qualified staff, it might in the future. Foreign and Domestic Operations Note 18 of Notes to Consolidated Financial Statements presents information about the Company's operations by geographic area for each of fiscal years 1998, 1997 and 1996. 15 ITEM 2. PROPERTIES The Company's principal executive offices are located in Wilmington, North Carolina. In June 1998, the Company entered into a new 10-year build-to-suit lease for approximately 67,500 square feet in Morrisville, North Carolina which is scheduled for completion in the summer of 1999. In September 1998, the Company entered into a new 10-year build-to-suit lease for approximately 70,000 square feet in Wilmington, North Carolina which is scheduled for completion in the fall of 1999. In December 1998, the Company entered into a new 15-year build-to-suit lease for approximately 61,000 square feet in Research Triangle Park, North Carolina which is scheduled for completion in the winter of 1999. The Company owns and operates a 52-bed Phase I facility in Leicester, England. The Company also owns a building in Kersewell, Scotland, which it acquired when it purchased Data Acquisition and Research Limited in December 1996. All other facilities are leased. The Company's operations currently occupy approximately 693,000 square feet of space worldwide, including over 126,000 square feet of space located outside of the United States. The Company believes that its facilities have adequate capacity to handle significant additional business growth. The locations of the Company's operating facilities as of December 31, 1998 were as follows:
LIFE SCIENCES GROUP The Americas Europe ------------ ------ Sao Paulo, Brazil Brussels, Belgium La Jolla, California Cambridge, England San Bruno, California Chelmsford, England Mississauga, Canada Leicester, England Overland Park, Kansas Southampton, England Columbia, Maryland Charenton-Le-Pont, France Cambridge, Massachusetts Karlsruhe, Germany Lawrenceville, New Jersey Nuremberg, Germany Morrisville, North Carolina Milan, Italy Research Triangle Park, North Carolina Kersewell, Scotland Wilmington, North Carolina Barcelona, Spain Austin, Texas (1) Madrid, Spain Richmond, Virginia Stockholm, Sweden Middleton, Wisconsin Eastern Europe -------------- Pacific Rim Prague, Czech Republic ----------- Budapest, Hungary Melbourne, Australia Warsaw, Poland Asia ---- Africa Osaka, Japan ------ Cape Town, South Africa (2) Bangkok, Thailand Johannesburg, South Africa (2) DISCOVERY SCIENCES GROUP The Americas ------------ Menlo Park, California Morrisville, North Carolina Research Triangle Park, North Carolina
The list of operating locations above does not include the locations in which the Company's environmental sciences segment operates. This segment was sold on January 31, 1999. See Note 4 of Notes to Consolidated Financial Statements. - ------ (1) In November 1995, the Company entered into a sale-leaseback transaction related to its Austin, Texas, facilities. See Note 10 of Notes to Consolidated Financial Statements. (2) The operations for South Africa were merged into the Johannesburg location in February 1999. 16 ITEM 3. LEGAL PROCEEDINGS In the normal course of business, the Company is a party to various claims and legal proceedings. Although the ultimate outcome of these matters is not yet determined, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company's financial condition or results of operations in any interim or annual period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1998. 17 EXECUTIVE OFFICERS The executive officers of the Company as of January 31, 1999, were as follows:
Name Age Position - --------------------------- --- ----------------------------------------------------- Fredric N. Eshelman 50 Vice Chairman and Chief Executive Officer Thomas D'Alonzo 55 President and Chief Operating Officer Rudy C. Howard 41 Chief Financial Officer, Vice President - Finance and Treasurer Fred B. Davenport, Jr. 47 General Counsel, Vice President - Legal and Secretary Joshua S. Baker 43 Senior Vice President, Global Operations
FREDRIC N. ESHELMAN has served as Chief Executive Officer and as a director of the Company since July 1990. Dr. Eshelman founded the Company's predecessor in 1985. Prior to rejoining the Company in 1990, Dr. Eshelman served as Senior Vice President, Development and as a director of Glaxo Inc., a subsidiary of Glaxo Holdings plc. THOMAS D'ALONZO is President and Chief Operating Officer of the Company and of its contract research organization subsidiary, PPD Pharmaco, Inc. Mr. D'Alonzo served as General Counsel of Adria Laboratories, a pharmaceutical company, from 1977 to 1983 and was employed from 1983 to 1993, in various capacities, including as President, by Glaxo Inc., a subsidiary of Glaxo Holdings plc. Mr. D'Alonzo was President of GenVec, Inc., a gene therapy biotechnology company, from 1993 until his employment by the Company in October 1996. RUDY C. HOWARD is Chief Financial Officer, Vice President - Finance and Treasurer of the Company. Prior to joining the Company in October 1995, Mr. Howard worked with Coopers & Lybrand L.L.P., an accounting firm, since 1990 and had been a Partner at Coopers & Lybrand L.L.P. since 1993. FRED B. DAVENPORT, JR. is General Counsel, Vice President - Legal and Secretary of the Company. Prior to his employment by the Company in December 1996, Mr. Davenport was a Partner in the Wilmington, North Carolina law firm of Murchison, Taylor, Kendrick and Gibson, L.L.P., which he joined in 1977. Mr. Davenport was also a member of the faculty of the University of North Carolina at Wilmington's Cameron School of Business Administration from 1982 to 1991. JOSHUA S. BAKER is Senior Vice President, Global Operations of the Company. Prior to holding this position, Dr. Baker served as Vice President, Biostatistics and Data Management of the Company. Prior to joining the Company in May 1994, Dr. Baker served as Director of Biostatistics of Glaxo Research Institute, the research and development division of Glaxo Inc., a position he had held since September 1987. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company, par value $0.10 per share (the "Common Stock"), is traded under the symbol "PPDI" in the over-the-counter market and is quoted on the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The following table sets forth the high and low prices for shares of the Common Stock, as reported by the National Association of Securities Dealers, Inc. These prices are based on quotations between dealers, which do not reflect retail mark-up, markdown or commissions. 1998 1997 --------------------------------------------------------------- High Low High Low First Quarter $ 24.25 $ 13.00 $ 30.00 $ 18.50 Second Quarter $ 25.875 $ 18.50 $ 25.125 $ 16.00 Third Quarter $ 29.375 $ 18.625 $ 24.00 $ 18.50 Fourth Quarter $ 30.688 $ 20.00 $ 22.625 $ 12.25 As of February 16, 1999, there were approximately 8,450 holders of the Company's Common Stock. Since its initial public offering, the Company has not paid any cash dividends on its Common Stock. The Company has no present plans to pay cash dividends to its shareholders and, for the foreseeable future, intends to retain all of its earnings for use in continuing to develop its business. The declaration of any future dividends by the Company is within the discretion of its Board of Directors and is dependent upon the earnings, financial condition and capital requirements of the Company, as well as any other factors deemed relevant by the Board of Directors. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 are derived from the audited consolidated financial statements included elsewhere herein. The selected financial data set forth below for the Company as of December 31, 1996, 1995 and 1994 and for each of the two years in the period ended December 31, 1995 are derived from the financial statements of the Company not included elsewhere herein. The data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's consolidated financial statements and related notes thereto included elsewhere in this Report. The Company's consolidated financial data reflects its former environmental sciences segment as discontinued operations due to the sale of this segment on January 31, 1999. See Note 4 of Notes to Consolidated Financial Statements. 19
Years Ended December 31, ------------------------------------------------------------------------------- 1998 1997 1996 (4) 1995(1) (2) (3) 1994 (1) (2) ----------- ----------- ----------- --------------- ------------ (in thousands, except per share data) Net revenue (5) $ 235,553 $ 187,487 $ 152,304 $ 160,495 $ 146,342 ----------- ---------- ---------- ---------- --------- Operating expenses 211,349 170,468 143,459 157,837 142,396 Loss on sale of business, special charges, restructuring costs, merger costs, and acquired in-process research and 3,163 9,670 14,773 24,290 - development costs ----------- ---------- ---------- ---------- --------- 214,512 180,138 158,232 182,127 142,396 ----------- ---------- ---------- ---------- --------- Income (loss) from operations 21,041 7,349 (5,928) (21,632) 3,946 Other income (expense), net 3,562 1,464 1,804 (2,616) (2,728) ----------- ---------- ---------- ---------- --------- Income (loss) from continuing operations before provision for income taxes 24,603 8,813 (4,124) (24,248) 1,218 Provision (benefit) for income taxes 9,448 3,363 2,257 (17,163) 591 Income from operations of discontinued environmental sciences segment, net (6) 4,614 4,152 2,874 2,578 (8,614) Extraordinary loss from early extinguishment of debt - - - (897) - ----------- ---------- ---------- ---------- --------- Net income (loss) $ 19,769 $ 9,602 $ (3,507) $ (5,404) $ (7,987) =========== ========== ========== ========== ========= Income (loss) from continuing operations per share: Basic $ 0.65 $ 0.24 $ (0.30) $ (0.38) $ 0.03 ============ ========== ========== ========== ========== Diluted $ 0.65 $ 0.24 $ (0.30) $ (0.38) $ 0.03 ============ ========== ========== ========== ========== Income (loss) from discontinued operations per share: Basic $ 0.20 $ 0.18 $ 0.13 $ 0.14 $ (0.46) ============ ========== ========== ======= ========== Diluted $ 0.20 $ 0.18 $ 0.13 $ 0.14 $ (0.46) ============ ========== ========== ======= ========== Loss from extraordinary item per share: Basic $ - $ - $ - $ (0.05) $ - ========== ========== ========= ======= ========= Diluted $ - $ - $ - $ (0.05) $ - ========== ========== ========= ======= ========= Net income (loss) per share: Basic $ 0.85 $ 0.42 $ (0.17) $ (0.29) $ (0.43) ============ ========== ========== ======= ========== Diluted $ 0.85 $ 0.42 $ (0.17) $ (0.29) $ (0.43) ============ ========== ========== ======= ========== Weighted average number of shares outstanding: Basic 23,186 22,825 21,168 18,815 18,671 Dilutive effect of stock options 169 60 - - - ----------- -------- ---------- -------- --------- Diluted 23,355 22,885 21,168 18,815 18,671 =========== ======== ========== ======== ========= As of December 31, 1998 1997 1996 1995 1994 ----------- ---------- ---------- ---------- ----------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 34,083 $ 15,879 $ 21,838 $ 13,565 $ 9,804 Marketable securities - 7,994 14,210 242 203 Working capital 93,917 69,950 66,603 37,320 27,795 Total assets 236,582 197,047 181,457 142,661 202,773 Long-term debt 161 340 1,428 3,471 47,620 Long-term debt, including current portion 3,741 5,246 5,649 5,672 51,170 Shareholders' equity 155,410 127,605 115,306 77,300 74,198
20 SELECTED FINANCIAL DATA, EXCLUDING TOXICOLOGY OPERATIONS (SOLD 11/95), LOSS ON SALE OF BUSINESS, SPECIAL CHARGES, RESTRUCTURING CHARGES, MERGER COSTS, ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS, GAIN ON SALE OF CCCR, DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS.
Years Ended December 31, 1998 1997 1996 1995(1)(2) (3) 1994(1) (2) --------- ----------- --------- ------------------- ------------- (in thousands, except per share data) Net revenue (5) $ 235,553 $187,487 $ 152,304 $122,049 $ 99,955 Operating expenses 211,349 170,468 143,459 118,255 98,418 --------- -------- --------- -------- --------- Income from operations 24,204 17,019 8,845 3,794 1,537 Other income (expense), net 2,490 1,464 1,804 (2,616) (2,728) --------- -------- --------- -------- --------- Income from continuing operations before provision for income taxes 26,694 18,483 10,649 1,178 (1,191) Provision (benefit) for income taxes 10,274 7,215 4,249 471 (476) --------- -------- --------- -------- --------- Net income (loss) $ 16,420 $ 11,268 $ 6,400 $ 707 $ (715) ========= ======== ========= ======== ========= Weighted average number of diluted shares outstanding 23,355 22,885 21,319 18,815 18,761 ========= ======== ========= ======== ========= Net income (loss) per share $ 0.70 $ 0.49 $ 0.30 $ 0.04 $ (0.04) ========= ========= ========== ========= =========
- ---------- 1. Following termination of its status as an S corporation prior to completion of its initial public offering in January 1996, PPD became subject to federal and state income taxes. The income tax data for each of the years ended December 31, 1995 and 1994 reflects the application of corporate income taxes to PPD's net income at the statutory combined federal and state tax rate as if the termination of PPD's S Corporation status had occurred on January 1, 1994. 2. Weighted average shares outstanding for each of the years ended December 31, 1995 and 1994 assumes the occurrence of events pursuant to PPD's initial public offering and the issuance of sufficient shares at $18.00 per share to provide net proceeds, after aggregate offering expenses and underwriting discounts, to repay the $5.5 million debt incurred by PPD in making the final S corporation distribution. 3. The loss from continuing operations for 1995 was affected by (i) the sale of APBI's toxicology business, which resulted in a pre-tax loss of $19.3 million charged against operating income, (ii) a special charge against operating income of $5.0 million primarily related to the impairment of APBI's available for sale investments and (iii) an increase in APBI's tax benefit as a result of the reversal of certain tax liabilities recorded in prior years for which it was determined that APBI will not be liable for payment. 4. The net loss for 1996 was affected by $14.8 million of merger costs incurred in connection with the acquisition of APBI. After associated tax benefits, the impact on net income of such merger costs was $13.0 million. 5. Revenues are presented net of subcontractor costs. See accompanying consolidated statements of operations. 6. The discontinued operations include the Company's environmental sciences segment sold in January 1999 and the writeoff of its remaining investment in PACE Incorporated during the fourth quarter of 1995. All prior periods have been restated to exclude both of the above operations. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Management's Discussion and Analysis that are not descriptions of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 reflecting management's current view with respect to certain future events and financial performance that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in the Company's other SEC filings, and including, in particular, risks relating to government regulation; dependence on certain industries; the fixed price nature of contracts; the commencement, completion or cancellation of large contracts; progress of ongoing contracts; potential liability associated with the Company's lines of business; dependence on personnel; management of growth and competition. Since a large percentage of the Company's operating costs are relatively fixed, variations in the timing and progress of large contracts can materially affect results. GENERAL During 1998, the Company reported net income of $19.8 million, or $0.85 per share, compared to net income of $9.6 million, or $0.42 per share, during 1997. Excluding gain on sale of business and acquisition related costs, the Company's net income of $21.0 million was 36.1% higher than prior year net income, excluding merger and acquisition costs, of $15.5 million. Effective January 31, 1999, the Company sold its environmental sciences segment to Environ Holdings, Inc., a new company formed by the management of ENVIRON. The Company received as consideration cash of $1.4 million, a four-year note in the amount of $7.0 million and a 12-year note in the amount of $18.0 million. The Company received an opinion from Lehman Brothers to the effect that the consideration received is fair from a financial standpoint. The Company will not recognize a pre-tax gain or loss as a result of the sale of the environmental sciences segment as the sales price was based on the net assets of the environmental sciences segment at January 31, 1999. The Company entered into a three year consulting agreement to provide certain consulting services to Environ Holdings for a fee of $0.5 million per year. In February 1999, the Company formed a joint venture, PPGx, with Axys Pharmaceuticals, Inc. to pursue the business of pharmacogenomics. The Company contributed $1.5 million in cash, the net assets of Intek, and assigned the rights to a certain software license from Axys for an 18.2% ownership interest in PPGx. Separately, the Company and Axys entered into a software licensing agreement whereby the Company licensed certain software from Axys in exchange for a $2.0 million license fee. The Company has received exclusive marketing rights to PPGx pharmacogenomics products and services and an option to increase its ownership share of PPGx after the first anniversary of PPGx. In February 1999, the Company signed a non-binding letter of intent to acquire ATP, Inc., a health information services company. ATP provides customized inbound and outbound telecommunications programs targeting consumers and health care providers. Under the terms of the letter of intent, the Company will issue approximately 1 million shares of unregistered common stock, subject to certain closing adjustments, to the shareholders of ATP in return for their ATP stock. The transaction is expected to be accounted for as a pooling of interests. In May 1998, the Company created GenuPro, Inc., a subsidiary of PPD which holds a license to a number of compounds in the genitourinary field which was purchased from Eli Lilly & Co. in the second quarter of 1998. As a result of the purchase of these compounds, the Company recorded an acquired in-process research and development charge of $3.2 million in the second quarter of 1998 as these compounds were in the initial stage of research and development at the date the compounds were acquired. The formation of GenuPro, Inc. is an addition to the Company's Discovery Sciences Group. In February 1998, the Company, through its subsidiary Clinix International Inc., sold substantially all of the assets of the Chicago Center for Clinical Research ("CCCR"). The selling price was approximately $7.8 million in the form of $5.3 million in cash and a promissory note for $2.5 million which will be received over a period of five years. The sale resulted in a gain of approximately $1.1 million which was recognized as other income during the first quarter of 1998. As part of the sales agreement, the Company will continue to provide CCCR with certain clinical and administrative services for an agreed upon amount through the first quarter of 1999. 22 In June 1997, the Company moved into a new line of business with the acquisitions of SARCO and the GSX System. These acquisitions formed the basis of the Company's Discovery Sciences Group, which focuses on the discovery segment of the research and development outsourcing market. The Company acquired SARCO in a transaction accounted for as a pooling of interests. The consideration for SARCO consisted of 263,158 shares of the Company's common stock. The Company acquired the GSX System, a functional genomics platform technology, for approximately $8.7 million in cash. In March 1997, the Company acquired Belmont, a software systems company, in a transaction accounted for as a pooling of interests. The consideration for Belmont consisted of 502,384 shares of the Company's common stock. In November 1997, the Company acquired Intek Labs, Inc. ("Intek"), a pharmacogenetics company, in a transaction accounted for as a pooling of interests. The consideration for Intek consisted of 399,999 shares of the Company's common stock. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, amounts for certain items in the Company's consolidated financial statements expressed as a percentage of net revenue from continuing operations and the percentage changes in dollar amounts of certain items compared with the prior period:
PERCENTAGE OF NET REVENUE FROM CONTINUING OPERATIONS For the Years Ended December 31, 1998 1997 1996 ----------------------- ---------------------- ---------------------- Amount % Amount % Amount % ---------- ---------- ---------- ---------- ---------- ---------- (dollars in thousands) Net revenue (1): Life sciences $ 234,626 99.6% $ 187,201 99.8% $ 152,304 100.0% Discovery sciences 927 0.4 286 0.2 - - ---------- --------- ---------- -------- ---------- ------ 235,553 100.0 187,487 100.0 152,304 100.0 Direct costs: Life sciences 117,625 94,909 79,108 Discovery sciences 3,623 1,859 - ---------- ---------- ---------- 121,248 51.5 96,768 51.6 79,108 51.9 Selling, general, and administrative expenses 77,784 33.0 62,820 33.5 55,453 36.4 Depreciation and amortization 12,317 5.2 10,880 5.8 8,898 5.8 Acquired in-process research and development costs 3,163 1.3 9,112 4.9 - - Merger costs - - 558 0.3 14,773 9.7 ---------- --------- ---------- -------- ---------- ------ Operating income (loss) $ 21,041 8.9% $ 7,349 3.9% $ (5,928) (0.4)% ========== ========= ========== ======== ========== ====== Percentage Change For the Years Ended December 31, ---------------------------------------------- 1998 vs. 1997 1997 vs. 1996 ------------- ------------- Net revenue: Life sciences 25.3% 22.9% Discovery sciences 224.1 N/A Total net revenue 25.6 23.1 Direct costs: Life sciences 23.9 20.0 Discovery sciences 94.9 N/A Selling, general and administrative expenses 23.8 13.3 Depreciation and amortization 13.2 22.3
- ---------- (1) Revenues are presented net of subcontractor costs. 23 YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997 Net revenue increased $48.1 million, or 25.6%, to $235.6 million in 1998 from $187.5 million. The Life Sciences Group's operations accounted for 99.6% of the Company's net revenue for 1998. The Life Sciences Group generated net revenue of $234.6 million, up $47.4 million, or 25.3%, from last year. The growth in the Life Sciences Group operations was primarily attributable to an increase in the size, scope and number of contracts in the global CRO Phase II-IV division. The Discovery Sciences Group generated net revenue of $0.9 million, up $0.6 million, or 224.1%, from last year. The growth in the Discovery Sciences operations was primarily attributable to an increase in the number of contracts in the combinatorial chemistry division. Net revenue is expected to increase in the Discovery Sciences operations during 1999, however, unless net revenue from achievement of development milestones is received, the effect of the segment on the Company's earnings per share should remain relatively constant. Total direct costs increased 25.3% to $121.2 million from $96.8 million last year and remained relatively constant as a percentage of net revenue at 51.5% for the current year from 51.6% last year. The Life Sciences Group direct costs decreased as a percentage of related net revenue to 50.1% from 50.7%. This decrease is principally due to higher utilization of direct labor employees and a focused effort to control costs. The Discovery Sciences Group direct costs increased to $3.6 million in 1998 as compared to $1.9 million in 1997. This increase was due to a full year of operations being recorded in the current year as opposed to a half-year of operations recorded in 1997. (As discussed previously, the Discovery Sciences Group was formed in June 1997 with the acquisitions of SARCO and the GSX System). Selling, general and administrative ("SG&A") expenses increased 23.8% to $77.8 million from $62.8 million in 1997. The increase is primarily attributable to the investment in additional personnel to support the Company's expanding operations. As a percentage of net revenue, SG&A expenses decreased slightly to 33.0% from 33.5% last year. Total depreciation and amortization expense of $12.3 million was $1.4 million, or 13.2%, higher than last year. The increase was related to the Company's growth as well as the ongoing capital investment in the Company's business. The Company's capital expenditures (excluding the environmental sciences segment) were $17.6 million in 1998. Computer equipment and software accounted for approximately 47% of this capital investment, while expanded capabilities in the Company's labs and Discovery Sciences Group accounted for approximately 12%. The Company recorded an acquired in-process research and development charge of $3.2 million in 1998 as a result of the purchase of a license to six genitourinary compounds from Eli Lilly & Co. during the second quarter. The Company immediately expensed the acquired in-process research and development costs because the compounds were in the initial phase of research and development and had no alternative future use. This compares to an acquired in-process research and development charge of $9.1 million recognized in 1997 related to the acquisition of the GSX System. Operating income improved $13.7 million to $21.0 million for the year ended December 31, 1998, as compared to $7.3 million for the year 1997. Excluding gain on sale of CCCR, merger and acquisition related costs, the Company's adjusted operating income of $24.2 million in 1998 was 42.2% higher than adjusted operating income of $17.0 million in 1997. As a percentage of net revenue, the yearly operating income of 8.9% represents a dramatic improvement from 3.9% of net revenue last year. Net interest and other income (expense), net, improved $2.1 million, rising to $3.6 million for the year ended December 31, 1998 from $1.5 million for the year 1997. Excluding the gain related to the sale of CCCR, net other income of $2.5 million was $1.0 million higher than the prior year. The improvement was primarily the result of the covenant not to compete payments of $0.7 million resulting from the sale of CCCR in the first quarter of 1998. The Company expects to receive an additional $0.1 million related to the non-compete agreement in the first quarter of 1999. The Company recorded income from discontinued operations, net of income tax expense, related to its environmental sciences segment, of $4.6 million in 1998, as compared to $4.2 million in 1997. The environmental sciences segment was sold on January 31, 1999. 24 The net income of $19.8 million in 1998 represents an improvement of $10.2 million over the $9.6 million from 1997. Net income per basic and diluted share of $0.85 for 1998 compares to $0.42 in 1997. Excluding the impact of the gain on sale of CCCR and acquisition-related charges in 1998 and the merger and acquisition-related charges in 1997, the Company's 1998 net income of $21.0 million is 36.1% higher than net income of $15.5 million for 1997. YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996 Net revenue increased $35.2 million, or 23.1%, to $187.5 million in 1997 from $152.3 million. The Life Sciences Group's operations accounted for 99.8% of the Company's net revenue for 1997. The Life Sciences Group generated net revenue of $187.2 million, up $34.9 million, or 22.9%, as compared to 1996. The growth in the Life Sciences Group operations was primarily attributable to an increase in the size, scope and number of contracts in the North America clinical development and biostatistics business over 1996. The acquisitions of Belmont and Intek, both completed in 1997, contributed net revenue of $5.7 million for 1997. The acquisitions of SARCO and the GSX System in June 1997 formed the basis for the Company's Discovery Sciences Group which had $0.3 million of net revenue during 1997. Total direct costs increased 22.3% to $96.8 million from $79.1 million last year and remained relatively constant as a percentage of net revenue at 51.6% for 1997 from 51.9% in 1996. The Life Sciences Group direct costs decreased as a percentage of related net revenue to 50.7% from 51.9%. This decrease is principally due to higher utilization of direct labor employees and a focused effort to control costs. Selling, general and administrative ("SG&A") expenses increased 13.3% to $62.8 million from $55.5 million in 1996. SG&A expenses from 1997 acquisitions comprised $2.8 million of the increase. The remaining increase is primarily attributable to the investment in the Company's business development and marketing organization and in the area of information technology. Additional costs in these areas include personnel costs, training and recruitment of highly qualified individuals. As a percentage of net revenue, SG&A expenses decreased to 33.5% from 36.4% last year. Total depreciation and amortization expense of $10.9 million was $2.0 million, or 22.3%, higher than last year. The increase was related to the Company's growth as well as the ongoing capital investment in the Company's business. During 1997, the Company recorded merger costs of $0.6 million in connection with the acquisitions of Belmont, SARCO and Intek. These costs were primarily cash expenses, such as legal and accounting fees related to pooling transactions. During 1996, the Company recorded merger costs of $14.8 million. These costs were primarily cash expenses, such as investment banking fees, legal and accounting fees, and employee severance as a result of the integration of the administrative functions of PPD and APBI. The Company recorded an acquired in-process research and development charge of $9.1 million in the second quarter of 1997. These costs were charged to operations upon the acquisition of the GSX System. The Company hired an independent consultant to determine the fair value of the acquired in-process research and development. The purchase price in excess of the net assets of the GSX System was allocated to acquired in-process research and development costs, because the technology had no alternative future use and had not reached technological feasibility at the date of the acquisition. Operating income improved $13.3 million to $7.3 million for the year ended December 31, 1997, as compared to an operating loss of $5.9 million for the year 1996. Excluding merger and acquisition related costs, the Company's operating income of $17.0 million in 1997 was 92.4% higher than operating income (before the impact of merger and acquisition related costs) of $8.8 million in 1996. As a percentage of net revenue, the 1997 operating income of 3.9% represents a dramatic improvement from the operating loss of 3.9% of net revenue in 1996. The Company recorded income from its discontinued environmental sciences segment of $4.2 million in 1997, as compared to $2.9 million in 1996. The increase in income from discontinued operations in 1997 as compared to 1996 was due to the 1997 acquisition of Technical Assessment Systems, Inc. 25 The net income of $9.6 million in 1997 represents an improvement of $13.1 million over the $3.5 million net loss in 1996. Net income per basic and diluted share of $0.42 for 1997 compares to a net loss per basic and diluted share of $0.17 in 1996. Excluding the impact of the merger costs and acquisition-related charges on both years, the Company's 1997 net income of $15.5 million is 53.6% higher than 1996's net income of $10.1 million. Excluding these non-recurring charges, net income per diluted share of $0.68 for 1997 compares to $0.47 for 1996 computed on 1.6 million more shares outstanding for 1997. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company had $34.1 million of cash and cash equivalents on hand. The Company has historically funded its operations and growth, including acquisitions, with cash flow from operations, borrowings and through the use of the Company's stock. For the year ended December 31, 1998, the Company experienced a net increase in cash flow from operating activities to $23.6 million as compared to $11.1 million for the year ended December 31, 1997. The increase in cash flow from operations is primarily due to an increase in the Company's net revenues and an increase in operating margins as a percentage of net revenues. For the 1998 period, net income of $19.8 million, depreciation and amortization of $14.2 million and the acquired in-process research and development of $3.2 million were offset primarily by the net increase of $13.8 million in other assets and liabilities (which includes a $28.1 million increase in accounts receivable and unbilled services due to the growth in revenue). For the year ended December 31, 1998, the Company's investing activities used net cash of $11.0 million. Capital expenditures of $19.3 million, cash paid for the acquisition of a license to certain compounds of $3.2 million and $1.8 million in net cash paid for acquisitions were partially offset by $8.0 million in proceeds from the sale of investments and $5.3 million of net proceeds received from the sale of CCCR. For the year ended December 31, 1998, the Company's financing activities provided $5.6 million in cash, as net proceeds from stock option exercises of $7.0 million were partially offset by $1.5 million in repayment of long-term debt. For the year ended December 31, 1997, the Company experienced a net increase in cash flow from operating activities to $11.1 million as compared to $0.3 for the year ended December 31, 1996. For the period, net income of $9.6 million, depreciation and amortization of $12.4 million and the acquired in-process research and development of $9.1 million were offset primarily by the net decrease of $19.1 million in other assets and liabilities (which includes a $24.5 million increase in billed and unbilled receivables due to the growth in revenue), as well as cash disbursements of $7.4 million related to previously accrued merger expenses. For the year ended December 31, 1997, the Company used net cash of $16.8 million in investing activities, as capital expenditures of $13.6 million and the cash paid for the acquisition of the GSX technology of $9.1 million were only partially offset by $6.3 million in cash provided by net maturities of investments. For the year ended December 31, 1997, the Company's financing activities provided $1.0 million in cash, as net proceeds from stock option exercises of $2.2 million were partially offset by $1.3 million in net repayment of long-term debt and $0.4 million in cash used to pay pre-merger distributions to shareholders of Belmont. In June 1998, the Company obtained a $50.0 million revolving credit facility with First Union National Bank. Interest accrues on amounts borrowed at a floating rate currently equal to LIBOR plus 0.625% per year. Indebtedness under the line is unsecured and subject to certain covenants relating to financial ratios and tangible net worth. The unused portion of the loan is available to provide working capital and for general corporate purposes. As of December 31, 1998, the Company had $15.0 million reserved under this facility in the form of a letter of credit. This credit facility expires in June 2000, at which time any outstanding balance is due. 26 In August 1998, the Company renegotiated a credit facility for $50.0 million with Wachovia Bank, N.A. Interest accrues on amounts borrowed at a floating rate currently equal to LIBOR plus 0.70% per year. Indebtedness under the line is unsecured and subject to certain covenants relating to financial ratios and tangible net worth. The unused portion of the loan is available to provide working capital and for general corporate purposes. As of December 31, 1998, the Company had $3.3 million outstanding under this facility. This credit facility expires in March 1999, at which time the outstanding balance is due. The Company plans to renegotiate this credit facility before its expiration date. The Company expects to continue expanding its operations through internal growth and strategic acquisitions. The Company expects such activities will be funded from existing cash, cash flow from operations, borrowings under its credit facilities and through the use of the Company's stock. The Company believes that such sources of cash will be sufficient to fund the Company's current operations for at least the next 12 months. The Company is currently evaluating a number of acquisitions and other growth opportunities which may require additional external financing, and the Company may seek to obtain funds from public or private issuances of equity or debt securities. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs having been written using two digits, rather than four, to define the applicable year. As a result, computer systems and/or software used by many companies in a very wide variety of applications may experience operating difficulties unless they are modified or upgraded to adequately process information involving, related to or dependent upon the four digit field. Significant uncertainty exists concerning the scope and magnitude of problems associated with the Year 2000. The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 failures and has established an internal review team to address the Year 2000 issue that encompasses operating and administrative areas of the Company. During the first quarter of 1997, a team of experienced information technology staff was assigned to work with Company personnel to identify and resolve significant Year 2000 issues in a timely manner. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. The process includes an assessment of issues and development of remediation plans, execution of those plans and testing of all technology affected by this issue. In addition, the Company is engaged in assessing the Year 2000 issue with significant suppliers and clients. At December 31, 1998, the assessment process is 95% complete for all equipment (including computer hardware and software technology) used internally by the Company as compared to 85% at September 30, 1998. The Company has also determined that it is unlikely that it will have any material exposure to contingencies related to the Year 2000 issue in connection with services and products sold by the Company. Remediation is well underway, with approximately 80% of all systems requiring remediation completed at December 31, 1998 as compared to 50% at September 30, 1998. All systems, regardless of whether they require remediation, are being tested to ensure Year 2000 compliance. The Company has completed testing for Year 2000 compliance as of December 31, 1998 for 89% of our systems as compared to 50% at September 30, 1998. The Company expects to complete this effort by April 1999. The Company has initiated formal communications with its significant suppliers in North America and Europe to determine the extent to which the Company is vulnerable to third party failure to remediate Year 2000 compliance problems. The Company is in regular communication with key suppliers and clients and responds promptly to all requests for information regarding Year 2000 compliance. Based on current information available, management believes that it will be able to perform all services and provide all products it currently offers without any material adverse effects arising from failure to remediate deficiencies arising from Year 2000. External and internal costs specifically associated with applying vendor upgrades, testing and modifying internal use software for Year 2000 compliance are expensed as incurred. The Company pays for Year 2000 expenses with cash from operating activities. The percentage of the Company's information technology budget expected to be used for remediation is approximately 11% in 1998 and 5% in 1999. To date, the Company has spent $1.4 million on Year 2000 compliance, and expects to spend an additional $0.2 million to complete the compliance process. Of the total amount that the Company expects to spend, $1.2 million is attributable to internal labor costs for assessment and testing. Although internal resources have been dedicated to Year 2000 efforts, work has been spread across all areas and there has been no material delay in any major projects. 27 The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company has represented to some clients that it intends to be Year 2000 compliant by April 1999. If unexpected issues arise causing delays in the clinical studies being performed for these clients, the Company will have a specified period of time to correct those issues. If not corrected, the client can modify or terminate its contract with the Company. The Company believes that modification or termination of one or more client contracts represents the most reasonably likely adverse event which might arise from material Year 2000 compliance failures. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and clients, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, liquidity or financial condition. The Company expects to significantly reduce the level of uncertainty about Year 2000 problems and, in particular, about Year 2000 compliance and readiness of its key suppliers and clients, as it nears completion of the inquiry, testing and replacement phase. The Company also believes that its experienced information technology staff, which has been instrumental in the Company's Year 2000 compliance efforts, may be able to mitigate many Year 2000 problems. However, the Company will continue to assess and develop contingency plans for a possible Year 2000 failure as it completes its testing of Year 2000 issues. The cost of the Year 2000 compliance project and the time by which the Company expects to complete its Year 2000 assessment and remediation are estimates, based on numerous assumptions, including the continued availability of funding resources and third party modification plans. However, there can be no guarantee that these estimates are accurate and will be achieved, and actual results could differ significantly from management's expectations. In addition, there is no guarantee that the Company's evaluation of the most likely effects of a material Year 2000 compliance failure is correct, or that its plan to address such failure will be adequate. In either instance, the effect upon the Company's financial condition could be material. EXCHANGE RATE FLUCTUATIONS AND EXCHANGE CONTROLS The vast majority of the Company's contracts are entered into by the Company's United States or United Kingdom subsidiaries. The contracts entered into by the United States subsidiaries are almost always denominated in United States dollars. Contracts between the Company's United Kingdom subsidiaries and their clients are generally denominated in pounds sterling. Substantially all of the United Kingdom subsidiaries' expenses, such as salaries, services, materials and supplies, are paid in pounds sterling. However, the Company's consolidated financial statements are denominated in dollars and, accordingly, changes in the exchange rate between the pound sterling and the dollar will affect the translation of such subsidiaries' financial results into dollars for purposes of reporting the Company's consolidated financial results, and also affect the amounts in dollars actually received by the Company from such subsidiaries. The Company currently participates in only a small number of transactions involving multiple currencies. In most of those situations, contractual provisions either limit or reduce the translation risk. Financial statement translation has not, to date, been material to the Company's balance sheet. The reasons for this are that the majority of international operations are located in the United Kingdom, which traditionally has had a relatively stable currency, and that international operations have not accounted for a significant portion of total operations (approximately 15%). It is anticipated that those conditions will persist for at least through December 31, 1999. There are no material exchange controls currently in effect in any country in which the Company's subsidiaries conduct operations on the payment of dividends or otherwise restricting the transfer of funds outside such countries by a company resident in such countries. Although the Company performs services for clients located in a number of foreign jurisdictions, to date, the Company has not experienced any difficulties in receiving funds remitted from foreign countries. However, if any such jurisdictions were to impose or modify existing exchange control restrictions on the remittance of funds to the Company, such restrictions could have an adverse effect on the Company's business. 28 POTENTIAL VOLATILITY OF QUARTERLY OPERATING RESULTS AND STOCK PRICE The Company's quarterly operating results are subject to volatility due to such factors as the commencement, completion or cancellation of large contracts, progress of ongoing contracts, acquisitions, the timing of start-up expenses for new offices, management of growth, and changes in the mix of services. Since a large percentage of the Company's operating costs are relatively fixed, variations in the timing and progress of large contracts can materially affect quarterly results. To the extent the Company's international business increases, exchange rate fluctuations and other international business risks may also influence these results. The Company believes that comparisons of its quarterly financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. However, fluctuations in quarterly results or other factors beyond the Company's control, such as changes in earnings estimates by analysts, market conditions in the CRO, environmental, pharmaceutical and biotechnology industries and general economic conditions, could affect the market price of the Common Stock in a manner unrelated to the longer-term operating performance of the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to foreign currency risk by virtue of its international operations. The Company conducts business in several foreign countries and approximately 15%, 13% and 14% of the Company's net revenues for the years ended December 31, 1998, 1997 and 1996, respectively, were derived from the Company's operations outside the United States. Funds generated by each subsidiary of the Company are generally reinvested in the country where they are earned. The operations in the United Kingdom have generated more than 45% of the Company's revenue from foreign operations. Accordingly, some exposure exists to potentially adverse movements in the pound sterling. The United Kingdom has traditionally had a relatively stable currency. It is anticipated that those conditions will persist for at least through December 31, 1999. Additionally, the Company's consolidated financial statements are denominated in U.S. dollars and, accordingly, changes in the exchange rates between the Company's subsidiaries' local currency and the U.S. dollar will affect the translation of such subsidiaries' financial results into U.S. dollars for purposes of reporting the Company's consolidated financial results. Translation adjustments are reported with accumulated other comprehensive income (loss) as a separate component of shareholders' equity. Financial statement translation has not, to date, been material to the Company's balance sheet. Such adjustments may in the future be material to the Company's financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item is set forth herein commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 PART III Certain information required by Part III is omitted from this report, because the Registrant intends to file a definitive proxy statement for its 1999 Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the end of its fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included therein is incorporated herein by reference to the extent provided below. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 of Form 10-K concerning the Registrant's executive officers is set forth under the heading "Executive Officers" located at the end of Part I of this Form 10-K. The other information required by Item 10 of Form 10-K is incorporated by reference to the information under the headings "Proposal No. 1 - Election of Directors" and "Other Information-Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information under the heading "Proposal No. 1 - Election of Directors - Information About the Board of Directors and Its Committees," "Other Information - Executive Compensation Tables," "--Director Compensation," "--Report of the Compensation Committee on Executive Compensation," "--Compensation Committee Interlocks and Insider Participation," and "--Performance Graph" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information under the heading "Other Information - Principal Shareholders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules 1. The consolidated financial statements of the Company and its subsidiaries filed as part of this Report are listed in the attached Index to Consolidated Financial Statements and Financial Statement Schedule. 2. The schedule to the consolidated financial statements of the Company and its subsidiaries filed as part of this Report is listed in the attached Index to Consolidated Financial Statements and Financial Statement Schedule. 3. The exhibits filed as part of this Report are listed in Item 14(c) below. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on February 16, 1999, relating to the Company's disposition of its environmental sciences consulting and management subsidiaries in a management buyout, which was effective January 31, 1999. As part of the Current Report on Form 8-K, the Company filed unaudited pro forma financial statements as of December 31, 1998 and for the twelve months ended December 31, 1998, December 31, 1997 and December 31, 1996, giving pro forma effect to the sale of the environmental sciences subsidiaries transaction. (c) Exhibits EXHIBIT NO. DESCRIPTION 2.1** --Plan of Merger to Merge PPD Subsidiary, Inc. with and into Pharmaceutical Product Development Clinical Research Unit, Inc. ("PPD-CRU"). 2.2** --Plan of Merger to Merge PPD-Europe, Inc. ("PPD Europe") with and into the Registrant. 2.3* --Agreement and Plan of Reorganization, dated as of June 20, 1996, among the Registrant, Wilmington Merger Corp. and Applied Bioscience International Inc. 2.4* --Stock and Asset Master Purchase Agreement by and among Huntingdon International Holdings plc, Huntingdon Life Sciences Inc., Applied Bioscience International Inc. and Pharmaco LSR International Inc., dated as of November 1, 1995, incorporated by reference to Exhibit 2 to Applied Bioscience International Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 1996. 2.5* --Stock Purchase Agreement among Applied Bioscience International Inc., PPD UK Holdings Limited and Environ Holdings Inc. for the acquisition of all the capital stock of APBI Environmental Sciences Group, Inc., Environmental Assessment Group Limited and Environ International Limited, dated January 31, 1999. 3.1* --Restated Articles of Incorporation. 3.2* --Amended and Restated Bylaws. 10.4** --Plan of Merger to Merge PPD Subsidiary, Inc. with and into PPD-CRU (see Exhibit 2.1). 10.5** --Plan of Merger to Merge PPD-Europe with and into the Registrant (see Exhibit 2.2). 10.8** --Pharmaceutical Product Development, Inc. Equity Compensation Plan, effective as of October 30, 1995. 10.9** --Pharmaceutical Product Development, Inc. Stock Option Plan for Non-Employee Directors, effective as of October 31, 1995. 10.10** --Registration Rights Agreement, dated January 24, 1996, by and among the Registrant and certain of its shareholders. 10.31** --Lease Agreement, dated as of August 1, 1991, by and between Connecticut General Life Insurance Company and the Registrant, as amended on January 5, 1993 and on August 18, 1995. 10.35** --Lease, dated January 26, 1994, by and between Michael James Lawton, Jeffrey William Ware, Prudential Nominees Limited and Gabbay Group Limited. 10.36** --Lease on Offices, dated October 19, 1993, by and between Eucro European Contract Research GmbH and Gabbay Group Ltd. 10.38** --Lease Agreement, dated as of October 25, 1995, by and between the Registrant and Perimeter Park West Associates Limited Partnership. 10.39** --Lease Agreement, dated as of October 25, 1995, by and between PPD-CRU and Perimeter Park West Associates Limited Partnership. 10.55** --Lease made January 23, 1996 between PPD-CRU and Western Center Properties, Inc. 10.57* --First Amendment to Registration Rights Agreement. 10.59* --First Amendment to Lease Agreement, dated October 25, 1995, between PPD and Perimeter Park West Associates Limited Partnership. 10.60* --First, Second and Third Amendments to Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership. 31 10.61* --Lease Agreement, dated March 25, 1996, between PPD and BBC Family Limited Partnership. 10.71* --Lease Agreement by and between ABI (TX) QRS 12-11, Inc. and Pharmaco LSR International Inc., incorporated by reference to Exhibit 10.43 to Applied Bioscience International Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995. 10.79* --Consulting Agreement, dated as of October 1, 1996, by and between Applied Bioscience International Inc., and John D. Bryer, incorporated by reference to Exhibit 10.66 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996. 10.80* --Employment Agreement, dated as of October 5, 1996, by and between Pharmaceutical Product Development, Inc., and Thomas D'Alonzo, incorporated by reference to Exhibit 10.67 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1996. 10.81* --Employment Agreement, dated as of September 26, 1996, by and between Pharmaceutical Product Development, Inc., and Fred B. Davenport, Jr. 10.83a-83f* --Substitute Non-Statutory Stock Option Agreements by and between Pharmaceutical Product Development, Inc. and Grover C. Wrenn, dated as of September 26, 1996. 10.84* --Employment Agreement dated June 4, 1997, by and between the PPD Discovery, Inc. and Mark E. Furth. 10.85* --Note and Loan Agreement, dated June 25, 1997, made by the PPD Discovery, Inc. for the benefit of First Union National Bank of North Carolina. 10.86* --Pharmaceutical Product Development, Inc. Employee Stock Purchase Plan, dated May 15,1997. 10.87* --Amendment to Employee Stock Purchase Plan, dated June 21, 1997. 10.88* --Amendment to Stock Option Plan for Non-Employee Directors, dated May 15, 1997. 10.89* --Amendment to Equity Compensation Plan, dated May 15, 1997. 10.90* --Employment Agreement, effective July 1, 1997, between Pharmaceutical Product Development, Inc. and Fredric N. Eshelman. 10.91* --Note and Loan Agreement, dated August 7, 1997, between Pharmaceutical Product Development, Inc. and Wachovia Bank, N.A. 10.92* --First Amendment to Loan Agreement dated August 11, 1997, between the Registrant and First Union National Bank. 10.93* --Lease Agreement dated July 9, 1997, between Weeks Realty, Inc. and PPD Pharmaco, Inc. 10.94* --Employment Agreement dated October 1, 1997 between PPD Pharmaco, Inc. and Joshua S. Baker. 10.95* --Employment Agreement dated January 1, 1998 between Pharmaceutical Product Development, Inc. and Rudy C. Howard. 10.96* --Employment Agreement dated January 1, 1998 between PPD Pharmaco, Inc. and Patrick C. O'Connor. 10.97* --Employment Agreement dated January 1, 1998 between PPD Pharmaco, Inc. and Paul S. Covington. 10.98* --Employment Agreement dated January 1, 1998 between PPD Pharmaco, Inc. and Mark A. Sirgo. 10.99* --Amendment to Employment Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Fred B. Davenport, Jr. 10.100* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Fredric N. Eshelman. 10.101* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Thomas D'Alonzo. 10.102* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Rudy C. Howard. 10.103* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Fred B. Davenport, Jr. 10.104* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Joseph H. Highland. 10.105* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Joshua S. Baker. 10.106* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Patrick C. O'Connor. 10.107* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Paul S. Covington. 32 10.108* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and Mark A. Sirgo. 10.109* --Severance Agreement dated February 2, 1998 between Pharmaceutical Product Development, Inc. and William Neilson. 10.110* --Amendment to Employee Stock Purchase Plan, dated March 2, 1998. 10.111* --Employment Agreement dated May 22, 1998 between Subsidiary No. 5, Inc. and Karl B. Thor. 10.112* --Severance Agreement dated May 22, 1998 between Subsidiary No. 5, Inc. and Karl B. Thor. 10.113* --Note and Loan Agreement, dated June 24, 1998 between Pharmaceutical Product Development, Inc. and First Union National Bank. 10.114* --Lease Agreement dated June 26, 1998 between Weeks Realty Limited Partnership and PPD Pharmaco, Inc. 10.115* --First Amendment to Loan Agreement dated August 6, 1998, between Pharmaceutical Product Development, Inc. and Wachovia Bank, N.A. 10.116* --First Amendment to Lease Agreement dated October 28, 1998, between PPD Pharmaco, Inc. and Weeks Realty, Inc. 10.117* --Lease Agreement dated September 15, 1998 between PPD Pharmaco, Inc. and BBC Family Limited Partnership. 10.118 --Lease Agreement dated December 16, 1998 between PPD Pharmaco, Inc. and Weeks Realty Limited Partnership. 10.119 --Employment Agreement dated January 1, 1999 between Pharmaceutical Product Development, Inc. and David R. Williams. 10.120 --Severance Agreement dated February 2, 1998 and Amendment No. 1 to Severance Agreement dated January 1, 1999 between Pharmaceutical Product Development, Inc. and David R. Williams. 10.121 --Loan Agreement dated February 1, 1999, by and among PPGx, Inc., Pharmaceutical Product Development, Inc., as Guarantor, and First Union National Bank. 10.122 --First Amendment to Loan Agreement dated January 30, 1999, between Pharmaceutical Product Development, Inc. and First Union National Bank. 10.123 --Second Amendment to Loan Agreement dated January 30, 1999, between Pharmaceutical Product Development, Inc. and Wachovia Bank, N.A. 10.124 --Stock Purchase Agreement dated February 1, 1999 between PPGx, Inc. and Pharmaceutical Product Development, Inc. 10.125 --Software License Agreement dated January 31, 1999 between Axys Pharmaceuticals and Pharmaceutical Product Development, Inc. 10.126 --PPD Technology Transfer Agreement dated February 1, 1999 between PPGx, Inc. and Pharmaceutical Product Development, Inc. 10.127 --Assignment and Assumption of License Agreement dated February 1, 1999 between Pharmaceutical Product Development, Inc. and PPGx, Inc. 10.128 --Credit and Security Agreement dated February 2, 1999, between Applied Bioscience International Inc., Environ Holdings, Inc. and APBI Environmental Sciences Group, Inc. 21 --Subsidiaries of the Registrant. 23.1 --Consent of PricewaterhouseCoopers LLP 27 --Financial Data Schedule (for SEC use only). * Previously filed. ** Incorporated by reference to the Registrant's Registration Statement on Form ex-27, as amended (File No. 33-98996). 33 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants F-2 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Pharmaceutical Product Development, Inc. and its Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Pharmaceutical Product Development, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Raleigh, North Carolina February 2, 1999 F-2 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996 --------- --------- --------- Life sciences revenues, net of subcontractor costs of $91,432, $69,094 and $47,933, respectively $ 234,626 $ 187,201 $ 152,304 Discovery sciences revenues, net of subcontractor costs of $48 and $45 in 1998 and 1997, respectively 927 286 - --------- --------- --------- Net revenue 235,553 187,487 152,304 --------- --------- --------- Direct costs - Life sciences 117,625 94,909 79,108 Direct costs - Discovery sciences 3,623 1,859 - Selling, general and administrative expenses 77,784 62,820 55,453 Depreciation and amortization 12,317 10,880 8,898 Merger costs - 558 14,773 Acquired in-process research and development costs 3,163 9,112 - --------- --------- --------- 214,512 180,138 158,232 --------- --------- --------- Operating income (loss) 21,041 7,349 (5,928) Interest: Income 1,584 1,342 1,919 Expense (414) (478) (420) Other income (expense), net 2,392 600 305 --------- --------- --------- Income (loss) from continuing operations before provision for income taxes 24,603 8,813 (4,124) Provision for income taxes 9,448 3,363 2,257 --------- --------- --------- Income (loss) from continuing operations 15,155 5,450 (6,381) Income from operations of discontinued environmental sciences segment, net of income taxes of $3,012, $2,711 and $1,877, respectively 4,614 4,152 2,874 --------- --------- --------- Net income (loss) $ 19,769 $ 9,602 $ (3,507) ========= ========= ========= Income (loss) from continuing operations per share: Basic $ 0.65 $ 0.24 $ (0.30) ========= ========= ========= Diluted $ 0.65 $ 0.24 $ (0.30) ========= ========= ========= Income from discontinued operations per share: Basic $ 0.20 $ 0.18 $ 0.13 ========= ========= ========= Diluted $ 0.20 $ 0.18 $ 0.13 ========= ========= ========= Net income (loss) per share: Basic $ 0.85 $ 0.42 $ (0.17) ========= ========= ========= Diluted $ 0.85 $ 0.42 $ (0.17) ========= ========= ========= Weighted average number of common shares outstanding: Basic 23,186 22,825 21,168 Dilutive effect of stock options 169 60 - --------- --------- --------- Diluted 23,355 22,885 21,168 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-3 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
1998 1997 ---------- ---------- Current assets Cash and cash equivalents $ 34,083 $ 15,879 Marketable securities - 7,994 Accounts receivable and unbilled services, net 126,815 101,554 Investigator advances 1,505 1,870 Prepaid expenses and other current assets 7,812 7,227 Deferred tax asset 2,751 1,973 ---------- --------- Total current assets 172,966 136,497 Property and equipment, net 42,509 34,902 Goodwill, net 14,869 18,026 Other assets 6,238 7,622 ---------- ---------- Total assets $ 236,582 $ 197,047 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 3,580 $ 4,906 Accounts payable 7,812 6,249 Payables to investigators 5,204 4,138 Other accrued expenses 28,007 20,484 Accrued income taxes - 3,048 Unearned income 34,446 27,722 ---------- ---------- Total current liabilities 79,049 66,547 Long-term debt, less current maturities 161 340 Deferred rent and other 1,962 2,555 ---------- ---------- Total liabilities 81,172 69,442 ---------- ---------- Commitments and contingencies (Notes 10 and 14) Shareholders' equity Common stock, $0.10 par value, 95,000,000 shares authorized; 23,433,000 and 22,949,000 shares issued and outstanding, respectively 2,343 2,295 Paid-in capital 123,709 115,680 Retained earnings 29,929 10,112 Accumulated other comprehensive income (571) (482) ---------- ---------- Total shareholders' equity 155,410 127,605 ---------- ---------- Total liabilities and shareholders' equity $ 236,582 $ 197,047 ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
Earnings Comprehensive Common Shares Paid in (Accumulated Income Shares Par Value Capital Deficit) (Loss) ----------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 18,677 $ 1,870 $ 65,701 $ 10,621 Net loss (3,507) $ (3,507) --------- Other comprehensive income: Unrealized gain on investments 226 Translation adjustments 1,093 --------- Other comprehensive income 1,319 --------- Comprehensive loss $ (2,188) ========= Public offering, net of cash offering costs 2,300 230 36,952 Shareholder S corp. distributions 1,595 (7,532) Issuance of common shares 242 24 622 Issuance of common shares for exercise of stock options 365 37 5,058 Income tax benefit from exercise of stock options and unearned compensation amortization 1,990 Other 40 2 688 55 ------------------------------------------------ BALANCE DECEMBER 31, 1996 21,624 2,163 112,606 (363) Net income 9,602 $ 9,602 --------- Other comprehensive income: Unrealized loss on investments, net (64) Translation adjustments (1,318) --------- Other comprehensive income (1,382) --------- Comprehensive income $ 8,220 ========= Issuance of common shares in connection with acquisitions 1,165 115 89 1,304 Issuance of common shares for exercise of stock options 142 16 2,199 Income tax benefit from exercise of stock options 510 Distribution to shareholders (431) Proceeds of Section 16(b) transaction, net of related tax provision of $155 276 Other 18 1 ------------------------------------------------ BALANCE DECEMBER 31, 1997 22,949 2,295 115,680 10,112 Net income 19,769 $ 19,769 --------- Other comprehensive income: Reclassification adjustment for net gain included in net income (167) Translation adjustments 78 --------- Other comprehensive income (89) --------- Comprehensive income $ 19,680 ========= Issuance of common shares for exercise of stock options and employee stock purchase plan 484 48 6,980 Income tax benefit from exercise of stock options 1,049 Repayment from shareholders 48 ------------------------------------------------ BALANCE DECEMBER 31, 1998 23,433 $ 2,343 $ 123,709 $ 29,929 ========= ========= ========= ========= Accumulated Other Comprehensive Unearned Income (Loss) Compensation Total ------------------------------------------ BALANCE, DECEMBER 31, 1995 $ (419) $ (473) $ 77,300 Net loss (3,507) Other comprehensive income: Unrealized gain on investments 226 Translation adjustments 1,093 Other comprehensive income 1,319 Comprehensive loss Public offering, net of cash offering costs 37,182 Shareholder S corp. distributions (5,937) Issuance of common shares 646 Issuance of common shares for exercise of stock options 5,095 Income tax benefit from exercise of stock options and unearned compensation amortization 1,990 Other 473 1,218 ------------------------------------ BALANCE DECEMBER 31, 1996 900 -- 115,306 Net income 9,602 Other comprehensive income: Unrealized loss on investments, net (64) Translation adjustments (1,318) Other comprehensive income (1,382) Comprehensive income Issuance of common shares in connection with acquisitions 1,508 Issuance of common shares for exercise of stock options 2,215 Income tax benefit from exercise of stock options 510 Distribution to shareholders (431) Proceeds of Section 16(b) transaction, net of related tax provision of $155 276 Other 1 ------------------------------------ BALANCE DECEMBER 31, 1997 (482) -- 127,605 Net income 19,769 Other comprehensive income: Reclassification adjustment for net gain included in net income (167) Translation adjustments 78 Other comprehensive income (89) Comprehensive income Issuance of common shares for exercise of stock options and employee stock purchase plan 7,028 Income tax benefit from exercise of stock options 1,049 Repayment from shareholders 48 ------------------------------------ BALANCE DECEMBER 31, 1998 $ (571) $ -- $ 155,410 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-5 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 19,769 $ 9,602 $ (3,507) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 14,210 12,394 10,436 Acquired in-process research and development 3,163 9,112 - Gain on sale of CCCR (1,071) - - Deferred income taxes 1,409 (910) 1,375 Stock compensation amortization - - 668 Loss on disposition of property and equipment 55 32 6 (Gain) loss on sale of investments (174) 3 (8) Change in operating assets and liabilities: Accounts receivable and unbilled services, net (28,140) (24,470) (2,043) Prepaid expenses and other current assets (381) 2,073 (4,317) Current income taxes (2,088) 3,406 1,354 Other assets 1,468 842 1,068 Accounts payable and other accrued expenses 7,046 (8,336) (3,873) Payable to investigators 1,066 (1,291) (2,999) Unearned income 7,243 8,740 2,569 Other - (58) (411) --------- --------- --------- Net cash provided by operating activities 23,575 11,139 318 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (19,343) (13,599) (11,176) Net cash received from sale of CCCR 5,285 - - Net cash paid for acquisition of in-process research and development (3,163) (9,112) - Proceeds from sale of property and equipment 5 174 74 Proceeds from sale of marketable securities 8,000 17,240 37,655 Purchases of marketable securities - (10,972) (51,454) Sale of investments - - 244 Purchase of investments - (1,500) - Net cash received from (paid for) acquisitions (1,829) 991 (3,867) --------- --------- --------- Net cash used in investing activities (11,045) (16,778) (28,524) --------- --------- --------- Cash flows from financing activities: Line of credit borrowings - - 669 Proceeds from long-term debt - 138 167 Principal repayments on long-term debt (1,480) (1,355) (2,415) Cash dividends paid - - (5,937) Proceeds of Section 16(b) transaction - 431 - Repayment from (distribution to) shareholders 48 (431) - Proceeds from issuance of common stock 7,028 2,215 42,902 --------- --------- --------- Net cash provided by financing activities 5,596 998 35,386 --------- --------- --------- Effect of exchange rate changes on cash 78 (1,318) 1,093 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 18,204 (5,959) 8,273 Cash and cash equivalents, beginning of the year 15,879 21,838 13,565 --------- --------- --------- Cash and cash equivalents, end of the year $ 34,083 $ 15,879 $ 21,838 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-6 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS Pharmaceutical Product Development, Inc. and its subsidiaries, collectively (the "Company"), provide a broad range of research and consulting services in two business segments: life sciences and discovery sciences. Prior to the divestiture of its environmental sciences segment on January 31, 1999 (see Note 4), the Company also provided environmental sciences services. Services provided in the life sciences segment include worldwide clinical research and development of pharmaceutical products and medical devices, biostatistical analysis and analytical laboratory services. Discovery sciences services include target identification and validation, compound creation, screening and compound selection. Environmental sciences services included assessment and management of chemical and environmental health risk, site investigation and remediation planning and litigation support. The Company provides its services under contract to clients in the pharmaceutical, general chemical, agrochemical, biotechnology and other industries. The environmental sciences segment also marketed services to clients in the industrial, manufacturing and oil and gas industries. The Company's life sciences services are marketed primarily in the United States and Europe. Revenues derived from the Company's discovery segment are all within the United States. The environmental sciences segment marketed its services primarily in the United States and Europe. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and results of operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. MERGER COSTS AND SPECIAL CHARGES During 1997, the Company recorded merger costs of $600 in connection with the acquisitions of Belmont Research, Inc., SARCO, Inc., and Intek Labs, Inc., which were accounted for using the pooling of interests method of accounting. These costs were primarily transaction expenses related to these pooling transactions. In connection with the acquisition of Applied Bioscience International Inc. ("APBI") in September 1996, the Company implemented a reorganization plan under which the Company would eliminate certain positions and close a facility. The Company recorded merger and reorganization costs related to this acquisition of $16,100. Included in these costs were transaction costs of $7,100, related primarily to investment banking, legal and accounting fees. In addition, the Company recorded $9,000 in accruals for severance, lease termination and certain other costs. Of the amounts accrued, $3,200 was for severance payments primarily for administrative personnel. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS The Company recorded an acquired in-process research and development charge of $3,200 in the second quarter of 1998 related to the purchase of a license to six genitourinary compounds from Eli Lilly & Co. The Company immediately expensed the acquired in-process research and development costs because these compounds were in the initial phase of research and development and had no alternative future use. The Company acquired the GSX System for $8,700 in cash in June 1997. Liabilities assumed in this transaction were $832. The purchase price in excess of the net assets of the GSX System of $9,100 was allocated to acquired in-process research and development costs and charged to operations at the acquisition date, as the technology under development by the GSX System had not reached technological feasibility and had no alternative future use. F-7 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): REVENUE RECOGNITION The Company records revenues from fixed-price contracts on a percentage-of-completion basis. Revenues from time-and-material contracts are recognized as hours are accumulated multiplied by the billable rates for each contract. Revenues are recorded net of reimbursement received from clients for pass-through expenses, which generally include subcontractor costs that consist of investigator fees, travel and certain other contract costs. If it is determined that a loss will result from the performance of a fixed-price contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made. Clients generally may terminate a study at any time, which may cause unplanned periods of excess capacity and reduced revenues and earnings. To offset the effects of early terminations of significant contracts, the Company attempts to negotiate the payment of an early termination fee as part of the original contract. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of unrestricted cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid investments with a maturity of three months or less at the date of purchase. Supplemental cash flow information consisted of the following: YEARS ENDED DECEMBER 31, 1998 1997 1996 --------- --------- --------- Cash paid: Interest $ 420 $ 354 $ 326 ========= ========= ========= Income taxes, net $ 12,628 $ 2,583 $ 1,594 ========= ========= ========= MARKETABLE SECURITIES The Company records its investment in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The classification of securities is generally determined at the date of purchase. All marketable securities of the Company have been classified as available-for-sale and have been reported at fair value with unrealized gains and losses reported in other comprehensive income. The unrealized net loss on investment in marketable securities included in other comprehensive income at December 31, 1998 and 1997 totaled $0 and $64, respectively. Gains and losses on sales of investments in marketable securities, which are computed based on specific identification of adjusted cost of each security, are included in other income at the time of the sales. INVESTIGATOR PAYMENTS Billings and payments to investigators are based on predetermined contractual agreements that may differ from the accrual of the expense. Investigator expenses are recognized based upon the status of the work completed as a percentage of the total procedures required under the contract or based on patient enrollment over the term of the contract. Payments made in excess of the accrued expenses are classified as investigator advances, and accrued expenses in excess of amounts paid are classified as payables to investigators in the consolidated balance sheet. Contracted physician costs are considered a pass-through expense and are recorded as a reduction to revenues in the consolidated statements of operations. F-8 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method, based on estimated useful lives of 20 to 40 years for buildings, five to 12 years for laboratory equipment, three to five years for computers and related equipment, and four to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the respective lives of the leases or the useful lives of the improvements. Property under capital leases is amortized over the life of the lease or the service life, whichever is shorter. INTERNAL USE SOFTWARE The Company accounts for internal use software in accordance with the provisions of AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which allows certain direct costs and interest costs that are incurred during the application stage of development to be capitalized and amortized over the useful life of the software. GOODWILL The excess of the purchase price of the businesses acquired over the fair value of net tangible assets and identifiable intangibles and acquired in-process research and development costs at the date of the acquisitions has been assigned to goodwill. Goodwill is being amortized over periods of 15 to 40 years. As of December 31, 1998 and 1997, accumulated amortization was $4,926 and $4,383, respectively. The amortization charges for each of the three years ended December 31, 1998, 1997 and 1996 were $1,235, $1,401 and $950, respectively. OTHER ASSETS Other assets are comprised of investments in certain technology companies, other intangible assets, a note receivable and net long-term deferred tax assets. Other intangible assets are being amortized over periods of three to five years. See Note 8. REALIZABILITY OF CARRYING VALUE OF LONG-LIVED ASSETS The Company is required to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment and intangibles, including goodwill, in relation to the operating performance and estimates of future discounted cash flows of the underlying business and recognizes an impairment, if necessary, to state property, equipment and intangibles at their fair value. No such impairment was necessary during each of the three years ended December 31, 1998, 1997 and 1996. UNBILLED SERVICES AND UNEARNED INCOME In general, prerequisites for billings are established by contractual provisions, including predetermined payment schedules, the achievement of contract milestones or submission of appropriate billing detail. Unbilled services arise when services have been rendered but clients have not been billed. Similarly, unearned income represents amounts billed in excess of revenue recognized. INCOME TAXES Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactment of changes in tax law or rates. If it is "more likely than not" that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recorded. F-9 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): CONCENTRATION OF CREDIT RISK Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", requires disclosure of information about financial instruments with off-balance-sheet risk and financial instruments with concentrations of credit risk. Financial instruments which subject the Company to concentrations of credit risk consist principally of accounts receivable and cash equivalents. The Company's clients are primarily pharmaceutical and biotechnology companies. No single client accounted for more than 10% of the Company's net revenue in 1998, 1997 or 1996. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of clients comprising the Company's client base. Ongoing credit evaluations of customers' financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's estimates. The Company's cash equivalents consist principally of commercial paper. Certain bank deposits may at times be in excess of the FDIC insurance limit. Based on the nature of the financial instruments and/or historical realization of these financial instruments, management believes they bear minimal risk. TRANSLATION OF FOREIGN FINANCIAL STATEMENTS Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the rate of exchange at each reporting date. Income and expenses are translated at the average rates of exchange prevailing during the month in which a transaction occurs. Gains or losses from translating foreign currency financial statements are accumulated in other comprehensive income. The cumulative translation adjustment included in other comprehensive income at December 31, 1998 and 1997 totaled $78 and $(1,318), respectively. Foreign currency transaction gains and losses are included in other income. Funds generated by each subsidiary of the Company are generally reinvested in the country where they are earned. EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), on December 31, 1997. The computation of basic income (loss) per share information is based on the weighted average number of common shares outstanding during the year. The computation of diluted income (loss) per share information is based on the weighted average number of common shares outstanding during the year plus the effects of any dilutive common stock equivalents at year-end. Earnings per share for all periods presented in the statements of operations conforms to the provisions of SFAS No. 128. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), effective January 1, 1998. SFAS No. 130 requires the Company to display an amount representing comprehensive income for the year in a financial statement which is displayed with the same prominence as other financial statements. The Company has elected to present this information in the Statements of Shareholders' Equity. Upon adoption, all prior period data presented was restated to conform to the provisions of SFAS No. 130. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), on December 31, 1998. SFAS No. 131 requires the Company to report certain information about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. See Notes 17 and 18. F-10 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), on December 31, 1998. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. See Note 13. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1998 presentation. 2. ACQUISITIONS: POOLINGS In March 1997, the Company acquired Belmont Research, Inc. ("Belmont"). The consideration for Belmont consisted of 502 shares of the Company's common stock plus options to purchase approximately 115 shares of Company common stock. In June 1997, the Company acquired SARCO, Inc. ("SARCO"). The consideration for SARCO consisted of 263 shares of the Company's common stock. In November 1997, the Company acquired Intek Labs, Inc. ("Intek"). The consideration for Intek consisted of 400 shares of the Company's common stock. All three of these acquisitions were accounted for as pooling of interests transactions. Pro forma information is not presented nor have the Company's consolidated financial statements for 1996 been restated to reflect the impact of these acquisitions as the results of operations of Belmont, SARCO and Intek prior to the dates of the acquisitions are not material individually or collectively to the Company. On September 26, 1996, a wholly-owned subsidiary of the Company was merged with and into APBI in a transaction accounted for as a pooling of interests. As a result of the merger, APBI became a wholly-owned subsidiary of the Company. Under the terms of the merger agreement, APBI shareholders received 0.4054 of a share of the Company's common stock for each APBI share. As a result of the merger, the Company issued 12,064 shares of its common stock in exchange for all the outstanding shares of common stock of APBI. Holders of options to acquire APBI stock had the choice to receive either shares of Company common stock for the value of the options, or substitute options to acquire Company common stock. As a result of the APBI option holders' choices, 203 additional shares of the Company's common stock were issued, and options to purchase 601 shares of the Company's common stock were issued. In accordance with the pooling of interests method of accounting, the consolidated financial statements are based on the assumption that the companies were combined for all of 1996 and the financial statements for 1996 were restated to give effect to the combination. PURCHASES In January 1998, the Company acquired two environmental consulting businesses for a total of $1,006 in cash and potential for the former owners to earn an additional amount depending on the profitability of the businesses for a certain period after the acquisition. In connection with these acquisitions, the Company recorded approximately $900 in goodwill. Pro forma information is not presented as the acquired companies' results of operations prior to the dates of the acquisitions are not material individually or collectively to the Company. F-11 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 2. ACQUISITIONS (CONTINUED): In January 1997, the Company acquired Technical Assessment Systems, Inc. ("TAS") for $490 in cash, a note for approximately $300 and the potential to earn an additional amount depending on TAS's profitability for a certain period after the acquisition. In connection with the acquisition, the Company recorded $1,070 in goodwill. In June 1997, the Company acquired the GSX System, a functional genomics platform technology. The GSX System was purchased for approximately $8,700 in cash. Liabilities assumed in this transaction were $832. Pro forma information is not presented as the acquired companies' results of operations prior to the dates of the acquisitions are not material individually or collectively to the Company. The Company's Life Sciences Group furthered its expansion outside of the U.S. in 1996 through the acquisitions of Trilife Gesellschaft Fur Medizinische Entwicklung Verwaltungs GmbH ("Trilife") in Germany, Medisys S.L. ("Medisys") in Spain, Q&Q Suporte A Pesquisa Clinica Ltda. ("Q&Q") in Brazil, Data Acquisition and Research Limited ("DAR") in Scotland, and Environmental Assessment Group Limited ("EAG") in England. The consideration for these five companies consisted of approximately $4,359 in cash and a note for $350. The Company has paid an additional $1,264 for these acquisitions, due to earnout clauses in the purchase agreements and amounts due on anniversaries of the acquisitions during the period from the date of purchase through December 31, 1998. Included in debt on the consolidated balance sheet at December 31, 1998 is another $340 which will be paid related to the acquisitions of Q&Q and DAR. In connection with these acquisitions, the Company recorded $6,278 in goodwill. Pro forma information is not presented as the acquired companies' results of operations prior to the dates of the acquisitions are not material individually or collectively to the Company. 3. SALE OF BUSINESS: On February 27, 1998, the Company, through its subsidiary Clinix International Inc., sold the business and assets of the Chicago Center for Clinical Research ("CCCR"). The consideration received by the Company for CCCR totaled approximately $7,785 which was comprised of $5,285 in cash and a promissory note of $2,500 which will be received over five years. The sale resulted in a gain of approximately $1,071 that was recognized as other income during the first quarter of 1998. As part of the sales agreement, the Company will continue to provide CCCR with certain clinical and administrative services for an agreed upon amount through the first quarter of 1999. 4. DISCONTINUED OPERATIONS: Effective January 31, 1999, the Company sold its environmental sciences segment for total consideration of $26,431 in a management buyout. The Company received as consideration cash of $1,431, a four-year note of $7,000 and a 12-year note of $18,000. The sale resulted in no pre-tax gain or loss as the sales price was based on the net assets of the environmental sciences segment at January 31, 1999. The consolidated balance sheets at December 31, 1998 and 1997 include the following assets and liabilities of the environmental sciences segment: December 31, --------------------------- 1998 1997 ---------- ---------- Current assets $ 24,214 $ 21,866 Total assets 32,527 28,647 Current liabilities 6,030 6,260 Total liabilities 6,209 6,735 ---------- ---------- Net assets of discontinued operations $ 26,318 $ 21,912 ========== ========= The operating results of the environmental sciences segment for each of the years ended December 31, 1998, 1997 and 1996 were as follows: Years Ended December 31, --------------------------------------- 1998 1997 1996 ---- ---- ---- Net revenues $ 50,056 $ 47,785 45,492 Income from operations 7,627 6,863 4,751 Net income 4,614 4,152 2,874 F-12 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 5. MARKETABLE SECURITIES: The estimated market value and aggregate cost of current marketable securities were as follows: DECEMBER 31, 1998 1997 ---------- ---------- Estimated market value $ - $ 7,994 Aggregate cost - 8,000 ---------- --------- Gross unrealized loss $ - $ (6) ========== ========= Marketable securities at December 31, 1997 consisted of debt securities issued by the U.S. Treasury. These securities were classified as available-for-sale, and reported in the balance sheet at fair value, which was determined based on quoted market prices. 6. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES: Accounts receivable and unbilled services consisted of the following: DECEMBER 31, 1998 1997 ---------- ----------- Trade: Billed $ 75,405 $ 55,257 Unbilled 51,702 46,730 Reserve for doubtful accounts (2,042) (1,515) ---------- --------- 125,065 100,472 Officers and employees 313 386 Other 1,437 696 ---------- ---------- $ 126,815 $ 101,554 ========== ========== Change in reserve for doubtful accounts consisted of the following:
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---------- ----------- --------- Balance at beginning of period $ 1,515 $ 1,511 $ 3,319 Additions charged to costs and expenses 993 647 1,715 Deductions (466) (740) (3,497) Other changes - 97 (26) ---------- ---------- --------- Balance at end of period $ 2,042 $ 1,515 $ 1,511 ========== ========== =========
F-13 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 7. PROPERTY AND EQUIPMENT: Property and equipment, stated at cost, consisted of the following:
DECEMBER 31, 1998 1997 --------- --------- Land $ 519 $ 517 Buildings and leasehold improvements 14,002 13,291 Construction in progress and asset deposits 2,621 620 Furniture and equipment 41,296 33,066 Computer equipment and software 43,688 36,466 --------- --------- 102,126 83,960 Less accumulated depreciation and amortization 59,617 49,058 --------- --------- $ 42,509 $ 34,902 ========= ========= The annual depreciation and amortization charges on property and equipment for each of the three years ended December 31, were: 1998 $ 12,887 1997 10,830 1996 9,399 8. OTHER ASSETS: Other assets consisted of the following: DECEMBER 31, 1998 1997 --------- --------- Investment in DAS $ 1,500 $ 1,500 Investment in SDI - 1,161 Long-term deferred tax asset 1,555 3,742 Note receivable from sale of CCCR 2,000 - Intangible and other assets, net of accumulated amortization of $1,190 and $1,040, respectively 1,183 1,219 --------- --------- $ 6,238 $ 7,622 ========= =========
The Company owns 600 shares of Digital Arts and Sciences ("DAS") Series D preferred stock which represent approximately 6.8% and 8.0% ownership of DAS as of December 31, 1998 and 1997, respectively. The Company's investment in DAS is valued at cost, which approximates fair market value. The Company owned 715 shares of Strategic Diagnostics Inc. ("SDI") common stock as of December 31, 1997. The trading price per share was $2.25 as of December 31, 1997. During 1997 the Company sold options to various other companies that provided them the right to acquire all SDI shares owned by the Company at a price of $1.625 per share. Accordingly, during 1997 the Company reduced the carrying value of this investment to $1.625 per share. At December 31, 1997, $174 was reported in other comprehensive income to represent the difference between option value and the carrying value of this investment at such date. The Company received $1,161 in March 1998 when all the options to acquire the SDI shares were exercised. At that time, a gain on the sale of the investment in SDI was realized of $174. The note receivable related to the sale of CCCR (see Note 3) will be received over five years in equal annual payments and bears interest at a rate of 10%. The annual amortization charges on intangible assets for each of the three years ended December 31, 1998, 1997 and 1996 were $88, $163 and $87, respectively. F-14 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 9. OTHER ACCRUED EXPENSES: Other accrued expenses consisted of the following:
DECEMBER 31, 1998 1997 --------- --------- Accrued salaries, wages, benefits and related costs $ 21,721 $ 15,626 Other 6,286 4,858 --------- --------- $ 28,007 $ 20,484 ========= ========= 10. LONG-TERM DEBT AND LEASE OBLIGATIONS: Long-term debt consisted of the following: DECEMBER 31, 1998 1997 -------- ------ LIBOR (5.20% at December 31, 1998) plus 0.70% unsecured line of credit facility due March 22, 1999 $ 3,300 $ 3,300 Equipment leases 47 721 Various notes at interest rates up to 8.75% 394 1,225 --------- --------- 3,741 5,246 Less current maturities 3,580 4,906 --------- --------- $ 161 $ 340 ========= =========
In June 1998, the Company entered into a $50,000 revolving credit facility with First Union National Bank. Interest accrues on amounts borrowed at a floating rate equal to the LIBOR plus 0.625% per year. Indebtedness under the line is unsecured and subject to certain covenants relating to financial ratios and tangible net worth. The unused portion of the loan is available to provide working capital and for general corporate purposes. As of December 31, 1998, the Company had $15,000 reserved in the form of a letter of credit and $35,000 available for borrowings under this facility. This credit facility expires in June 2000, at which time any outstanding balance is due. In August 1998, the Company renegotiated a credit facility for $50,000 with Wachovia Bank, N.A. Interest accrues on amounts borrowed at a floating rate equal to LIBOR plus 0.70% per year. Indebtedness under the line is unsecured and subject to certain covenants relating to financial ratios and tangible net worth. The unused portion of the loan is available to provide working capital and for general corporate purposes. As of December 31, 1998, the Company had $3,300 outstanding and $46,700 available for borrowings under this facility. This credit facility expires in March 1999, at which time the outstanding balance is due. For the years subsequent to December 31, 1998, annual maturities of long-term debt outstanding are: 1999 $ 3,580 2000 76 2001 52 2002 33 --------- $ 3,741 F-15 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 10. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED): OPERATING LEASES The Company is obligated under noncancellable leases expiring at various dates through 2011 relating to its operating facilities and certain equipment. Rental expense for all operating leases, net of sublease income, was $13,330, $13,492 and $10,334 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company completed a sale-leaseback transaction involving owned real estate in Austin, Texas in November 1995. Total gross proceeds in the transaction were $12,000, resulting in a pre-tax gain of approximately $2,100. The gain, which has been deferred, is classified as deferred rent and other in the accompanying consolidated balance sheets and is being amortized as a reduction of rent expense on a straight-line basis over the 15-year lease term. The facilities are leased to the Company with all responsibility of operations and maintenance residing with the Company. Certain facility leases entered into provided for concessions by the landlords, including payments for leasehold improvements, moving expenses, and free rent periods. These concessions have been reflected as deferred rent and other in the accompanying consolidated financial statements. The Company is recording rent expense on a straight-line basis for these leases. Future minimum payments for all operating lease obligations for years subsequent to December 31, 1998 are as follows: 1999 $ 11,841 2000 12,751 2001 11,828 2002 9,845 2003 8,786 2004 and thereafter 46,682 --------- $ 101,733 Omitted from the table above are the operating lease obligations related to the Company's environmental sciences segment which was sold on January 31, 1999. See Note 4. Future minimum payments related to operating lease obligations of this segment were $18,593 at December 31, 1998 F-16 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 11. STOCK PLANS: STOCK INCENTIVE PROGRAM The Company has two stock option plans (the "Plans") under which the Company may grant options to its employees and directors for up to 2,600 shares of common stock. Under the Plans, the exercise price of each option equals the market price of the Company's stock on the date of grant and an option's maximum term is 10 years. Options are granted upon approval of the Board of Directors and vest over various periods, as determined by the Board of Directors at the date of the grant. On January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation." As permitted by SFAS No. 123, the Company has chosen to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for the Plans. Accordingly, no compensation cost has been recognized for options granted under the Plans. Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates for awards under the Plans consistent with the method required by SFAS No. 123, the Company's net income (loss) and basic and diluted net income (loss) per share would have been the pro forma amounts indicated below.
1998 1997 1996 ----------------------- ----------------------- ----------------------- AS AS AS REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA Net income (loss) $19,769 $ 17,236 $ 9,602 $ 7,730 $ (3,507) $ (7,670) Basic and diluted net income (loss) per share $ 0.85 $ 0.74 $ 0.42 $ 0.34 $ (0.17) $ (0.36)
For the purposes of the pro forma presentation above, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996: expected volatility of 60.3%, 58.7% and 49.9%, respectively; risk-free interest of 5.75%, 6.0% and 6.25%, respectively; and expected lives of five years. The resulting estimated weighted average fair value of options granted during 1998, 1997 and 1996 was $13.49, $9.48 and $11.48 per share, respectively. All options granted during the years ended December 31, 1998, 1997 and 1996 were granted with an exercise price equal to the fair value of the Company's common stock at the grant date The estimated pro forma amounts above include the compensation cost for the Company's Employee Stock Purchase Plan based on the fair value of the contributions under this plan consistent with the method of SFAS No. 123. A summary of the status of the Plans as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates, is presented below:
1998 1997 1996 ----------------------- -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 1,532 $ 20.53 1,274 $ 22.28 1,181 $ 16.29 Granted 381 23.20 526 15.56 1,089 22.57 Exercised (256) 15.69 (158) 14.74 (859) 15.10 Forfeited (83) 25.97 (110) 24.55 (137) 17.96 ----- ------ ----- Outstanding at end of year 1,574 $ 21.67 1,532 $ 20.53 1,274 $ 22.28 ===== ======= ====== ======== ===== ======= Options exercisable at year-end 837 $ 21.90 841 $ 20.80 771 $ 19.85 ===== ======= ====== ======== ===== =======
F-17 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 11. STOCK PLANS (CONTINUED): The following table summarizes information about the Plans' stock options at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ---------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 0.00-$ 10.00 14 4.4 years $ 6.46 13 $ 6.27 $ 10.01-$ 20.00 607 6.6 years $ 15.73 357 $ 16.33 $ 20.01-$ 30.00 891 7.3 years $ 24.96 405 $ 25.17 $ 30.01-$ 40.00 56 0.4 years $ 35.58 56 $ 35.58 $ 40.01-$ 50.00 6 3.2 years $ 40.55 6 $ 40.55 -------- --------- 1,574 837 ======== =========
OTHER STOCK PROGRAMS In August 1995, APBI granted a total of 60 restricted stock units ("RSUs") to two executive officers of APBI. The RSUs vested at the time the average closing price for APBI's common stock equaled or exceeded $10.00 per share for a period of 10 consecutive trading days. The RSUs vested in July 1996. The executives were not required to pay any consideration in exchange for the RSUs. Unearned compensation was amortized to expense over the vesting period of the RSUs. Compensation expense of $534 related to these RSUs has been recorded in the accompanying statement of operations for the year ended December 31, 1996. SAVINGS RELATED STOCK OPTION PLAN The Company has a United Kingdom Savings Related Stock Option Plan under which options are granted to employees who elect to purchase shares of common stock at the end of a five or seven-year period. Savings are accumulated through voluntary payroll deductions. The Company contributes a bonus to each participant's savings account equal to nine monthly contributions at the end of the five-year period and 18 monthly contributions at the end of the seven-year period. When the savings period ends, the employee may elect to purchase the shares using the savings balance, including the bonus; purchase some of the shares and receive the savings balance in cash; or receive the savings and bonus in cash. The United Kingdom Plan, as approved by the shareholders, was implemented by Applied Bioscience International Inc. during 1988. Currently, employees of the Company's United Kingdom subsidiary, Pharmaco International Ltd., participate in this plan. Outstanding options of APBI at the time of the merger were converted in accordance with the exchange ratio provided for in the merger agreement. At December 31, 1998, there were 1 options outstanding at an average exercise price of $13.72. Of those, 0.9 options were exercisable at December 31, 1998, at an average exercise price of $13.75. F-18 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 11. STOCK PLANS (CONTINUED): EMPLOYEE STOCK PURCHASE PLAN The Board of Directors has reserved 500 shares of the Company's common stock for issuance under the Employee Stock Purchase Plan (the "ESPP"). The ESPP has two six-month offering periods (each an "Offering Period") annually, beginning January 1 and July 1, respectively. The first Offering Period under the ESPP began July 1, 1997. Eligible employees can elect to make deductions from 1% to 15% of their compensation during each payroll period of an Offering Period. Special limitations apply to eligible employees who own 5% or more of the outstanding common stock of the Company. None of the contributions made by eligible employees to purchase the Company's common stock under the ESPP are tax deductible to the employees. At the end of an Offering Period, the total payroll deductions by an eligible employee for that Offering Period will be used to purchase common stock of the Company at a price equal to 85% of the lesser of (a) the reported closing price of the Company's common stock for the first day of the Offering Period, or (b) the reported closing price of the common stock for the last day of the Offering Period. Only 150 shares will be available for purchase during each of the Offering Periods beginning with the period commencing January 1, 1998. Employees eligible to participate in the ESPP include employees of the Company and its United States operating subsidiaries, except those employees who customarily work less than 20 hours per week or five months in a year. Since the eligible employee determines both participation in and contributions to the ESPP, it is not possible to determine the benefits and amounts that would be received by an eligible participant or group of participants in the future. At December 31, 1998, $957 had been contributed to the ESPP relating to unissued shares. Shares were not issued on December 31, 1998 since the market had to be closed before a purchase price could be determined. On January 4, 1999, 51 shares were issued. During 1998, $2,971 had been contributed to the ESPP and 225 shares were issued. The compensation costs for the ESPP as determined based on the fair value of the contributions under the ESPP, consistent with the method of SFAS No. 123, was $532 and $196 and is reflected in the pro forma net income and basic and diluted net income per share for 1998 and 1997, respectively as disclosed above. 12. INCOME TAXES: The components of income (loss) before provision for income taxes were as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- --------- --------- Domestic $ 24,875 $ 10,044 $ (3,523) Foreign (272) (1,231) (601) --------- --------- --------- Income (loss) from continuing operations 24,603 8,813 (4,124) Domestic 7,357 6,169 4,817 Foreign 269 694 (66) --------- --------- --------- Income from discontinued operations 7,626 6,863 4,751 --------- --------- --------- Total $ 32,229 $ 15,676 $ 627 ========= ========= =========
F-19 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 12. INCOME TAXES (CONTINUED): The components of the provision for income taxes were as follows: YEARS ENDED DECEMBER 31, 1998 1997 1996 ------- ------- --------- State income taxes: Current $ 942 $ 313 $ 330 Deferred 99 (97) 90 Federal income taxes: Current 9,607 5,305 2,130 Deferred 1,549 115 1,285 Foreign income taxes: Current 503 438 299 Deferred (240) - - --------- --------- --------- Provision for income taxes $ 12,460 $ 6,074 $ 4,134 ========= ========= ========= The income tax provision is included in the financial statements as follows: YEARS ENDED DECEMBER 31, 1998 1997 1996 ------- -------- --------- Continuing operations $ 9,448 $ 3,363 $ 2,257 Discontinued operations 3,012 2,711 1,877 --------- --------- --------- Total $ 12,460 $ 6,074 $ 4,134 ========= ========= ========= The 1998, 1997 and 1996 current foreign income tax expense represents the foreign income tax liabilities associated with the Company's foreign operations. The 1998 federal and state tax expense reflects the benefit related to the utilization of capital loss carryforwards on the sale of the assets of Clinix International, Inc. F-20 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 12. INCOME TAXES (CONTINUED): Taxes computed at the statutory U.S. federal income tax rate of 35% are reconciled to the provision for income taxes as follows:
YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 --------- --------- ----------- Effective tax rate 38.7% 38.7% 660.2% ========= ========= =========== United States federal statutory rate of 35% $ 11,280 $ 5,487 $ 213 Differential on rates applied to foreign earnings - - (72) State taxes (net of federal benefit) 677 237 277 Utilization of capital loss carry forward (1,799) - - Tax gain in excess of book 1,319 - - Foreign taxes in excess of U.S. rate 423 - - Allowance for limitation of utilization of foreign tax losses (38) 533 299 APBI merger costs not deductible for income tax purposes - - 2,751 Goodwill and other items not deductible for income tax purposes 450 449 435 Other 175 (371) 231 Benefit of federal statutory rate reduction from 35% to 34% - (100) - Deferred taxes set up for S to C conversion on acquisitions - (161) - Change in valuation allowance (27) - - --------- --------- ----------- Provision for income taxes $ 12,460 $ 6,074 $ 4,134 ========= ========= ===========
During 1997, the Company began recording deferred taxes at a 35% federal rate due to expected levels of income in the future. Components of the net current deferred tax asset are as follows: DECEMBER 31, 1998 1997 --------- --------- Future benefit of foreign net operating losses $ 2,736 $ 2,523 Allowance for doubtful accounts 413 787 Accruals 2,002 1,090 Valuation allowance (2,400) (2,427) --------- --------- Net current deferred tax asset $ 2,751 $ 1,973 ========= ========= Components of the net long-term deferred tax asset, which are included in other assets on the consolidated balance sheets, are as follows: DECEMBER 31, 1998 1997 --------- --------- Depreciation and amortization $ 1,504 $ 2,721 Deferred rent 220 1,068 Other (169) (47) --------- --------- Net long-term deferred tax asset $ 1,555 $ 3,742 ========= ========= A valuation allowance was recorded against the foreign net operating loss carryforwards because there is a significant uncertainty that the deferred tax assets will be realized. In addition, there is an $11,000 gross capital loss carryforward, which the Company has written off against the valuation allowance as the Company does not expect to realize this. F-21 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 12. INCOME TAXES (CONTINUED): The cumulative amount of undistributed earnings of foreign subsidiaries for which the Company has not provided U.S. income taxes at December 31, 1998 was $1,223. No provision has been made for the additional taxes that would result from the distribution of earnings of foreign subsidiaries since such earnings have been permanently reinvested in the foreign operations. During 1997, the Company utilized all U.S. net operating loss carryforwards and alternative minimum tax credit carryforwards. 13. EMPLOYEE SAVINGS AND PENSION PLANS: SAVINGS PLANS The Company provides a 401(k) Retirement Savings Plan to its U.S. employees. The Company matches 50% of an employee's savings up to 6% of pay, and these contributions vest ratably over a four-year period. Company matching contributions for all employees for each of the three years ended December 31, 1998, 1997 and 1996 were $2,201, $1,945 and $1,483, respectively. PENSION PLANS Pension costs and related disclosures are determined under the provisions of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits," which was adopted by the Company in 1998. There was no impact on the Company's financial statement balances as a result of the adoption of this pronouncement. The Company has a separate contributory defined benefit plan (the "U.K. Plan") for its qualifying United Kingdom employees and directors employed by the Company's U.K. subsidiaries. The benefits for the U.K. Plan are based primarily on years of service and average pay at retirement. Plan assets consist principally of investments managed in a mixed fund. Pension costs for the U.K. Plan included the following components: YEARS ENDED DECEMBER 31, 1998 1997 1996 --------- --------- --------- Service cost-benefits earned during the year $ 662 $ 738 $ 553 Interest cost on projected benefit obligation 777 631 623 Actual return on plan assets (984) (954) (771) Net amortization and deferral (13) (13) (14) --------- --------- --------- Net pension cost $ 442 $ 402 $ 391 ========= ========= ========= F-22 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 13. EMPLOYEE SAVINGS AND PENSION PLANS (CONTINUED): The change in benefit obligation, change in plan assets and funded status of the defined benefit plan was as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996 --------- --------- --------- Change in benefit obligations Benefit of obligation at beginning of year $ 8,528 $ 8,404 $ 7,456 Service cost 662 738 553 Interest cost 777 631 623 Net actuarial loss (gain) 2,046 (403) - Benefits paid (513) (540) (228) Foreign currency translation adjustment 45 (302) - --------- --------- --------- Benefit obligation at end of year $ 11,545 $ 8,528 $ 8,404 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 10,931 $ 9,963 $ 9,162 Actual return on plan assets 1,535 1,451 779 Employer contributions 430 366 171 Plan participants' contributions 141 50 79 Benefits and expenses paid (513) (540) (228) Foreign currency translation adjustment 55 (359) - --------- --------- --------- Fair value of plan assets at end of year $ 12,579 $ 10,931 $ 9,963 ========= ========= ========= Net amount recognized Funded status $ 1,034 $ 2,404 $ 1,558 Unrecognized transition asset (85) (97) (115) Unrecognized net actuarial loss (gain) 1,085 (406) 512 --------- --------- --------- Prepaid pension cost $ 2,034 $ 1,901 $ 1,955 ========= ========= =========
Assumptions used to determine pension costs and projected benefit obligations were as follows:
1998 1997 1996 ----------- ----------- --------- Discount rate 7.5% 8.5% 8.5% Rate of compensation increase 5.0% 6.0% 6.5% Long-term rate of return on plan assets 8.5% 9.5% 8.5%
Prior to January 31, 1999, the Company maintained the APBI Environmental Sciences Group, Inc. Pension Plan (the "Pension Plan"), a tax-qualified, defined-contribution money-purchase pension plan, for the benefit of its eligible ENVIRON employees. ENVIRON is required to make annual contributions to the Pension Plan in an amount equal to the sum of 3.75% of each eligible employee's total compensation, plus 3.75% of the portion of such employee's compensation in excess of the Social Security wage base. Participants vest in 20% of their account balances after two years of service and 20% per year until they are fully vested. The annual pension expense of the Pension Plan for the three years ended December 31, 1998, 1997 and 1996 was $697, $638 and $620, respectively. As of December 31, 1998 and 1997, accrued pension cost, included in other accrued expenses, was $651 and $701, respectively. Effective January 1, 1994, APBI Environmental Sciences Group, Inc. established the ENVIRON Supplemental Executive Retirement Plan. This plan is nonqualified and provides certain key employees defined-contribution benefits that supplement those provided by the Pension Plan. Company contributions to this plan in 1998, 1997 and 1996 were $35, $35 and $39, respectively. The Pension Plan and the ENVIRON Supplemental Executive Retirement Plan became the responsibility of the purchaser of the environmental services segment on January 31, 1999. F-23 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 14. COMMITMENTS AND CONTINGENCIES: The Company currently maintains liability insurance on a "claims made" basis for professional acts, errors and omissions. As of December 31, 1998, this coverage included two policies. One policy is for the Life and Discovery Sciences Groups with a self-insured retention per claim of $250 and one is for the environmental sciences segment with a $500 self-insured retention per claim. As of December 31, 1998 and 1997 there are no open claims related to these coverages. The Company currently is self-insured for group health for employees located within the United States. The Company maintains insurance on a "claims made" basis, up to a maximum of $100 per occurrence. As of December 31, 1998 and 1997 the Company maintained a reserve of approximately $1,500 and $1,300, respectively, included in other accrued expenses on the consolidated balance sheets to cover estimated open claims. In the normal course of business, the Company is a party to various claims and legal proceedings. The Company records a reserve for these matters when an adverse outcome is probable and the amount of the potential liability is reasonably estimable. Although the ultimate outcome of these matters is currently not determinable, management of the Company, after consultation with legal counsel, does not believe that the resolution of these matters will have a material effect upon the Company's financial condition or results of operations for an interim or annual period. 15. RELATED PARTY TRANSACTIONS: Several of the Company's shareholders collectively own 14.6% of LOI Building, Inc. ("LOI"), which leased operating facilities to the Company through November 1996. Rent paid to LOI for the year ended December 31, 1996 totaled $402. One of the members of the Company's Board of Directors (who was a member of APBI's Board of Directors prior to the Company's acquisition of APBI) is Vice Chairman at Lehman Brothers. Lehman Brothers acted as APBI's investment banker for APBI's acquisition by the Company. For those investment-banking services, Lehman Brothers earned $3,059 in 1996. The Company is related through common ownership with E.M. Associates, Inc., which provides investigative board services to the Company. The Company had transactions with E.M. Associates, Inc. of $37 and $66 in expenses for the years ended December 31, 1997 and 1996, respectively. There were no transactions with E.M. Associates during the year ended December 31, 1998. The Company paid legal fees in 1996 of approximately $333 to a firm, which had a partner who became General Counsel of the Company in 1996. At the time this individual became the Company's General Counsel, this individual disposed of all of his interest in the law firm. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CURRENT ASSETS AND CURRENT LIABILITIES The carrying amount approximates fair value because of the short maturity of those instruments. INVESTMENT IN DAS The Company's investment in DAS is recorded at $1,500 at December 31, 1998. The Company's investment in DAS is valued based on the cost method as the preferred stock of DAS is not tradeable and does not exceed estimated net realizable value. F-24 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED): INVESTMENT IN SDI The Company's investment in SDI was recorded at $1,161 compared to the market price $1,608 as quoted on the National Market System of the National Association of Securities Dealers Automated Quotation System at December 31, 1997. At December 31, 1997, this investment was not valued at the market price due to the purchase options outstanding at the exercise price of $1.625 per share for all shares of SDI which the Company owned. The Company received $1,161 in March 1998 when all the options were exercised. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. Fair value approximates the carrying amount as the Company's debt instruments bear interest based on variable rates. LETTERS OF CREDIT The Company utilizes letters of credit to back certain guarantees and insurance policies. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined in the market place. 17. BUSINESS SEGMENT DATA: During 1998 and 1997, the Company operated in three business segments - life sciences, environmental sciences and discovery sciences. The Company sold its environmental sciences segment in January 1999 (see Note 4). Prior to 1997, the Company operated in two segments - life sciences and environmental sciences. Accordingly, the income statements have been restated to conform to the provisions of APB 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Operations". The consolidated balance sheets and cash flows have not been restated to exclude the assets, liabilities and cash flows of the environmental sciences segment. F-25 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 17. BUSINESS SEGMENT DATA (CONTINUED): Revenues by principal business segment are separately stated in the consolidated financial statements. Merger costs and acquired in-process research and development costs incurred in 1998, 1997 and 1996 of $3,163, $9,670 and $14,773, respectively, were not allocated to the Company's business segments and are shown separately for purposes of business segment analysis. Income taxes are allocated evenly to each division for purposes of business segment analysis. Income (loss) from operations, net income, depreciation and amortization, identifiable assets and capital expenditures by principal business segment were as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996 --------- --------- --------- Income (loss) from operations: (a) Life sciences $ 28,693 $ 19,344 $ 8,845 Discovery sciences (4,489) (2,325) - Merger costs and acquired in-process research and development costs (3,163) (9,670) (14,773) --------- --------- -------- Total $ 21,041 $ 7,349 $ (5,928) ========= ========= ========= Net income (loss) Life sciences $ 17,851 $ 6,856 $ (6,381) Discovery sciences (2,696) (1,406) - Environmental sciences 4,614 4,152 2,874 --------- --------- -------- Total $ 19,769 $ 9,602 $ (3,507) ========= ========= ========= Depreciation and amortization: (a) Life sciences $ 11,897 $ 10,651 $ 8,898 Discovery sciences 420 229 - --------- --------- -------- Total $ 12,317 $ 10,880 $ 8,898 ========= ========= ========= Identifiable assets: Life sciences $ 200,382 $ 165,855 $ 159,394 Discovery sciences 3,672 1,465 - Environmental sciences 32,528 29,727 22,063 --------- --------- -------- Total $ 236,582 $ 197,047 $ 181,457 ========= ========= ========= Capital expenditures: Life sciences $ 16,866 $ 11,589 $ 9,895 Discovery sciences 740 495 - Environmental sciences 1,737 1,515 1,281 --------- --------- --------- Total $ 19,343 $ 13,599 $ 11,176 ========= ========= =========
(a) Does not include results of operations of the environmental sciences segment which was sold January 31, 1999. See Note 4. F-26 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 18. OPERATIONS BY GEOGRAPHIC AREA: The following table presents information about the Company's operations by geographic area:
YEARS ENDED DECEMBER 31, 1998 1997 1996 ----------- ---------- ------------ Net revenue: (a) United States $ 199,295 $ 162,822 $ 130,851 U.K. 16,506 14,583 14,372 Other (b) 19,752 10,082 7,081 ----------- ----------- ----------- Total $ 235,553 $ 187,487 $ 152,304 =========== =========== =========== Operating income (loss): (a) United States $ 20,749 $ 8,778 $ (6,032) U.K. (1,004) (575) (939) Other (b) 1,296 (854) 1,043 ----------- ----------- ----------- Total $ 21,041 $ 7,349 $ (5,928) =========== =========== ============ Identifiable assets: United States $ 183,411 $ 157,543 $ 142,464 U.K. 36,825 27,063 27,657 Other (b) 16,346 12,441 11,336 ----------- ----------- ----------- Total $ 236,582 $ 197,047 $ 181,457 =========== =========== ===========
(a) Does not include results of operations of the environmental sciences segment which was sold January 31, 1999. See Note 4. (b) Principally consists of revenue from 15 countries, nine of which are located in Europe, none of which individually comprise more than 5% of net revenue, operating income (loss) or identifiable assets. F-27 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 19. QUARTERLY FINANCIAL DATA (UNAUDITED):
1998 (A) FIRST SECOND THIRD FOURTH TOTAL - ------------------------------- -------- --------- --------- --------- --------- Net revenue $ 52,153 $ 57,465 $ 61,452 $ 64,483 $ 235,553 Operating income 3,976 2,183 6,596 8,286 21,041 Net income from continuing operations 3,434 1,669 4,428 5,624 15,155 Net income from operations of discontinued environmental sciences segment 1,102 1,206 1,198 1,108 4,614 Net income 4,536 2,875 5,626 6,732 19,769 Net income per share: Basic $ 0.20 $ 0.12 $ 0.24 $ 0.29 $ 0.85 Diluted $ 0.20 $ 0.12 $ 0.24 $ 0.29 $ 0.85 Income from continuing operations per share: Basic $ 0.15 $ 0.07 $ 0.19 $ 0.24 $ 0.65 Diluted $ 0.15 $ 0.07 $ 0.19 $ 0.24 $ 0.65 1997 (A) Net revenue $ 45,969 $ 47,942 $ 46,295 $ 47,281 $ 187,487 Operating income (loss) 3,980 (4,300) 4,544 3,125 7,349 Net income (loss) from continuing operations 2,565 (2,382) 2,917 2,350 5,450 Net income from operations of discontinued environmental sciences segment 778 1,036 1,224 1,114 4,152 Net income (loss) 3,343 (1,346) 4,141 3,464 9,602 Net income (loss) per share: Basic $ 0.15 $ (0.06) $ 0.18 $ 0.15 $ 0.42 Diluted $ 0.15 $ (0.06) $ 0.18 $ 0.15 $ 0.42 Income (loss) from continuing operations per share: Basic $ 0.12 $ (0.11) $ 0.13 $ 0.10 $ 0.24 Diluted $ 0.11 $ (0.11) $ 0.13 $ 0.10 $ 0.24
- ---------------- (a) Quarterly financial operating results have been restated to reflect the environmental sciences segment as discontinued operations. F-28 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 20. SUBSEQUENT EVENTS: On January 31, 1999, the Company sold its environmental sciences segment. See Note 4. In February 1999, the Company formed a joint venture, PPGx, with Axys Pharmaceuticals, Inc. to pursue the business of pharmacogenomics. The Company contributed $1,500 in cash, the net assets of Intek, and assigned the rights to a certain software license from Axys for an 18.2% ownership interest in PPGx. Separately, the Company and Axys entered into a software licensing agreement whereby the Company licensed certain software, from Axys in exchange for a $2,000 license fee. The Company has received exclusive marketing rights to PPGx pharmacogenomics products and services and an option to increase its ownership share of PPGx after the first anniversary of the forming of PPGx. In February 1999, the Company signed a non-binding letter of intent to acquire ATP, Inc., a health information services company. ATP provides customized inbound and outbound telecommunications programs targeting consumers and health care providers. Under the terms of the letter of intent, the Company will issue approximately 1,000 shares of its unregistered common stock, subject to certain closing adjustments, to the shareholders of ATP in return for their ATP stock. The transaction will be accounted for as a pooling of interests. F-29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. Date: March 4, 1999 By: /s/ Fredric N. Eshelman, Pharm.D. --------------------------------- Name: Fredric N. Eshelman, Pharm.D. Title: Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Fredric N. Eshelman, Pharm.D. Director and Chief Executive Officer March 4, 1999 - --------------------------------- (Principal Executive Officer) Fredric N. Eshelman, Pharm.D. /s/ Rudy C. Howard Chief Financial Officer, Vice President of March 4, 1999 - --------------------------------- Finance and Treasurer (Principal Financial Rudy C. Howard Officer) /s/ Linda Baddour Chief Accounting Officer and Executive March 4, 1999 - --------------------------------- Director, Finance (Principal Accounting Linda Baddour Officer) /s/ Ernest Mario, Ph.D. Director March 4, 1999 - --------------------------------- Ernest Mario, Ph.D. /s/ Stuart Bondurant, M.D. Director March 4, 1999 - --------------------------- Stuart Bondurant, M.D. /s/ Abraham Cohen Director March 4, 1999 - --------------------------- Abraham E. Cohen /s/ Thomas D'Alonzo Director March 4, 1999 - ------------------------------------ Thomas D'Alonzo /s/ Frederick Frank Director March 4, 1999 - ------------------------------------ Frederick Frank /s/ Paul J. Rizzo Director March 4, 1999 - ------------------------------------ Paul J. Rizzo /s/ John A. McNeill, Jr. Director March 4, 1999 - ------------------------------------ John A. McNeill, Jr. /s/ Donald C. Harrison, M.D. Director March 4, 1999 - ------------------------------------ Donald C. Harrison, M.D.
S-1 EX-10 2 EXHIBIT 10.118 LEASE AGREEMENT BY AND BETWEEN PPD PHARMACO, INC., as Tenant AND WEEKS REALTY, L.P., as Landlord TABLE OF CONTENTS 1. PREMISES AND TERM. 2. BASE RENT, OPERATING EXPENSES, AND SECURITY DEPOSIT. 3. COMPLIANCE WITH LAWS AND USE. 4. REPAIR AND MAINTENANCE. 5. ALTERATIONS. 6. SIGNS. 7. INSPECTION. 8. UTILITIES. 9. ASSIGNMENT AND SUBLETTING. 10. FIRE AND CASUALTY DAMAGE. 11. LIABILITY. 12. CONDEMNATION. 13. HOLDING OVER AND TERMINATION. 14. QUIET ENJOYMENT. 15. EVENTS OF DEFAULT. 16. REMEDIES. 17. LANDLORD'S LIEN. 18. MORTGAGES. 19. MECHANIC'S LIENS. 20. NOTICES. 21. BROKER'S CLAUSE. 22. LANDLORD'S LIABILITY. i 23. RULES AND REGULATIONS. 24. HAZARDOUS MATERIALS. 25. LANDLORD'S RIGHT TO SUBSTITUTE THE PREMISES. 26. COVENANT OF TENANT. 27. MISCELLANEOUS. ii EXHIBITS EXHIBIT A- THE LAND EXHIBIT B- FLOOR PLAN EXHIBIT C- PLANS AND SPECIFICATIONS EXHIBIT C-1- PROJECT DESIGN AND CONSTRUCTION SCHEDULE EXHIBIT C-2- SHELL BUILDING COMPONENTS EXHIBIT C-3- BASE BUILDING UPFIT EXHIBIT D- RULES AND REGULATIONS iii LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease"), is made and entered into as of the 16th day of December, 1998, by and between WEEKS REALTY, L.P., a Georgia limited partnership authorized to do business in North Carolina as WEEKS REALTY LIMITED PARTNERSHIP (the "Landlord"), and PPD PHARMACO, INC., a Texas corporation (the "Tenant"). W I T N E S S E T H: 1. PREMISES AND TERM. (a) PREMISES. In consideration of the obligation of Tenant to pay rent as herein provided, and in consideration of the other terms, provisions and covenants hereof, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, certain premises to be comprised of approximately 61,380 rentable square feet (the "Premises") in a building to be constructed by Landlord (the "Building") and situated on certain land (the "Land") in Morrisville, the County of Wake, State of North Carolina, more particularly described on Exhibit A, attached hereto and incorporated herein by reference, together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way pertaining to the Premises. A floor plan of the Building and the Premises shall be attached hereto and made a part hereof as Exhibit B. The measurement of the Premises shall be conducted in accordance with BOMA standards, 1996 edition, currently applicable for a Class A office building comparable to the Building. Any upfit performed by Landlord to prepare the Premises for occupancy by Tenant shall be conducted in a good and workmanlike manner and in accordance with all laws, statutes, and regulations, and Landlord shall warrant the construction of the improvements for a period of one year from the Commencement Date. The taking of possession by Tenant shall be deemed conclusively to establish that each portion of the Premises and any improvements thereto are in good and satisfactory condition as of the date Tenant commenced occupancy of that portion of the Premises, except for latent defects and punchlist items. Tenant and Landlord shall complete a punchlist of items requiring repair that are the responsibility of Landlord within thirty (30) days of the Commencement Date. Tenant further acknowledges that no representations as to the repair of the Premises, nor promises to alter, remodel or improve the Premises have been made by Landlord unless such representations or promises are expressly set forth in this Lease. Within five days of the Commencement Date, Tenant shall, upon demand of Landlord, execute and deliver to Landlord a letter of acceptance of delivery of the Premises, acknowledging the Commencement Date. All construction of the Premises shall be performed by Landlord in accordance with the schedule, plans and specifications for the Premises (herein referred to collectively as the "Plans") which Plans are subject to the mutual and reasonable approval of Landlord and Tenant, a preliminary copy of which is attached hereto and made a part hereof as Exhibit C. Construction of the Premises shall proceed in accordance with the Building Design and Construction Schedule attached hereto and made a part hereof as Exhibit C-1. The components of the Shell Building shall be as set forth in Exhibit C-2, attached hereto and made a part hereof. The components of the Building Upfit shall be as set forth in Exhibit C-3, attached hereto and made a part hereof. Tenant shall review the Plans to provide its input with respect to all aspects of the Plans, including, but not limited to, the specific needs of Tenant with respect to Heating, Ventilation and Air Conditioning and other Building systems, and Landlord shall act reasonably to accommodate the specific needs of Tenant with respect to the Building systems. Notwithstanding the above, Landlord and Tenant agree that a formal construction schedule and final Construction Drawings and Specifications, upon the completion of such documents by Landlord, Landlord's architectural and engineering service providers, and other such parties and further subject to the mutual and reasonable approval of such documents by Landlord and Tenant, will replace the contents of Exhibit C for purposes of controlling the actual construction of the Premises; and such formal construction schedule and final Construction Drawings and Specifications shall replace Exhibit C by means of a lease amendment between Landlord and Tenant. The base rent delineated in Paragraph 2(a) includes the costs of the Shell Building, currently estimated to be Ninety-Four and 35/100 Dollars ($94.35) per rentable square foot of the Premises (the "Shell Allowance"). Should the actual costs of the Shell Building (together with the reduced or increased financing costs and commissions of the Landlord) be different than the Shell Allowance, the base rent due hereunder shall be increased or decreased accordingly by multiplying the difference between the actual cost thereof and the Shell Allowance by a factor of Ten and 85/100 Percent (10.85%), as reasonably determined by Landlord. The base rent delineated in Paragraph 2(a) also includes a contribution by the Landlord of Ninety-Two and 14/100 Dollars ($92.14) per rentable square foot of the Premises to be applied to the Building upfit, as set forth in Exhibit C-2 (the "Upfit Allowance"). Further, Landlord has agreed to permit Tenant to increase the Upfit Allowance by up to an additional Twelve and 86/100 Dollars ($12.86) per Rentable Square Foot of the Premises to satisfy Tenant's interior finish requirements, as reasonably approved by Landlord (the Additional Upfit Allowance"). At the option of Tenant, any portion or all of the Additional Upfit Allowance used by Tenant to complete the upfit shall be amortized over the term of the Lease with interest at the rate of eleven percent (11%) per annum and repaid by Tenant in equal monthly installments together with its payment of base rent hereunder. Should for any reason the upfit costs for the Premises be greater than a total of One Hundred Five and NO/100 Dollars ($105.00) per rentable square foot (the "Maximum Upfit Allowance"), such excess (the "Excess") shall be borne by Tenant and payable by Tenant to Landlord within thirty (30) days of demand by Landlord to Tenant. Failure by Tenant to pay the Excess upon demand as aforesaid is an event of default 2 hereunder and, in addition to all other remedies available to Landlord at law, or in equity for such event of default, Landlord may recover from Tenant the cost it incurs in preparing the Premises for another tenant. Should the upfit costs for the Premises be less than the Upfit Allowance, Tenant shall be allowed to upgrade the improvements to the Premises, as reasonably approved by Landlord, to fully utilize the entire Upfit Allowance; or Tenant may elect to have Landlord apply the unused Upfit Allowance (together with the reduced financing costs and commissions of Landlord), multiplied by the amortization constant for eleven percent (11%) per annum to reduce the base rent due hereunder, proportionately over the entire Lease Term, all as reasonably determined by Landlord and Tenant. Additionally, in the event that Tenant shall not utilize all the Upfit Allowance or all or any part of the Additional Upfit Allowance, Tenant shall have the right to apply such unused monies towards the costs of upfitting the Premises subsequent to completion of the initial improvements ("Deferred Allowance") up to the Maximum Upfit Allowance, subject to mutual and reasonable approval of plans and specifications for such improvements by Landlord and Tenant. Tenant's right to the Deferred Allowance shall expire at the end of the second year of the term of the Lease and Landlord shall have no further obligation to provide any improvement allowances of any kind during the term of the Lease unless stated otherwise in this Lease. Any Deferred Allowance used by Tenant shall be amortized over the term of the Lease remaining at the time of completion of such improvements, with interest at the rate of eleven percent (11%) per annum (the "Amortization Constant"), and repaid by Tenant in equal monthly installments together with its payment of base rent hereunder. Landlord shall act reasonably to allow Tenant reasonable access to the Premises at least thirty days prior to the Commencement Date to install its furniture, telephone and computer systems, and other special Building systems. Tenant covenants and agrees to conduct its actions in such a manner to not disturb the preparation by Landlord of the Premises for occupancy by Tenant. Upon the entry by Tenant onto the Premises, this Lease shall be deemed to apply with respect to the requirements that Tenant carry the insurance policies required under this Lease, and that Tenant shall indemnify, defend and hold harmless Landlord in accordance with the provisions of this Lease, as provided in Sections 10 and 11 hereof. (b) TERM. TO HAVE AND TO HOLD the same for an initial term of one hundred and eighty (180) months commencing upon the date (i) the Premises are delivered by Landlord to Tenant as substantially complete in accordance with the Plans, and (ii) a temporary certificate of occupancy has been issued for the Premises by the Town of Morrisville, NC (the "Commencement Date"), and ending 180 months thereafter, unless sooner terminated pursuant to the provisions hereof (the "Termination Date"). The Commencement Date and Termination Date may be extended by Landlord, in its discretion, due to delays beyond the control of Landlord, including, but not limited to, acts or omissions of Tenant, 3 force majeure, delays in obtaining permits, licenses or other approvals, acts of God, delays caused by Tenant, and/or inclement weather, including site conditions or winter weather that prohibit or adversely affect construction (collectively, the "Excused Delays"). In the event the Commencement Date has not occurred by December 1, 1999 due to acts or omissions of Landlord (with such date being extended for any Excused Delays), Landlord shall credit against the first installment(s) of base rent due hereunder from Tenant an amount equal to one day's base rent for each day the Commencement Date is delayed. In the event the Commencement Date has not occurred by December 1, 1999 due to acts or omissions of Tenant (with such date being extended for any delay due to acts or omissions of Landlord and any Excused Delay except for a Tenant Delay), Landlord shall receive from Tenant on the Commencement Date an amount equal to one day's base rent for each day the Commencement Date is delayed due solely by reason of a Tenant Delay (as hereinafter defined). The aforesaid monetary amounts shall act as a sole and exclusive remedy to each party hereto for any delay in the Commencement Date. Landlord shall use reasonable efforts to provide Tenant at least sixty days prior written notice of the Commencement Date. A Tenant Delay shall be defined as a delay due in whole or in part to (i) failure by Tenant to furnish information requested by Landlord within five business days of the request therefor, or if such request may not be satisfied by Tenant within five business days due to the time reasonably needed to satisfy such request if Tenant is acting in good faith and proceeding diligently, Tenant fails to commence its efforts to satisfy such request within five business days or fails to diligently pursue satisfaction of a request thereafter; (ii) the acts or omissions by a person or entity employed by Tenant in the completion of any work in connection with the upfit of the Premises by said person or entity; or (c) other acts or omissions, whether negligent, willful, or intentional of Tenant, its agents, employees, officers, directors, or independent contractors, and as a result of the foregoing, Landlord is unable to complete its obligations under this Lease by the Commencement Date. Landlord shall provide written notice to Tenant of any Tenant Delay as soon as practicable after the occurrence of any Tenant Delay. (c) Option to Renew. Tenant shall have the option to renew the term of the Lease for one renewal period (the "Renewal Term") of five lease years in duration, provided that Tenant shall not be in default under the Lease on the date such rights are exercised, or on the date the Renewal Term shall commence. The date of the commencement of the Renewal Term shall be the day after the expiration of the then current term of the Lease (unless sooner terminated as provided herein). All terms and conditions of this Lease shall be in effect during the Renewal Term (including the right of Landlord to increase base rent as provided in paragraph 2 of the Lease), except that (i) the base rent paid by Tenant during the Renewal Term shall be the lesser of: (1) ninety-five percent of the then prevailing market rental rate (the "Market Rent") for laboratory buildings in the Research Triangle Park, North Carolina area of similar research usage, utility, size, age, construction, finishes, upfit, and with similar amenities and landscaping, and similar occupancy levels to the Building, as reasonably determined by Landlord and Tenant, or (2) $24.00 per rentable square foot, triple net; and (ii) upon the exercise by Tenant of its right for the Renewal Term, all rights of Tenant to 4 renew or extend this Lease term shall lapse. The base rent established by Landlord and Tenant for the Renewal Term shall increase on January 1 of each year during the Renewal Term by two and three-fourths percent (2 and 3/4ths) over the base rent paid the previous year. In the event that Landlord and Tenant cannot agree upon the base rent to be paid by Tenant during the Renewal Term, this Lease shall terminate and the options to renew provided to Tenant hereunder shall be null and void and of no further force and effect. Tenant shall deliver Landlord written notice of its election to exercise its option to renew no less than nine (9) months prior to the expiration of the initial term of the Lease; failing which Tenant's right to renew for the Renewal Term shall be null and void. (d) Option to Purchase. Provided there is (i) no default or event of default by Tenant under this Lease on the date its rights are exercised or upon the date that Tenant shall purchase the Building and Land and (ii) Tenant shall continue to lease the entirety of the Building, Tenant shall have a one-time right to purchase the Building and Land for a purchase price of $15,000,000.00 in cash provided that Tenant shall provide Landlord written notice of its intent to exercise its Option to Purchase at least nine months prior to the Termination Date, and shall close on the purchase on the first business day following the Termination Date of the initial term of this Lease. Should Tenant fail to comply strictly with the foregoing conditions precedent, the rights of Tenant under this Option to Purchase shall be null and void and of no further force and effect. Each party hereto shall pay its fees and expenses in connection with a closing by Tenant upon the Building and Land. 2. BASE RENT, OPERATING EXPENSES, AND SECURITY DEPOSIT. (a) BASE RENT. Tenant agrees to make monthly payments of base rent to Landlord for the Premises ("base rent"), in advance, without demand, deduction or offset, in lawful money of the United States, in the following amounts: TIME PERIOD BASE RENT PER RENTABLE SQUARE FOOT OF THE PREMISES Year 1 $23.44 Year 2 $23.44 Year 3 $23.79 Year 4 $24.16 Year 5 $24.53 Year 6 $24.92 Year 7 $25.32 Year 8 $25.73 Year 9 $26.14 Year 10 $26.58 Year 11 $27.02 Year 12 $27.02 Year 13 $27.47 5 Year 14 $27.94 Year 15 . $28.42 Base rent shall be due and payable commencing upon the Commencement Date, and continuing on the first day of each and every month thereafter until the Termination Date. Rent payments for any fractional calendar month at the end, or the beginning of the term of the Lease, shall be prorated. Base rent for the Premises as provided herein has been calculated based upon the construction of the Premises as provided in the Plans attached hereto. Base rent shall be revised in accordance with paragraph 1(a) of this Lease should the Plans be modified and any such modifications result in increases or decreases in the costs incurred in constructing the Premises in accordance with the Plans, as reasonably determined by Landlord and Tenant. 6 (b) TAXES. Beginning on the Commencement Date and continuing for the entire term hereof, Tenant shall pay to Landlord, as additional rental, Tenant's pro rata share of all taxes, assessments and governmental charges of any kind or nature whatsoever levied or assessed against the Land and the Building by any municipality, county, or other governmental agency (the "Taxes"), which shall be based upon the ratio of the square footage of the Premises to the total square footage of the Building. Tenant shall pay its pro rata share of the Taxes in advance in equal monthly installments in such amounts as are estimated for each year by Landlord at the beginning of each calendar year during the term, each such installment being made along with payments of base rent hereunder. Tenant's share of Taxes for the initial year of the term is estimated by Landlord to be $.84 per square foot per year, or $4,296.60 per month. (c) INSURANCE EXPENSE. Beginning on the Commencement Date and continuing for the entire term hereof, Tenant shall pay to Landlord, as additional rental, Tenant's pro rata share of the insurance premiums (the "Insurance Expense") for commercial general liability, and fire and extended coverage insurance on the Building and the Land, which shall be based upon the ratio of the square footage of the Premises to the total square footage of rentable space in the Building. Tenant shall pay its pro rata share of the Insurance Expense in advance in equal monthly installments in such amounts as are estimated by Landlord at the beginning of each calendar year during the term, each such installment being made along with payments of base rent hereunder. Tenant's pro rata share of the Insurance Expense for the initial year of the term is estimated by Landlord to be $.03 per square foot per year or $ 15.35 per month. (d) CAM EXPENSE. Beginning on the Commencement Date and continuing for the entire term hereof, Tenant shall pay to Landlord, as additional rental, Tenant's pro rata share of the cost to Landlord of all the costs and expenses of the operation, repair and maintenance of the Premises, the Building, its exterior and common areas, and driveways and parking areas, including, but not limited to, the costs of lawn maintenance, driveway and parking area maintenance for the Premises and for the streets and roadways providing access to the Building and the Land, management and supervisory fees, costs for the monitoring, review, and supervision of Tenant with respect to its maintenance and repair responsibilities as set forth in paragraph 4 hereof, exterior lighting maintenance, snow removal, repair and maintenance of paved areas, cleaning supplies, miscellaneous building supplies, sweeper brushes, supplies for materials used in common by all tenants of the complex in which the Premises are located, external paint for the Building, exterior and common area maintenance, external plumbing for the Building, utility costs for exterior lighting including lighting in exterior common areas, security guards for the complex in which the Premises are located, signs for the complex in which the Premises are located, fuel for vehicles and street sweepers used by Landlord in the complex in 7 which the Premises are located and miscellaneous maintenance expenses, labor, materials, supplies, equipment and tools, permits, licenses, inspection fees, window glass replacement and repair, compensation (including employment taxes and fringe benefits) of all persons who perform duties in connection with the operation and/or maintenance of the Building, and costs for janitorial expense, maintenance, repair, and replacement of Building systems not being repaired, maintained and replaced by Tenant, if any, and trash removal at the Premises (hereinafter collectively, the "CAM Expense"). The pro rata share of Tenant for CAM Expense shall be based upon the ratio of the square footage of the Premises to the total square footage of rentable space in the Building. Tenant's pro rata share of the CAM Expense for the initial year of the term is estimated by Landlord to be $.76 per square foot per year or $3,887.40 per month. 8 (e) RECONCILIATION OF EXPENSES. Landlord shall promptly notify Tenant of the total actual (i) Taxes assessed against the Land and the Building, (ii) Insurance Expense, and (iii) CAM Expense, attaching a copy of the tax or special assessment bill, the insurance invoice, or the calculation of CAM Expense, as applicable, and shall specify (i) Tenant's pro rata share thereof, and (ii) the excess, if any, of Tenant's pro rata share over Landlord's estimation for such calendar year. Tenant shall pay the excess amount so specified to Landlord within thirty (30) days following receipt by Tenant of Landlord's letter. Failure by Tenant to pay Landlord such amount within the period designated shall constitute a non-payment of rent by Tenant and a default of Tenant's obligation under the Lease, and Landlord shall be entitled to all remedies provided for in this Lease upon default in payment of rent. If the first year for which Tenant's pro rata share of Taxes, Insurance Expense, or CAM Expense (hereinafter collectively, the "Expenses") are due or the final year of the term hereof do not coincide with the calendar year, Tenant's pro rata share of Expenses for the portion of that year shall be prorated according to the number of months during which Tenant was in possession of the Premises. In the event Landlord's estimation of Expenses shall exceed the actual amount of Expenses, the amount paid by Tenant for such year shall be adjusted between Landlord and Tenant and Tenant shall receive a credit against the next due installment of rent hereunder in such excess amount unless this Lease has expired or been otherwise terminated, in which event Landlord shall pay to Tenant such excess amount within thirty (30) days following receipt by Tenant of Landlord's letter. In the event Tenant shall dispute the amount set forth in any statement provided by Landlord under this subparagraph (e), Tenant shall have the right, not later than thirty days following the receipt of such statement and upon condition that Tenant shall first deposit with Landlord the undisputed portion, if any, to elect to have Landlord's books and records with respect to such calendar year to be audited by auditors selected by Tenant and subject to Landlord's reasonable approval. Such audit must be completed no later than 60 days after receipt of Landlord's letter, with such time limit to be extended due to delays caused by Landlord. All costs for the audit shall be borne by Tenant unless the audit disclosed an overcharge of ten percent or more, in which case the costs of the audit not to exceed $1,000 shall be borne by Landlord. If Tenant shall not request an audit in accordance with the provisions of this paragraph within thirty days of receipt of Landlord's statement provided pursuant to this subparagraph (e), such statement shall be final and binding for all purposes hereof. (f) SECURITY FOR PERFORMANCE BY TENANT. Until the day that is the sixth anniversary of the Commencement Date, Tenant shall provide Landlord with a clean, irrevocable and unconditional letter of credit from an issuer satisfactory to Landlord payable to Landlord as beneficiary in the amount of $3,000,000.00 (the "Letter of Credit"). The Letter of Credit must continue at all times in full force and effect, shall secure the performance by Tenant under this Lease and may be presented by Landlord for payment upon either: (i) the occurrence of an event of default under this Lease; or (ii) failure by Tenant to provide evidence to Landlord of its renewal of the Letter of Credit at least thirty days prior to the then current expiration date of the Letter of Credit. Upon the 9 end of the fifth lease year hereunder, if the shareholder equity in Tenant is not in excess of $90,000,000.00, the Letter of Credit must continue to be provided by Tenant for an additional five years upon the terms and conditions provided herein. Should Tenant fail to provide sufficient evidence to Landlord of its shareholder equity or the continued existence of the Letter of Credit prior to the end of the fifty-ninth month of the Lease term, Landlord may draw the full $3,000,000.00 of the Letter of Credit. Should Landlord draw upon the Letter of Credit, Landlord shall reduce the base rent due and payable hereunder by Tenant proportionately over the term of the Lease, as reasonably determined by Tenant. Should the Lease be terminated for any reason, Tenant shall not be entitled to a refund of the amount drawn by Landlord under the Letter of Credit. Landlord shall reimburse Tenant for its legal fees and expenses in procuring and maintaining the Letter of Credit in an amount of up to $30,000.00 each year within thirty days after Tenant provides to Landlord reasonable evidence of its fees and expenses. 10 (g) PROVISIONS TO SURVIVE LEASE TERMINATION. Any unperformed obligations of Tenant under this Section 2 shall survive the termination of the Lease, for whatever reason, or any extension or renewal hereof. 3. COMPLIANCE WITH LAWS AND USE. (a) The Premises shall be used only for the following purposes: the conduct of laboratory testing and research procedures and general office purposes related thereto. Tenant shall conduct no activity that will result in the discharge of harmful gases, effluents or other wastes or toxic substances other than as required in the ordinary course of the business of Tenant and in compliance with all applicable laws, statutes, and regulations. Outside storage, including, without limitation, trucks and other vehicles, is prohibited without Landlord's prior written consent except such outside storage as is reflected on the Plans. Tenant shall at its sole cost and expense obtain any and all licenses and permits necessary for its use of the Premises. Tenant shall comply with all governmental laws, ordinances, policies and regulations relating to the use of the Premises, and shall promptly comply with all governmental orders and directives for the correction, prevention and abatement of any violation of such laws, ordinances, policies and regulations in or upon, or connected with, the Premises, all at Tenant's sole expense. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to permeate in or emanate from the Premises, nor take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the Building or unreasonably interfere with their respective premises. Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive, flammable, combustible, corrosive, caustic, radioactive, toxic, hazardous or poisonous except as required in the ordinary course of the business of Tenant and in compliance with all applicable laws, statutes, and regulations. Tenant will not permit the Premises to be used for any purpose or in any manner (including, without limitation, any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the State Board of Insurance or other insurance authority to disallow any sprinkler credits. Tenant shall give notice to Landlord immediately upon the occurrence of any accident or incident on the Premises that would trigger reporting requirements under applicable laws, including, under the Occupational Safety and Health Act, as amended ("OSHA"), or upon Tenant's discovery of any defects thereon or in any fixtures or equipment located therein or upon the occurrence of any emergency in the Premises or the Building. Tenant shall ensure the proper and lawful storage and disposal of all medical, radioactive, hazardous, toxic and other substances from the Premises, and shall indemnify, defend and hold harmless Landlord, its agents, employees, and officers of and from all liability, loss, cost and expense incurred due to the improper or unlawful storage and disposal by Tenant of any medical, radioactive, hazardous, toxic or other substances used by Tenant at the Premises. (b) Any costs or expenses for alterations, additions or improvements required to modify the common areas of the Building to comply with the Americans with Disabilities Act, as amended (the "ADA") shall be paid by Landlord throughout the term of this 11 Lease. Such alterations, additions or improvements shall be made or not made in the sole discretion of Landlord, and Landlord shall be solely liable for failure to make the required alterations, additions or improvements. All alterations, additions or improvements to the Premises required by the ADA on the Commencement Date of this Lease, and after the Commencement Date if the initial construction to be performed by Landlord has not been completed prior to the Commencement Date, shall be made and paid for by Landlord, and Landlord shall be solely liable for failure to make such required alterations, additions or improvements. Except as provided above, any alterations, additions or improvements to the Premises required by any modification or supplement to the ADA promulgated after the Commencement Date, shall be made and paid for by Tenant, and Tenant shall be solely liable for failure to make such required alterations, additions or improvements. In the event either party hereto shall fail to make any required alterations, additions or improvements pursuant to the ADA, after thirty (30) days written notice to the other party hereto, accompanied by evidence in support of its position regarding the needed alterations, shall have the right but not the obligation to make such alterations, additions or improvements at the expense of the other party and demand reimbursement of its expenses. For purposes of this Lease, the common areas for the Building shall consist of the entranceways and private roadways to the Building, landscape areas on the Land, and the driveways and parking areas located on the Land (hereinafter collectively, the "Common Areas") but no third party shall have rights thereto unless specifically granted. These common areas may be expanded by Landlord for the benefit of all occupants of the Building. (c) To the best of Landlord's knowledge, the Premises shall, as of the Commencement Date, comply with the ADA. 4. REPAIRS AND MAINTENANCE. (a) Landlord shall maintain, repair and replace only the roof, downspouts, gutters, foundation, utility lines located outside the Premises, dock boards, truck doors, dock bumpers, parking lots and sidewalks on the Land, and the structural soundness of the exterior walls of the Building in good repair, reasonable wear and tear excepted. Tenant shall repair, replace and pay for, any damage to the foregoing caused by the negligence of Tenant or Tenant's employees, agents or invitees, or caused by Tenant's default hereunder. The term "walls" as used herein shall not include interior windows, glass or plate glass, doors, special interior store fronts or office entries. Tenant shall immediately give Landlord written notice of defect or need for repairs, after which Landlord shall have reasonable opportunity to repair same or cure such defect. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. (b) Tenant shall at its own cost and expense maintain, repair and replace all parts of the Premises (except those for which Landlord is expressly responsible under the terms 12 of this Lease) in good condition in accordance with the standards for laboratory buildings in the Research Triangle Park, North Carolina area of similar research usage, utility, size, age, construction, finishes, and upfit as reasonably determined by Landlord, promptly making all necessary repairs and replacements, including, but not limited to, all Building systems, including, but not limited to, heating, ventilation, air conditioning, mechanical, plumbing and electrical, and vacuum, air pressure, DI water, gas manifolds, gas storage, gas pipes, hazardous waste disposal, elevators, windows, glass and plate glass, doors, any special office entry, interior walls, finish work, and floors and floor coverings, and Tenant shall conduct all general maintenance, including, bolt repair and light fixtures, normal wear and tear excepted. Tenant shall not be obligated to repair any damage covered by the insurance to be maintained by Landlord pursuant to subparagraph 10(a) below, unless due to the acts or omissions of Tenant, its agents, employees, or independent contractors. (c) If either party hereto shall fail to fulfill its obligations under this paragraph, the other party hereto may enter upon the area of the Building or the Premises as required to conduct the obligations of the defaulting party, and shall be entitled to reimbursement from the defaulting party for its actual costs and expenses in conducting such obligations. The defaulting party shall reimburse the other party hereto for its actual costs and expense promptly upon demand made by the other party hereto. The provisions of this subparagraph shall not be interpreted to obligate either party hereto to conduct obligations of the other party hereto. (d) Tenant shall conduct periodic maintenance of all hot water, heating and air conditioning systems and units in the Premises, remove and replace filters therein. In addition, Tenant shall bear responsibility to ensure the provision of daily janitorial service and removal of trash and debris from the Premises. Tenant shall enter into contracts providing for the periodic maintenance, repair, and replacement of all Building systems, for periodic pest and insect extermination, and for daily janitorial service and removal of trash and debris from the Premises and deposit of trash in exterior containers located by Landlord on the Land; provided, however, Tenant shall bear sole responsibility for the removal of hazardous, or toxic substances, or medical wastes from the Premises and to the appropriate site as required under applicable laws, statutes, and ordinances. A copy of all of the aforesaid contracts entered into by Tenant shall be provided to Landlord on or prior to the Commencement Date. (e) Tenant shall not damage any demising wall of the Building, or disturb the integrity and support provided by any demising wall and shall, at its sole cost and expense, promptly repair any damage or injury to any demising wall caused by Tenant or its employees, agents or invitees. (f) Tenant and its employees, customers and licensees shall have the non- exclusive right to use the parking areas on the Land as may be designated by Landlord in writing, subject to reasonable rules and regulations as Landlord may from time to time prescribe and subject to rights of ingress and egress of other tenants. Tenant shall not park on streets, rights of ways, driveways, or roadways adjacent to the Building or the 13 Land, nor allow its employees, agents, invitees, or licensees to do so. No vehicles other than passenger vehicles shall be parking on the Land, without the prior written consent of the Landlord. Any vehicles, including, tractors, trailers, or tractor trailers parked at the Building in violation of any provision of this Lease, or abandoned on the Land, as reasonably determined by Landlord, are subject to removal by Landlord, at the cost and expense of Tenant, and Tenant shall indemnify, defend, and hold harmless Landlord of and from all loss, cost and expense incurred by Landlord in the enforcement of the provisions of this Section. Tenant shall be considerate of the parking needs of other tenants of the Building, and shall not violate the rights of other tenants of the Building. So long as Tenant shall continue to lease at least 61,380 rentable square feet, Tenant shall have the non-exclusive use of 172 parking spaces at the Building (this total includes handicapped parking spaces; provided, however, in the event any improvements, or equipment located by Tenant on the Land consume any portion of the parking area located on the Land, the parking spaces affected shall be counted against the parking ratio available for use by Tenant at the Premises. Landlord shall act reasonably to enforce Tenant's parking rights against any third parties. Landlord may require, at its option, in its sole discretion, that Tenant, its employees, invitees, and visitors use certain numbered spaces to be designated by Landlord. 5. ALTERATIONS. (a) Subject to the provisions of this subparagraph (a), Tenant shall not make any alterations, additions or improvements to the Premises (including, but not limited to, roof and wall penetrations) without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, should Tenant submit preliminary plans for making an alteration to the Premises and such plans are in form sufficient for Landlord to review the alteration contemplated by Tenant, Landlord shall respond within ten business days of its receipt of such plans, or the plans and the alteration to be made by Tenant shall be deemed approved. If the plans submitted by Tenant are insufficient for Landlord to review the contemplated alteration, Landlord shall so notify Tenant and Tenant shall revise and resubmit the plans to Landlord but the ten day time period for Landlord to act as aforesaid shall not be deemed to commence until such time as Tenant shall have submitted a sufficient plan to Landlord, as reasonably determined by Landlord. All submissions of plans to Landlord under this paragraph 5 shall be sent in accordance with the provisions of paragraph 20 hereof. Landlord may require as a condition to Tenant making any alteration to the Premises that Tenant restore the Premises to its condition as of the Commencement Date prior to Tenant vacating the Premises. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner, erect such shelves, bins, machinery and trade fixtures and remove and replace interior non-structural walls, as it may deem advisable, without altering the basic character or structure of the Premises or improvements and without overloading or damaging the Premises or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. Tenant shall not make any alterations, additions or improvements to the Premises which will contravene Landlord's policies insuring against loss or damage by fire or other hazards, including but not limited to commercial general liability, or which will prevent Landlord from securing 14 such policies in companies acceptable to Landlord. If any such alterations, additions or improvements cause the rate of fire or other insurance on the Premises by companies acceptable to Landlord to be increased beyond the minimum rate from time to time applicable to the Premises for permitted uses thereof, Tenant shall pay as additional rent the amount of any such increase promptly upon demand by Landlord. (b) Any and all alterations, additions, improvements, partitions and fixtures erected by Tenant shall be the property of Landlord and shall remain at the Premises upon termination of the Lease or upon earlier vacating of the Premises. All shelves, bins, machinery, trade fixtures and other specialized equipment installed and paid for by Tenant may be removed by Tenant prior to the termination of this Lease provided such removal may be accomplished without damage to the Premises or to the primary structure or structural qualities of the Building and other improvements situated on the Premises. Tenant shall repair any damage to the Premises, or to the Building as a result of any alteration, addition, improvement, or repair to the Premises, or the removal of personal property or trade fixtures by Tenant, its employees, agents, invitees, or contractors to the Premises. Should Tenant fail to conduct any such repair within ten days of written notice from Landlord, Landlord may, at its option, perform same, and Tenant shall remit payment to Landlord for the actual cost and expense incurred by Landlord in effecting such repair immediately upon demand. 6. SIGNS. (a) Landlord shall install at its expense a monument sign on the Land containing the name of Tenant. In addition, Landlord shall include the name of Tenant on the Building directory. All signs for the Premises shall be in form and substance, location, color, shape, size (including, height, width and length of lettering and total signage) and configuration, mutually and reasonably approved by Landlord. (b) Tenant shall have the right to install signs upon the Premises only when first approved in writing by Landlord and subject to any applicable governmental laws, ordinances, regulations and other requirements. Tenant shall remove all such signs upon the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises, and Tenant shall repair any injury or defacement, including, without limitation, discoloration of the Building caused by such installation and/or removal. Tenant shall have the right to install paraphet signage on the Building at the expense of Landlord, and provided Tenant complies with the provisions of this paragraph 6. 7. INSPECTION AND ENTRY. (a) Landlord and Landlord's agents and representatives shall have the right to enter and inspect the Premises at any reasonable time during business hours, for the purpose of ascertaining the condition of the Premises or in order to make such repairs as may be required or permitted to be made by Landlord under the terms of this Lease or in order to show the Premises to any prospective purchaser or lender so long as Landlord shall be escorted by an employee of 15 Tenant, or the agent or employee of Landlord entering the Premises shall have received training from Tenant with respect to entry upon the Premises based upon the usage of the Premises by Tenant. During the period that is six (6) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the Premises at any reasonable time during business hours for the purpose of showing the Premises to any prospective tenant and shall have the right to erect on the Premises a suitable sign indicating the Premises are available. Tenant shall schedule with Landlord at least sixty (60) days prior to vacating the Premises a time mutually agreeable to the parties hereto for a joint inspection of the Premises prior to vacating. In the event of Tenant's failure to give notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibilities for repairs and restoration. (b) Within thirty days of the Commencement Date of this Lease, Tenant shall develop and provide a copy to Landlord of its hazard communication plan (the "Plan") with respect to any accidents or incidents at the Building, and shall thereafter provide Landlord with any amendments to the Plan within five days of their development. Tenant shall ensure that the Plan complies with all applicable laws, statutes, and regulations. Tenant shall bear all costs of training the employees of Landlord with respect to the Plan, and any amendments thereof. (c) Tenant shall provide Landlord immediately a copy of any notices or correspondence it receives from OSHA, or from any other state, federal, or local agency concerning the Premises. (d) Tenant shall provide to Landlord training for its employees and staff that may enter the Building. This training shall be provided on an annual basis and shall be sufficient to apprise the employees and staff of Landlord of the usage of Tenant of the Building and the safety concerns with respect to any entry thereon. Training updates shall be provided by Tenant to Landlord upon the same schedule as provided to employees of Tenant. All training shall be provided in the Building or in another building of Landlord located nearby and shall be at the cost and expense of Tenant. 8. UTILITIES. Landlord agrees to provide at its cost, all utility line connections into the Premises. Tenant shall contract and pay for all utilities for the Premises directly with each service provider of the Premises. Landlord shall not be liable for any interruption or failure of utility services on the Premises; provided, however, in the event any utility service to the Premises is interrupted due to acts or omissions of Landlord, the liability of Landlord therefor shall be the costs to restore same. 9. ASSIGNMENT AND SUBLETTING. Tenant shall not sublet the Premises or the interest of Tenant therein in whole or in part, or assign this Lease or the interest of Tenant therein in whole or in part, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Further, Tenant may not sell, lien, or encumber its interest in this Lease, or assign or delegate the management or permit the use or occupancy of the Premises in whole or in part by anyone other than Tenant without the prior written consent of Landlord, which consent Landlord may withhold in its sole discretion. Landlord and Tenant acknowledge and agree that the foregoing provisions have been freely negotiated by the parties 16 hereto and that Landlord would not have entered into this Lease without Tenant's consent to the terms of this Paragraph 9. In no event shall this Lease be assignable by operation of any law, without the prior written consent of Landlord which consent shall not be unreasonably withheld, and Tenant's rights hereunder may not become, and shall not be listed by Tenant as an asset under any bankruptcy, insolvency, or reorganization proceedings. No assignment, transfer, mortgage, sublease or other encumbrance, whether or not approved, and no indulgence granted by Landlord to any assignee or subtenant, shall in any way impair the continuing primary liability (which after an assignment shall be joint and several with the assignee) of Tenant hereunder, and no approval in a particular instance shall be deemed to be a waiver of the obligation to obtain Landlord's approval in any other case. If for any approved assignment or sublease Tenant receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the base rent hereunder, or in case of a sublease of part of the Premises, in excess of the portion of such rent fairly allocable to such part, after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, Tenant shall pay to Landlord as additional rent one-half of the full excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Notwithstanding the foregoing, if Tenant shall offer any sublease or assignment of space in the Premises for less than the current asking price of Landlord for space comparable in size and usage by Landlord to a prospective tenant in an arms length transaction at the current fair market value for such space (which asking price Landlord shall provide to Tenant upon request made therefor), then Landlord shall be entitled to receive all of the full excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Notwithstanding any provision of this Lease to the contrary, should Tenant receive consent from Landlord to sublease or assign its interest in the Premises and seek to sublease or assign its interest in the Premises in accordance with this paragraph, Tenant shall not use the name of Landlord, any insignia of Landlord, or any likeness of the Building in any of its advertising for such sublease or assignment. 10. FIRE AND CASUALTY DAMAGE. (a) Landlord agrees to maintain standard fire and extended coverage insurance for the Building in an amount not less than full replacement cost as such term is defined in the Replacement Cost Endorsement to be attached thereto, insuring against special causes of loss, including, the perils of fire, and lightning, such coverages and endorsements to be as defined, provided and limited in the standard bureau forms prescribed by the insurance regulatory authority for the State of North Carolina. Subject to the provisions of subparagraphs 10(c), 10(d) and 10(e) below, such insurance shall be for the sole benefit of Landlord and under its sole control. 17 (b) If the Premises should be damaged or destroyed by any peril covered by the insurance to be provided by Landlord under subparagraph 10(a) above, Tenant shall give immediate written notice thereof to Landlord. (c) If the Premises should be totally destroyed by any peril covered by the insurance to be provided by Landlord under subparagraph 10(a) above, or if they should be so damaged thereby that rebuilding or repairs cannot in Landlord's estimation be completed within one hundred and eighty (180) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage. (d) If the Premises should be damaged by any peril covered by the insurance to be provided by Landlord under subparagraph 10(a) above, but only to such extent that rebuilding or repairs can, in Landlord's estimation, be completed within one hundred and eighty (180) days after the date upon which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall, at its sole cost and expense, thereupon proceed with reasonable diligence to rebuild and repair the Premises to substantially the condition in which they existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the Premises by Tenant. If the Premises are untenantable in whole or in part following such damage, the rent payable hereunder during the period in which they are untenantable shall be abated as may be fair and reasonable under all of the circumstances, as reasonably determined by Landlord and Tenant. (e) Notwithstanding anything herein to the contrary, in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon all rights and obligations hereunder thereafter accruing shall cease and terminate. (f) Each of Landlord and Tenant hereby waives all rights to recover against each other or against any other tenant or occupant of the Building, or against the officers, directors, shareholders, partners, joint venturers, employees, agents, customers, invitees, or business visitors of each other or of any other tenant or occupant of the Building, for any loss or damage arising from any cause covered by any insurance required to be carried by each of them pursuant to this Lease, or any other insurance actually carried by either of them. Landlord and Tenant shall cause their respective insurers to issue waiver of subrogation rights endorsements to all policies of insurance carried in connection with the Building or the Premises or the contents of either of them, and any cost for the issuance of such endorsements shall be borne by the original insured under such policies. (g) The obligation of Landlord in this paragraph 10 to repair and restore the Premises and the Building as provided herein, does not include an obligation of Landlord to repair 18 the fixtures, equipment, or personal property of Tenant, which Tenant shall insure for its benefit, and Tenant shall have the obligation to repair and restore in the event of a casualty or other loss to the extent that replacement of such items is appropriate for the Tenant's continuing use of the Premises. (h) The period of time within which repair and restoration of the Premises must be completed shall be extended due to delays occasioned by force majeure; provided, however, all repair and restoration must be completed by Landlord within 360 days after the date of the casualty. 11. LIABILITY. Landlord shall not be liable to Tenant or Tenant's employees, agents, officers, partners, licensees or invitees, or to any other person whomsoever, for any damage to property on or about the Premises belonging to Tenant or any other person, due to any cause whatsoever, unless caused by the gross negligence, or willful or intentional misconduct of Landlord. Tenant hereby covenants and agrees that it will at all times indemnify, defend (with counsel approved by Landlord) and hold safe and harmless Landlord (including, without limitation, its trustees and beneficiaries if Landlord is a trust), and Landlord's agents, employees, patrons and visitors from any loss, liability, claims, suits, costs, expenses, including without limitation attorney's fees and damages, both real and alleged, incurred by Landlord, its agents, employees, officers, partners, invitees, or licensees arising out of or resulting from the occupancy by Tenant of the Premises, a breach by Tenant of any provision of this Lease, or the conduct by Tenant of its business in the Building. Landlord hereby covenants and agrees that it will at all times indemnify, defend (with counsel reasonably approved by Tenant) and hold safe and harmless Tenant (including, without limitation, its trustees and beneficiaries if Tenant is a trust), and Tenant's agents, employees, patrons and visitors from any loss, liability, claims, suits, costs, expenses, including without limitation attorney's fees and damages, both real and alleged, incurred by Tenant, its agents, employees, officers, partners, invitees, or licensees arising out of or resulting from a breach by Landlord of any provision of this Lease. Tenant shall procure and maintain throughout the term of this Lease a policy or policies of insurance, at its sole cost and expense, naming Landlord as an additional insured, and insuring both Landlord and Tenant against all claims, demands or actions arising out of or in connection with: (i) the Premises; (ii) the condition of the Premises; (iii) Tenant's operations in and maintenance and use of the Premises; (iv) the equipment, personal property and fixtures of Tenant located on the Premises; (v) any interruption in the conduct of the business of Tenant on the Premises; (v) Tenant's liability assumed under this Lease, and such other kinds of insurance as Landlord shall reasonably request. The limits of coverage maintained by Tenant for (i) commercial general liability shall be not less than $5,000,000.00 with respect to each occurrence, not less than $5,000,000.00 with respect to personal injury or death of a single person, not less than $5,000,000 general aggregate, and not less than $5,000,000.00 with respect to products completed operations aggregate, (ii) for business interruption insurance shall be not less than 19 coverage for actual loss, and (iii) for replacement of the equipment, personal property and fixtures of Tenant shall be not less than full replacement value. All such policies shall be procured by Tenant from responsible insurance companies satisfactory to Landlord with an A.M. Best's Rating of at least "A". Certified copies of such policies, together with receipt evidencing payments of premiums thereof, shall be delivered to Landlord prior to the Commencement Date. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of the renewals thereof (bearing notations evidencing the payment of renewal premiums) shall be delivered to Landlord. Such policies shall further provide that not less than thirty (30) days prior written notice shall be given to Landlord before such policy may be canceled or changed to reduce insurance provided thereby. 12. CONDEMNATION. (a) If the whole or any substantial portion of the Premises should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Premises by Tenant for the purposes provided herein, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of the Premises shall occur. (b) If a portion of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the use by Tenant of the Premises is not materially interfered with, this Lease shall not terminate but the rent payable hereunder during the unexpired portion of this Lease shall be reduced in an amount that shall be reasonable under all of the circumstances. (c) In the event of any such taking or private purchase in lieu thereof, Landlord shall be entitled to receive and retain all awards as may be awarded in any condemnation proceedings other than those specifically awarded Tenant for a taking of Tenant's personal property, loss of business and moving expenses. 13. HOLDING OVER AND TERMINATION. (a) Tenant shall upon the termination of this Lease by lapse of time or otherwise, yield up immediate possession to Landlord without the requirement of notice by Landlord to Tenant of the termination of this Lease, nor any grace or cure period should Tenant fail to yield up immediate possession to Landlord. Unless the parties hereto shall otherwise agree in writing, if Landlord agrees in writing that Tenant may hold over after the expiration or termination of this Lease, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than five (5) days advance written notice, or by Tenant at any time upon not less than thirty (30) days advance written notice, and all of the other terms and provisions of this Lease shall be applicable during that period, except that Tenant shall pay Landlord from time to time upon demand, as rental for the period of any hold over, an amount equal to one and 35/100 (1-35/100) the 20 rent in effect on the termination date, computed on a daily basis for each day of the hold over period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided. The preceding provisions of this Paragraph 13 shall not be construed as Landlord's consent for Tenant to hold over. (b) Upon the termination of this Lease for whatever reason, Tenant shall quit and immediately surrender the Premises to Landlord, broom clean, in good order and condition with all repairs and maintenance required by Tenant hereunder having been performed, ordinary wear and tear and damage by casualty that is the responsibility of Landlord to repair excepted, and Tenant shall remove its personal property from the Premises in accordance with this Lease. Should any of the personal property or trade fixtures of Tenant remain upon the Premises after the Termination Date, all such property shall be deemed abandoned by Tenant, and Landlord may remove same at the cost and expense of Tenant with no liability to Tenant therefore, and Tenant hereby releases Landlord from all liability therefor. 14. QUIET ENJOYMENT. Landlord covenants that it now has, or will acquire before Tenant takes possession of the Premises, good title to the Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, deed of trust(s), or mortgage(s) of record, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. In the event this Lease is a sublease, then Tenant agrees to take the Premises subject to the provisions of the prior leases. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the Premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this Lease. 15. EVENTS OF DEFAULT. The following events shall be deemed to be events of default by Tenant under this Lease: (a) Tenant shall fail to pay any installment of the rent herein reserved, or payment with respect to taxes hereunder, or any other payment or reimbursement to Landlord required herein, within five (5) days of when due; provided, however, the aforesaid five day period shall be extended to ten days for any one instance in a twelve month period in which Tenant shall make a payment after the five day period. (b) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. (c) Tenant shall file a petition under any section or chapter of the Bankruptcy Reform Act, as amended or under any similar law or statute of the United States or any state thereof; or Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder. 21 (d) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant. (e) Tenant shall desert all of the Premises. (f) Tenant shall fail to yield up immediate possession of the Premises to Landlord upon termination of this Lease. (g) Tenant shall fail to comply with the provisions of this Lease concerning the Letter of Credit as required in paragraph 2 hereof. (h) Tenant shall fail to comply with any term, provision or covenant of this Lease (other than the provisions of subparagraphs (a), (b), (c), (d), (e),(f) and (g) of this Paragraph 15), and shall not cure such failure within twenty (20) days after written notice thereof to Tenant, or such additional period of time as shall be granted by Landlord should Landlord determine that Tenant is acting in good faith and proceeding diligently to effect a cure but additional time is required by Tenant to complete a cure. 16. REMEDIES. Upon the occurrence of any event of default in Paragraph 15 hereof, Landlord shall have the option to pursue any remedy at law or in equity, including, but not limited to, one or more of the following remedies without any notice or demand whatsoever: (a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of the Premises and expel and remove Tenant and any other person who may be occupying the Premises or any part thereof, with or without judicial approval, by any legal means necessary, without being liable for prosecution or any claim of damages therefor; secure the Premises against unauthorized entry; and Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise. (b) Enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part thereof, with or without judicial approval, by any legal means necessary, without being liable for prosecution and receive the rent thereof; secure the Premises against unauthorized entry; store any property located on the Premises at the expense of the owner thereof and Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting. In the event Landlord is successful in reletting the Premises at a rental in excess of that agreed to be paid by Tenant pursuant to the terms of this Lease, Landlord and Tenant each mutually agree that Tenant shall not be entitled, under any circumstances, to such excess rental, and Tenant does hereby specifically waive any claim to such excess rental. 22 (c) Enter upon the Premises, with or without judicial approval, by any legal means necessary, without being liable for prosecution or any claim for damages therefor, secure the Premises against unauthorized entry, remove all property of Tenant from the Premises and store it at the cost and expense of Tenant, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by the negligence of Landlord or otherwise. (d) Accelerate and demand the payment of all base rent and other charges due and payable hereunder over the term of this Lease which amount shall be reduced by any amounts received by Landlord from any new tenant that enters into occupancy of the Premises. In the event Tenant fails to pay any installment of base rent or additional rent hereunder within fifteen days of the due date of such installment, Tenant shall pay to Landlord on demand a late charge in an amount equal to four percent (4%) of such installment to help defray the additional cost to Landlord for processing such late payment. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies hereunder, Tenant agrees to pay any and all reasonable attorneys' fees so incurred. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law or equity, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. No act or thing done by Landlord or its agents during the term hereby granted shall be deemed a termination of this Lease or an acceptance of the surrender of the Premises, and no agreement to terminate this Lease or accept a surrender of the Premises shall be valid unless in writing signed by Landlord. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants herein contained. Landlord's acceptance of the payment of rental or other payments hereunder after the occurrence of an event of default shall not be construed as a waiver of such default, unless Landlord so notifies Tenant in writing, and no receipt of money by Landlord from Tenant after the termination of this Lease or after service of any notice or after the commencement of any suit or after final judgment for possession of the Premises shall reinstate, continue or extend the term of this Lease or affect any such termination, notice, suit or judgment, unless Landlord so notifies Tenant in writing. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute waiver of such default or of Landlord's right to enforce any such remedies with respect to such default or any subsequent default. 23 17. LANDLORD'S LIEN. [INTENTIONALLY DELETED.] 18. MORTGAGES. Tenant accepts this Lease subject and subordinate to any mortgage(s) and/or deed(s) of trust now or at any time hereafter constituting a lien or charge upon the Premises or the improvements situated thereon; provided, however, that if the mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this Lease superior to any such instrument, then by notice to Tenant from such mortgagee, trustee or holder, this Lease shall be deemed superior to such lien, whether this Lease was executed before or after said mortgage or deed of trust. Tenant shall at any time hereafter on demand execute any instruments, releases or other documents which may be required by any mortgagee or trustee for the purpose of further subjecting and subordinating this Lease to the lien of any such mortgage or deed to trust, and shall forward same to Landlord within five days of a request therefor; provided, that any current or future mortgagee, trustee, or deed of trust beneficiary, as the case may be, shall provide Tenant with a nondisturbance agreement in form reasonably satisfactory to Tenant which shall grant Tenant the right to continue to occupy the Premises under the terms hereof so long as Tenant is not in default under this Lease. 19. MECHANIC'S LIENS. Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs, and each such claim shall affect and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this instrument. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Premises or the improvements thereon and that it will save and hold Landlord harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the right, title and interest of Landlord in the Premises or under the terms of this Lease. 20. NOTICES. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations, or other requirements with reference to the sending, mailing, or delivery of any notice by Landlord to Tenant or with reference to the sending, mailing, or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address hereinbelow set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligations to pay rent and any other amounts to Landlord under the terms and of this Lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord. 24 (b) Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not when: (i) deposited in the United States Mail, postage prepaid; (ii) sent by federal express or other nationally recognized overnight courier, charges prepaid; or (iii) sent by Certified or Registered Mail, return receipt requested, postage prepaid, and addressed to the parties hereto at the respective addresses set out below, or at other such addresses as they have heretofore specified by written notice delivered in accordance therewith. LANDLORD: Weeks Realty, L.P. 1800 Perimeter Park Drive Suite 200 Morrisville, North Carolina 27560 Attention: Mr. Robert G. Cutlip With a copy to: Dave Lindner Weeks Realty, L.P. 1800 Perimeter Park Drive Suite 200 Morrisville, NC 27560 25 Cathy M. Rudisill, Esq. Smith Helms Mulliss & Moore, L.L.P. 2800 Two Hannover Square Raleigh, North Carolina 27601 TENANT: PPD Pharmaco, Inc. 3151 South 17th Street Extension Wilmington, NC 28412 Attention: Director of Administration With a copy to: General Counsel PPD Pharmaco, Inc. 3151 South 17th Street Extension Wilmington, NC 28412 If and when included within the term "Landlord", as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Landlord; if and when included within the term "Tenant, as used in this instrument, there is more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices to Tenant. All parties included within the terms "Landlord" and "Tenant", respectively, shall be deemed to have received notices in accordance with the provisions of this paragraph with the same effect as if each had received such notice. 21. BROKER'S CLAUSE. Tenant warrants and represents to Landlord that it has had no dealings with any real estate broker or agent in connection with this Lease other than Corporate Realty Advisors, and Weeks Corporation, and Tenant covenants to pay, hold harmless, and indemnify Landlord from and against any and all costs, expenses, liabilities (including reasonable attorneys' fees), causes of action, claims or suits in connection with any compensation, commission, fee, or charges claimed by any other real estate broker or agent with respect to this Lease or the negotiation thereof, arising out of any act of Tenant. Landlord warrants and represents to Tenant that it has had no dealings with any real estate broker or agent in connection with this Lease other than Corporate Realty Advisors, and Weeks Corporation, and Landlord covenants to pay, hold harmless, and indemnify Tenant from and against any and all costs, expenses, liabilities (including reasonable attorneys' fees), causes of action, claims or suits in connection with any compensation, commission, fee, or charges claimed by any other real estate broker or agent with respect to this Lease or the negotiation thereof, arising out of any act of Landlord. 26 22. LANDLORD'S LIABILITY. Notwithstanding anything to contrary contained in this Lease, Tenant agrees and understands that Tenant shall look solely to the estate and property of Landlord in the Building for the enforcement of a judgment (or other judicial decree) requiring the payment of money by Landlord to Tenant by reason of default or breach of Landlord in performance of its obligations under this Lease, it being intended that there will be absolutely no personal liability on the part of Landlord, its successors and assigns with respect to any of the terms, covenants, and conditions of this Lease, and no other assets of Landlord or of Landlord's partners, if any, shall be subject to levy, execution, attachment or any other legal process for the enforcement or satisfaction of the remedies pursued by Tenant in the event of such default or breach, this exculpation of liability to be absolute and without exception whatsoever. 23. RULES AND REGULATIONS. Tenant shall fully comply with the Rules and Regulations attached hereto as Exhibit D and made a part hereof and any and all modifications thereof, or amendments thereto with respect to which Landlord notifies Tenant. 24. HAZARDOUS MATERIALS. (a) Tenant agrees that it will not release, discharge, place, hold, or dispose of any Hazardous Material (as hereinafter defined) on, under or at the Premises, in the Building, or on the Land, and that it will not use the Premises, the Building, the Land, or any other portion thereof as a site for the treatment, storage, or disposal (whether permanent or temporary) of any Hazardous Material, other than materials used in the ordinary course of the business of Tenant in accordance with all Applicable Laws. Tenant further agrees that it will not cause or allow any asbestos to be incorporated into any improvements or alterations which Tenant makes or causes to be made to the Premises, or the Building. (b) Tenant hereby agrees to indemnify, defend (with counsel reasonably approved by Landlord) and hold harmless Landlord of from and against any and all losses, liabilities, damages, injuries, costs, fines, penalties, expenses and claims of any and every kind whatsoever (including without limitation, expert and consultant fees, court costs and attorneys' fees at all tribunal levels) which at any time or from time to time may be paid, incurred or suffered by, or asserted against Landlord for, with respect to, or as a direct or indirect result of (i) any breach by Tenant of the provisions of this Paragraph, or (ii) the acts or omissions of Tenant or any agent, employee, invitee, licensee, or independent contractor of Tenant resulting in or contributing to, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, or release from, onto, or into the Premises, the Building, the Land, the atmosphere, or any watercourse, body of water, or groundwater, of any Hazardous Material or (iii) the violation of any applicable law including, without limitation, any third party claim or claims for contribution or cost recovery under applicable laws or common law. The provisions of and undertakings and indemnification set forth in this paragraph shall survive the termination or expiration of this Lease, for any reason, and shall continue to be the liability, obligation and indemnification of Tenant, binding upon Tenant forever. The provisions of the preceding sentence shall govern and control over any inconsistent provision of this Lease. 27 (c) For purposes of this Lease, "Hazardous Material" means and includes any radioactive, hazardous or toxic substance, pollutant, contaminant, effluent, gas, petroleum product or medical product or waste defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, any so-called "Superfund" or "Superlien", law, the Toxic Substances Control Act, as amended, or any other Federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any radioactive, hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect, or any other hazardous, toxic or dangerous, waste, substance or material, gas or petroleum product, and "Applicable Laws" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, any so-called "Superfund" or "Superlien", law, the Toxic Substances Control Act, as amended, or any other Federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any radioactive, hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect, or any other hazardous, toxic or dangerous, waste, substance or material, gas, petroleum product, medical product or waste. (d) Tenant shall provide Landlord with a list of any and all Hazardous Materials released, discharged, placed, held, or disposed of on the Premises, and certification to Landlord of compliance by Tenant with all Applicable Laws, within ten days of a request therefor by Landlord. 25. [INTENTIONALLY DELETED.] 26. COVENANT OF TENANT. If Landlord encounters difficulties in negotiating permanent or construction financing for the Building, and after using its best efforts is unable to resolve those difficulties without obtaining minor modifications to this Lease, Tenant will act in good faith to execute an amendment to this Lease, but this agreement on the part of Tenant will not require Tenant to make any changes that in Tenant's reasonable judgment alter the term hereof, or adversely affect any substantive right of Tenant, whether legal or economic. 27. MISCELLANEOUS. (a) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. (b) The terms, provisions and covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Landlord shall have the right to assign any of its rights and obligations under this Lease. Each party agrees to furnish to the other, promptly upon demand, a resolution, or other appropriate documentation evidencing the due authorization of such party to enter into this Lease. 28 (c) The captions inserted in this Lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this Lease, or any provision hereof, or in any way affect the interpretation of this Lease. (d) Tenant agrees from time to time, within ten (10) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating that this Lease is in full force and effect, the date to which rent has been paid, the unexpired term of this Lease and such other matters pertaining to this Lease as may be requested by Landlord. It is understood and agreed that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this Lease. (e) This Lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. (f) All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this Lease shall survive the expiration or earlier termination of the term hereof, including, without limitation, all payment obligations concerning the condition of the Premises. (g) In the event of a transfer by Landlord of its interest in the Premises, Landlord shall be released from all obligations and liabilities under the terms of this Lease subsequent to the date of such transfer. In the event a transferee shall agree to assume the obligations and liabilities of Landlord under the Lease prior to the date of the transfer, Landlord shall be released from all obligations and liabilities under the Lease. (h) If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby, and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added as a part of this Lease contract a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. (i) [INTENTIONALLY DELETED.]. (j) All references in this Lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this Lease. (k) Time is of the essence of this Lease. (l) (i) If Landlord (1) breaches any agreement or obligation in this Lease and such breach continues for a period of thirty (30) days after written notice to Landlord by 29 Tenant, or (2) through Landlord's gross negligence or willful act, Landlord fails to provide (where Landlord is obligated to provide the Landlord Essential Service), or Landlord fails to act reasonably to cause a cure (but only to the extent that Landlord is responsible for the cure and such cure is within Landlord's control to effect) or Landlord otherwise affirmatively acts to stop, interrupt or materially reduce a Landlord Essential Service (as hereinafter defined) so that Tenant is not able to carry on its business at the Premises for five (5) consecutive business days and such interruption continues for a period of five (5) business days after written notice to Landlord, then upon the occurrence of (l) and/or (2) above, if Landlord shall not in good faith have commenced the curing of such breach specified in (1) or (2) above within such thirty (30) or five (5) business day period after written notice, as the case may be and thereafter, shall have not diligently and continuously proceeded to cure such breach completely, the Landlord shall be in default hereunder, and Tenant shall have all rights and remedies available at law or in equity for such default. (ii) In addition, Tenant shall have the right but not the obligation, to effect a cure on behalf of Landlord and to demand the actual and reasonable costs of cure from Landlord. (iii) For purposes of this Lease, a "Landlord Essential Service" does not mean a service to be provided by Landlord under this Lease per se, but rather a facility or system within the Building controlled, operated or maintained by Landlord (but not a third party, e.g., Carolina Power & Light Company, to the extent that such third party is responsible) that provides electricity, elevator service, telecommunications (including data transmission), and heating, air conditioning and ventilation and are necessary for the purpose of Tenant's conduct of its business at the Premises. (iv) Landlord shall have no liability for any incidental or consequential damages of Tenant, or anyone claiming by, through or under Tenant, for any reason whatsoever. (m) In the event that Landlord shall default in the performance of Landlord's obligations hereunder, the holder of a mortgage or the beneficiary of a deed of trust which includes the Premises shall have the right, but not the obligation, to perform or comply with any covenants, agreements and provisions violated in connection with such default. Further, if such holder or beneficiary notifies Tenant that such holder or beneficiary has taken over Landlord's right under this Lease, Tenant shall not assert any right to deduct the cost of repairs or any monetary claims against Landlord theretofore accrued from rent thereafter due and payable, but shall look solely to Landlord and not such holder or beneficiary for satisfaction of such claim. (n) This Lease does not create the relationship of partner or joint venturer between Landlord and Tenant. (o) The laws of the State of North Carolina shall govern the interpretation, the validity, performance and enforcement of this Lease. (p) The undersigned officer of Tenant does hereby warrant and certify to Landlord that Tenant is a corporation in good standing and duly organized under the laws of the 30 State of Texas and is authorized to do business in the State of North Carolina. The undersigned officer of Tenant hereby further warrants and certifies to Landlord that such officer is authorized and empowered to bind the corporation to the terms of this Lease by such officer's signature hereto. Tenant shall provide Landlord a consent of its officers and directors to enter into this Lease, and the person authorized to sign this Lease on behalf of Tenant concurrently with the execution of this Lease. (q) This Lease shall be executed in duplicate, each of which shall be deemed an original and complete of itself and may be introduced into evidence or used for any purpose without the production of any other copy. If Tenant is a corporation, two authorized corporate officers must execute this Lease in their appropriate capacity for Tenant and affix the corporate seal. (r) The provisions contained in the Rider attached hereto, if any, are incorporated herein by reference and made a part of this Lease. In the event of any conflict between the printed portion of this Lease and the Rider, the provisions of the Rider shall govern and control. (s) Although the printed provisions of this Lease were drafted by Landlord, such fact shall not cause this Lease to be construed either for or against Landlord or Tenant. (t) This Lease may not be recorded. Upon the request and at the expense of Tenant, Landlord shall execute a memorandum of this Lease suitable for recording which shall omit the financial terms herein but which shall identify the Premises and the term of this Lease. Upon the expiration of this Lease, a recorded memorandum of this Lease may be canceled of record by a document executed by Landlord, or its successor in interest for such purpose. (u) Within five days of the request by Landlord upon the occurrence of a default or event of default hereunder by Tenant, Tenant shall provide to Landlord, financial statements of Tenant certified by the chief financial officer of Tenant. (v) No remedy conferred herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or thereunder or now or hereafter existing at law or in equity or by statute or otherwise. (w) No provision of this Lease shall be deemed to waive any statutory (as provided in Chapter 44A of the North Carolina General Statutes), or common law rights of Landlord to assert a lien upon property of Tenant. [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK.] 31 IN WITNESS WHEREOF, the parties hereto have executed this Lease under seal as of the day and year first above written. LANDLORD: WEEKS REALTY, L.P. (SEAL), a Georgia limited partnership authorized to do business in the State of North Carolina as Weeks Realty Limited Partnership BY: WEEKS GP HOLDINGS, INC., a Georgia corporation, its sole general partner By: /s/ Robert G. Cutlip Robert G. Cutlip, Senior Vice President TENANT: PPD PHARMACO, INC., a Texas corporation By: /s/ Fred N. Eshelman Print Name: Fred N. Eshelman Title: CEO Witness/Attest: /s/ Meg Davenport Print Name: Meg Davenport Title: Executive Director, Corporate Administration [CORPORATE SEAL] 32 EXHIBIT A THE LAND TO BE ATTACHED UPON COMPLETION OF SITE PREPARATION FOR THE BUILDING. 33 EXHIBIT B FLOOR PLAN OF BUILDING AND PREMISES 34 EXHIBIT C PLANS AND SPECIFICATIONS [TO BE ATTACHED UPON THE MUTUAL APPROVAL OF LANDLORD AND TENANT.] 35 EXHIBIT C-1 PROJECT DESIGN AND CONSTRUCTION SCHEDULE [TO BE ATTACHED UPON THE MUTUAL APPROVAL OF LANDLORD AND TENANT.] 36 EXHIBIT C-2 SHELL BUILDING COMPONENTS [TO BE ATTACHED UPON THE MUTUAL APPROVAL OF LANDLORD AND TENANT.] 37 EXHIBIT C-3 BASE BUILDING UPFIT [TO BE ATTACHED UPON THE MUTUAL APPROVAL OF LANDLORD AND TENANT.] 38 EXHIBIT D RULES AND REGULATIONS 1. The sidewalks, common areas, and public portions of the Building, such as entrances, passages, courts, elevators, vestibules, stairways, corridors or halls, and the streets, alleys or ways surrounding or in the vicinity of the Building shall not be obstructed by Tenant, even temporarily, or encumbered by Tenant or used for any purpose other than ingress to and egress from the Premises. 2. No awnings or other projections shall be attached to the outside walls of the Building. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by Tenant on any part of the outside of the Premises or Building unless approved by Landlord. Signs on entrance doors shall, at Tenant's expense, be inscribed, painted or affixed for each tenant by sign makers approved by Landlord. In the event of the violation of the foregoing by Tenant, Landlord may remove same without notice to Tenant or any liability therefor, and may charge the expense incurred by such removal to Tenant. 4. The sashes, sash doors, skylights, windows, heating, ventilating and air conditioning vents and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant. 5. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the public halls, corridors, or vestibules without the prior written consent of Landlord. 6. The bathrooms and plumbing fixtures shall not be used for any purposes other than those for which they were designed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the bathrooms or fixtures shall be the responsibility of Tenant. 7. Tenant shall not in any way deface any part of the Premises or the Building. 8. No bicycles, vehicles, or animals of any kind (other than animals used by Tenant for research purposes) shall be brought into or kept in or about the Premises, or in the Building. No cooking shall be done or permitted by Tenant on the Premises except that performed in the ordinary course of the business of Tenant and in conformity with all applicable laws, statutes, regulations. Tenant shall not cause or permit any unusual or objectionable odors to be produced upon or permeate from the Premises. 9. [INTENTIONALLY DELETED.] 10. No space in the Building shall be used for the sale of merchandise, goods, or property of any kind at auction. 39 11. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of the Building or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, talking machine, unmusical noise, whistling, singing, or in any other way. Tenant shall not throw anything out of the doors, windows or skylights or down the passageways. 12. Neither Tenant, nor any of Tenant's servants, employees, agents, visitors, or licensees, shall at any time bring or keep upon the Premises any inflammable, combustible or explosive fluid, or chemical substance, other than those used in the ordinary course of the business of Tenant and in compliance with all applicable laws, statutes, and regulations. 13. No additional locks or bolts of any kind shall be placed upon any of the doors, walls, accessways, or windows by Tenant, nor shall any changes be made in existing locks or the mechanism thereof, without the prior written approval of Landlord, not to be unreasonably withheld, and unless and until a duplicate key or access card, as applicable, is delivered to Landlord. Tenant shall, upon the termination of its tenancy (i) return to Landlord all keys for the Premises and for any area of the Building, or common areas, either furnished to, or otherwise procured by Tenant, (ii) restore the locks, walls, accessways, windows, and doors to their original condition on the date of this Lease by removing any security measures installed by Tenant, repairing any damage to the Premises or to the Building as a result of the restoration and removal, and (iii) in the event of the loss of any keys furnished to Tenant by Landlord, Tenant shall pay to Landlord the cost thereof. 14. Tenant shall not overload any floor. 15. Tenant shall not occupy or permit any portion of the Premises to be used for the possession, storage, manufacture or sale of liquor, narcotics, or tobacco in any form except as used in the ordinary course of the business of Tenant and in accordance with all applicable laws, statutes, and regulations. 16. Tenant shall be responsible for all persons for whom it issues passes and/or keys and shall be liable to Landlord for all acts of such persons. 17. The Premises shall not be used for lodging or sleeping, or for any illegal purpose. 18. Questions of Tenant regarding the Premises and the Building will be attended to only by Landlord or the property manager of the Premises. 19. Canvassing, soliciting, and peddling in the Building are prohibited and Tenant shall cooperate to prevent the same. 20. All paneling, grounds or other wood products not considered furniture shall be of fire retardant materials. 40 21. No smoking is permitted in the Premises, or in the Building. Smoking is permitted outside the Building in designated smoking areas. All cigarette butts and other refuse should be placed in designated containers. 22. No weapons concealed or visible are permitted in the Premises, in the Building, or on the Land. 23. Landlord shall not be responsible to Tenant or liable for the non-observance or violation of any of these Rules and Regulations by any other tenant. Whenever the above rules conflict with any of the rights or obligations of Tenant pursuant to the provisions of the Lease, the provisions of the Lease shall govern. EX-10 3 EXHIBIT 10.119 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (hereinafter the "Agreement"), made this 1st day of January, 1999, by and between Pharmaceutical Product Development, Inc., a North Carolina corporation with its principal office at 3151 17th Street Extension, Wilmington, North Carolina 28412 (hereinafter "PPD"), and David R. Williams (hereinafter "Employee"). RECITALS: A. Employee desires employment upon the terms and conditions herein stated. B. PPD desires to employ Employee upon the terms and conditions herein stated. C. Employee and PPD desire to embody in writing the terms and conditions of such employment in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants and considerations contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Employment. PPD hereby employs Employee and Employee hereby accepts such employment on a full time basis as Senior Vice President of Human Resources upon the terms and conditions hereinafter set forth. 2. Term. The term of this Agreement shall be for one year, beginning January 1, 1999, and ending December 31, 1999, unless sooner terminated as provided herein. Thereafter, this Agreement shall be automatically renewed for successive one-year terms upon the terms and conditions herein set forth and subject to salary adjustments as provided for in paragraph 9 below, unless either party gives notice as herein provided to the other of said party's intent not renew this Agreement not less than 60 days prior to the expiration of the one-year term then in effect. 3. Salary. For all services rendered by Employee under this Agreement, PPD Pharmaco shall pay to Employee an annual salary of $150,000 for the initial one-year term hereof. 4. Duties. Employee shall have overall responsibility for and, in consultation with executive management, decision making authority necessary to fulfill the duties of Senior Vice President of Human Resources. Employee shall undertake such travel as required to perform the duties prescribed herein. During the term of this Agreement, Employee shall devote substantially all of his working time, attention and energies to the business of PPD. 5. Working Facilities. PPD shall furnish Employee with office space, equipment, technical, secretarial and clerical assistance and such other facilities, services, support and supplies as may be reasonably needed to perform the duties herein prescribed in an efficient and professional manner. 6. Non-Compete. During the term of this Agreement, Employee hereby agrees that he shall not (a) become an officer, employee, director, agent, representative, member, associate or consultant of or to a corporation, partnership or other business entity or person, (b) directly or indirectly acquire a proprietary interest in a corporation, partnership or other business entity or person, or (c) directly or indirectly own any stock in a corporation (other than a publicly traded corporation of which Employee owns less than five percent (5%) of the outstanding stock) which is engaged in the business of managing clinical research programs for pharmaceutical and medical products or in any other business which is developed by PPD during the term of this Agreement anywhere in the United States (whether or not such business is physically located within the United States). The parties agree that the business and operations of PPD are national in scope. For that reason, the parties agree that a geographical limitation on the foregoing covenant is not appropriate. 7. Termination. Notwithstanding any other provision of this Agreement, PPD may terminate Employee's employment hereunder upon the occurrence of any of the following events: a. Death of Employee. b. A determination by the President and Chief Operating Officer of PPD, acting in good faith but made in his sole discretion, that Employee has failed to substantially perform his duties under this Agreement. c. A determination by the President and Chief Operating Officer of PPD, acting in good faith but made in his sole discretion, that Employee (i) has become physically or mentally incapacitated and is unable to perform his duties under this Agreement as a result of such disability, which inability continues for a period of sixty (60) consecutive calendar days, (ii) has breached any of the material terms of this Agreement, (iii) has demonstrated gross negligence or willful misconduct in the execution of his duties, or (iv) has been convicted of a felony. 8. Disclosure of Information. As a condition of employment hereunder, Employee will execute as of the date of this Agreement that certain Proprietary and Inventions Agreement attached hereto as Exhibit A and incorporated herein by reference. 2 9. Benefits. During the term thereof, Employee shall be entitled to participate in all benefits provided by PPD and its subsidiaries to their employees generally, including but not limited to health insurance, disability insurance and retirement plans, all of which are currently provided to employees of PPD and its subsidiaries, subject to the eligibility requirements of any plan(s) establishing same. Employee shall be subject to PPD's policies applicable to other senior management employees of PPD with respect to periodic reviews and increases in salary, and shall be considered for and eligible to participate in benefits, if any, provided generally by PPD to its senior management employees, including but not limited to issuance of stock options, cash bonuses, etc., in connection with Employee's duties and performance as a senior management employee. 10. Expenses. PPD Pharmaco shall pay all reasonable expenses of Employee which are directly related to Employee's duties hereunder in accordance with PPD's policy for reimbursement of employee expenses. 11. Remedies. In the event of Employee's actual or threatened breach of the provisions of paragraph 6 of this Agreement, PPD shall be entitled to a temporary restraining order and/or permanent injunction restraining Employee from such breach. Nothing herein shall be construed as preventing PPD from pursuing any other available remedies for such breach or threatened breach, including recovery of damages from Employee and from any corporation, partnership or other business entity or person with which the Employee has entered or attempted to enter into a relationship. 12. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be altered or amended except by agreement in writing signed by the parties. 13. Waiver of Breach. Waiver by either party of a breach of any provision of this Agreement by the other party shall not operate as a waiver of any subsequent breach by the other party. No waiver shall be valid unless in writing and signed by the party against whom the waiver is sought. 14. Severability. If any portion of this Agreement shall be declared invalid by a court of competent jurisdiction, the remaining portion shall continue in full force and effect as if this Agreement has been executed with the invalid portion eliminated and this Agreement shall be so construed. 15. Benefit. This Agreement shall inure to the benefit of and be binding upon PPD, its successors and assigns, and Employee, his heirs, successors, assigns and personal representatives. 16. Applicable Law. This Agreement shall be governed by the laws of the State of North Carolina. 3 17. Assignment. Neither party hereto may assign said party's rights or obligations hereunder without the prior written consent of the other. 18. Notice. Any notice required or permitted hereunder shall be delivered in person or mailed certified mail, return receipt requested, if to PPD at PPD's principal office in Wilmington, North Carolina at the address hereinabove set forth, and if to Employee at PPD's principal office in Wilmington, North Carolina, and shall be deemed received when actually received. Any notice from Employee to PPD shall be addressed to the President and Chief Operating Officer of PPD, with a copy to the General Counsel of PPD. Either party hereto may change the notice address provided for herein upon ten days prior written notice to the other in the manner prescribed for herein. 19. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, including but not limited to any breach, or as to its existence, validity, interpretation, performance or non-performance, breach or damages, including claims in tort, shall be decided by a single neutral arbitrator in Wilmington, North Carolina in binding arbitration pursuant to the commercial Arbitration Rules of the American Arbitration Association then in effect. The parties to any such arbitration shall be limited to the parties to this Agreement or any successor thereof. The arbitration shall be conducted in accordance with the procedural laws of the United States Federal Arbitration Act, as amended. The written decision of the arbitrator shall be final and binding, and may be entered and enforced in any court of competent jurisdiction and each party specifically acknowledges and agrees to waive any right to a jury trial in any such forum. Each party to the arbitration shall pay its fees and expenses, unless otherwise determined by the arbitrator. 20. Amendment; Modification. No amendment or modification of this Agreement and no waiver by any party of the breach of any covenant contained herein shall be binding unless executed in writing by the party against whom enforcement of such amendment, modification or waiver is sought. No waiver shall be deemed a continuing waiver or a waiver in respect of any subsequent breach or deferral, either of a similar or different nature, unless expressly so stated in writing. 21. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same Agreement. 22. Descriptive Headings: Interpretation. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first hereinabove set forth. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fredric N. Eshelman ------------------------------- Name: Fredric N. Eshelman Title: CEO /s/ David R. Williams (SEAL) ------------------------------- David R. Williams EX-10 4 EXHIBIT 10.120 SEVERANCE AGREEMENT THIS AGREEMENT, made this 2nd day of February, 1998, by and between Pharmaceutical Product Development, Inc. ("PPD") and David R. Williams ("Employee"). WHEREAS, Employee is a valued employee of PPD and in order to induce Employee to remain in the employ of PPD, PPD desires to provide the severance benefits hereinafter described in the event of a "Change in Control", as hereinafter defined, of PPD. NOW, THEREFORE, it is agreed as follows: 1. Definitions a. "Change in Control" means a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), provided that such a Change in Control shall be deemed to have occurred if any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of PPD representing 50% or more of the combined voting power of PPD's then outstanding securities. b. "Constructive Termination" means a termination of Employee's employment by PPD during the Covered Period initiated by Employee after (i) a substantial diminution or alteration in the duties of Employee, (ii) a reduction by PPD in Employee's base salary in effect on the date of the Change in Control, or (iii) the relocation of Employee's primary work location to a location that is more than twenty-five (25) miles from Employee's primary work location prior to the Change in Control. Constructive Termination specifically does not include termination of Employee by reason of death, Disability or retirement at or after age 65. Employee shall give PPD written notice of a Constructive Termination, which notice shall provide a brief description of the circumstances which Employee asserts gives rise to a right of Constructive Termination, and PPD shall have ten (10) days from receipt of said notice within which to remedy said circumstances. c. "Covered Period" means the time period commencing on the date of and coincident with a Change of Control and ending one year thereafter. d. "Disability" means the inability of Employee to perform his assigned duties for PPD for a period of three (3) months due to Employee's physical or mental illness as determined by a reputable medical doctor. e. "PPD" means Pharmaceutical Product Development, Inc. and all of its subsidiaries and affiliated entities. f. "Termination for Cause" means (i) an act or acts involving fraud, embezzlement or theft from PPD, (ii) Employee's willful and repeated failure to follow directions of the Board of Directors that continues for at least ten (10) days following written notice of the Board of Directors of such failure to follow directions, or (iii) termination for cause as defined in and made pursuant to a then effective employment agreement, if any, between Employee and PPD. 2. Compensation Upon Change of Control. If during the Covered Period (i) PPD terminates Employee's employment for reason other than Termination for Cause or (ii) Employee's employment is terminated by reason of Constructive Termination, Employee shall be entitled to the following compensation and benefits: a. PPD shall pay Employee a lump sum equal to Employee's W-2 compensation for the six (6) months ending on the last day of the month preceding the month of Employee's termination, said sum to be paid within ten (10) days after Employee's termination of employment. b. PPD shall pay Employee any bonus or deferred compensation (whether in the form of cash, stock or otherwise) accrued but unpaid as of Employee's termination, said sum to be paid within ten (10) days after Employee's termination of employment. c. For a period of six months after Employee's termination of employment with PPD, PPD shall continue to pay for and provide existing employee welfare benefits which Employee is receiving as of the date of termination of employment, including life insurance, health, medical, dental, vision and wellness, accidental death and dismemberment and disability benefits; provided, however, that PPD's obligations under this clause shall terminate from the date that Employee first becomes eligible after termination of employment with PPD for similar coverage under another employer's plan. d. Notwithstanding anything to the contrary in any award agreement for non-qualified stock options, (i) all unvested shares underlying PPD non-qualified stock options granted more than six months prior to the date of Employee's termination shall become fully vested as of the date of Employee's termination, and (ii) Employee shall continue to be treated under each award agreement as if he was an employee of PPD until the first to occur of (x) the third anniversary of Employee's termination of employment, or (y) the expiration of the exercise period provided for therein; provided, however, in the event of Employee's death or his disability (as disability is defined in the award agreement) after the date of Employee's termination of employment hereunder, the time for exercise after death or such disability prescribed in the award agreement shall apply. The provisions of this subsection shall also apply to any and all substitute stock 2 options granted to Employee in exchange for Employee's PPD non-qualified stock options to which this subsection applies. 3. Miscellaneous. a. PPD will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of PPD, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that PPD would be required to perform it if no succession had taken place. b. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executives, administrators, successors, heirs, distributees, devisees and legatees. c. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be given (i) by certified mail, return receipt requested, postage prepaid, or (ii) by recognized overnight carrier, and shall be deemed received when actually received. Notices shall be addressed as follows: If to PPD: Pharmaceutical Product Development, Inc. 3151 17th Street Extension Wilmington, North Carolina 28412 Attention: Chief Executive Officer If to Employee: David R. Williams ----------------------------------------- ----------------------------------------- Either party hereto may change the notice address by giving notice thereof in the same manner as provided for herein. d. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any provision or condition of this Agreement to be performed by such other party shall be deemed a subsequent waiver of the same or similar provisions or conditions. e. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this agreement, and this Agreement supersedes and replaces 3 in its entirety all prior agreements and representations, expressed, implied, oral or otherwise, made by PPD to or with Employee. f. This Agreement shall be governed by and interpreted under the laws of the State of North Carolina. g. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. h. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. i. All legal expenses incurred by Employee in the successful enforcement of any of the terms of this Agreement shall be paid by PPD. IN WITNESS WHEREOF, the parties have executed this Agreement effective the date first hereinabove set forth. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fred N. Eshelman Title: CEO EMPLOYEE /s/ David R. Williams (SEAL) Name: David R. Williams AMENDMENT NO. 1 TO SEVERANCE AGREEMENT BETWEEN PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND DAVID R. WILLIAMS THIS AMENDMENT NO. 1, made this 1st day of January, 1999, by and between Pharmaceutical Product Development, Inc. ("PPD") and David R. Williams ("Employee"), amends that certain Severance Agreement (the "Agreement") between PPD and Employee dated February 2, 1998. For and in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, PPD and Employee hereby amend the Agreement by rewriting Section 2.a. to read as follows: a. PPD shall pay Employee a lump sum equal to Employee's W-2 compensation for the twelve (12) months ending on the last day of the month preceding the month of Employee's termination, said sum to be paid within ten (10) days after Employee's termination of employment. The Agreement, as amended herein, shall continue in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 effective the date first hereinabove stated. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fredric N. Eshelman ------------------------------------- Name: Fredric N. Eshelman ----------------------------------- Title: CEO ---------------------------------- /s/ David R. Williams (SEAL) ---------------------------------------- David R. Williams f:d\l\g\amend EX-10 5 EXHIBIT 10.121 LOAN AGREEMENT LOAN AGREEMENT dated February _1_, 1999 (the "Loan Agreement" or this "Agreement") by and among PPGx, Inc., a Delaware corporation (the "Borrower"), PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (the "Company"), the subsidiaries and affiliates of the Borrower identified on the signature pages hereto or hereafter joined as a Guarantor hereunder (together with the Company, the Guarantors") and FIRST UNION NATIONAL BANK (the "Bank"). W I T N E S S E T H WHEREAS, the Borrower has requested an $8 million revolving credit facility for the purposes hereinafter set forth; WHEREAS, the Bank has agreed to make the requested credit facility available to the Borrower on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. "Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United States Code, as amended, modified, succeeded or replaced from time to time. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Charlotte, North Carolina are authorized or required by law to close; provided, however, that when used in connection with a rate determination, borrowing or payment in respect of a LIBOR Rate Loan, the term "Business Day" shall also exclude any day on which banks in London, England are not open for dealings in U.S. dollar deposits in the London interbank market. "Closing Date" means the date hereof. "Commitment Period" means the period from and including the date hereof to but excluding the earlier of (i) the Termination Date, or (ii) the date on which the commitments hereunder shall have been terminated in accordance with the provisions hereof. "Consolidated Debt to Total Capitalization Ratio" means, as of any day, the ratio of Consolidated Funded Debt to Consolidated Total Capitalization. "Consolidated Fixed Charge Coverage Ratio" means, as of the last day of any fiscal quarter for the Company and its subsidiaries on a consolidated basis, the ratio of Consolidated Income Available for Fixed Charges to Consolidated Fixed Charges. "Consolidated Fixed Charges" means, for the applicable period for the Company and its subsidiaries on a consolidated basis, the sum of Consolidated Interest Expense plus rental and lease expense, in each case as determined in accordance with GAAP applied on a consistent basis. Except as expressly provided otherwise, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Funded Debt" means Funded Debt of the Company and its subsidiaries on a consolidated basis determined in accordance with GAAP. "Consolidated Income Available for Fixed Charges" means, for any period for the Company and its subsidiaries on a consolidated basis, the sum of Consolidated Net Income plus Consolidated Interest Expense plus federal, state and local income taxes paid plus rental and lease expense, in each case determined in accordance with GAAP applied on a consistent basis. Except as expressly provided otherwise, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Interest Expense" means, for any period for the Company and its subsidiaries on a consolidated basis, all interest expense, including the amortization of debt discount and premium, the interest component under capital leases and the implied interest component under securitization transactions, in each case determined in accordance with GAAP applied on a consistent basis. Except as expressly provided otherwise, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Net Income" means, for any period for the Company and its subsidiaries on a consolidated basis, net income as determined in accordance with GAAP applied on a consistent basis, but excluding for purposes of determining the Fixed Charge Coverage Ratio, (i) extraordinary gains or losses, and any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses, and (ii) one-time non-recurring charges associated with mergers and acquisitions permitted hereunder. Except as expressly provided otherwise, the applicable period shall be for the four consecutive fiscal quarters ending as of the date of determination. "Consolidated Net Worth" means, on any day for the Company and its subsidiaries on a consolidated basis, shareholders' equity as determined in accordance with GAAP applied on a consistent basis. "Consolidated Tangible Net Worth" means, on any day Consolidated Net Worth minus the aggregate amount of goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names, organizational and developmental expenses, covenants not to compete and other intangible assets, in each case as determined in accordance with GAAP applied on a consistent basis. For purposes hereof, Consolidated Tangible Net Worth shall not include that certain seller financing promissory note from [current management of APBI Environmental Sciences Group, Inc.] in favor of the Company in an aggregate principal amount of up to $18,000,000 in connection with the sale of APBI Environmental Sciences Group, Inc. ("APBI") to [current management of APBI]. "Consolidated Total Capitalization" means, on any day for the Company and its subsidiaries on a consolidated basis, the sum of Consolidated Funded Debt plus Consolidated Net Worth. 2 "Credit Documents" means, collectively, this Agreement and the Note. "Credit Parties" means the Borrower and the Guarantors. "Eurodollar Reserve Percentage" means for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of Eurocurrency liabilities, as defined in Regulation D of such Board as in effect from time to time, or any similar category of liabilities for a member bank of the Federal Reserve System in New York City. "Funded Debt" means, as of any day for any Person, without duplication, (i) all indebtedness for borrowed money, (ii) all indebtedness and obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations to pay the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business), (iv) all obligations as lessee under capital leases, (v) all obligations of reimbursement relating to letters of credit, bankers' acceptances or other similar instruments (whether or not then drawn and owing), (vi) all Guaranty Obligations, (vii) the attributed principal amount of any securitization transaction and (viii) all obligations under any synthetic lease, tax retention operating lease, off-balance sheet loan or other similar off-balance sheet financing product where the product is considered borrowed money indebtedness for tax purposes, but is classified as an operating lease for purposes of GAAP. "GAAP" means generally accepted accounting principles in the United States applied on a consistent basis. "Governmental Authority" means any federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guaranteed Obligations" means: (a) All unpaid principal of and interest on (including, without limitation, interest accruing at the then applicable rate provided in this Agreement after the maturity of the Loans and other obligations owing under this Agreement and interest accruing at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Bank, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Note or any other document relating hereto, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Bank that are required to be paid by the Borrower pursuant to the terms of this Agreement); and 3 (b) all other indebtedness, liabilities and obligations of any kind or nature, now existing or hereafter arising, owing by the Borrower to the Bank, arising under any interest rate protection agreement, currency agreement or other agreement or arrangement, whether primary, secondary, direct, contingent, or joint and several. "Guaranty Obligation" means any obligation, contingent or otherwise, directly or indirectly guaranteeing the indebtedness or other obligation of another Person, including without limitation, (i) an agreement to purchase or pay (or to supply or advance funds for the purchase or payment of) any such indebtedness or other obligation (whether by way of partnership agreement, keep-well agreement, comfort letter, maintenance agreement or the like), or (ii) any arrangement entered into for the purpose of assuring payment of the indebtedness or other obligation of another Person or otherwise protecting a party from loss in respect thereof; provided that such term shall not include endorsements for collection or deposit in the ordinary course of business. "Interest Payment Date" means (a) as to any Prime Loan, the last Business Day of each March, June, September and December to occur while such Loan is outstanding, (b) as to any LIBOR Rate Loan having an Interest Period of three months or less, the last day of such Interest Period and (c) as to any LIBOR Rate Loan having an Interest Period longer than three months, each day which is three months after the first day of such Interest Period and the last day of such Interest Period. "Interest Period" means with respect to any LIBOR Rate Loan, (i) initially, the period commencing on the date of borrowing or conversion date, as the case may be, with respect to such LIBOR Rate Loan and ending one, two or months thereafter, as selected by the Borrower in the notice of borrowing or notice of conversion given with respect thereto; and (ii) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such LIBOR Rate Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Bank not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that the foregoing provisions are subject to the following: (A) if any Interest Period pertaining to a LIBOR Rate Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (B) any Interest Period pertaining to a LIBOR Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the relevant calendar month; 4 (C) if the Borrower shall fail to give notice as provided above, the Borrower shall be deemed to have selected a Prime Loan to replace the affected LIBOR Rate Loan as provided herein; (D) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; and (E) no more than 6 LIBOR Rate Loans may be in effect at any time. For purposes hereof, LIBOR Rate Loans with different Interest Periods shall be considered as separate LIBOR Rate Loans, even if they shall begin on the same date and have the same duration, although borrowings, extensions and conversions may, in accordance with the provisions hereof, be combined at the end of existing Interest Periods to constitute a new LIBOR Rate Loan with a single Interest Period. "LIBOR" means the arithmetic mean (rounded to the nearest 1/100th of 1%) of the offered rates for deposits in U.S. dollars for a period equal to the Interest Period selected which appears on the Telerate Page 3750 at approximately 11:00 A.M. London time, two (2) Business Days prior to the commencement of the applicable Interest Period. If, for any reason, such rate is not available, then "LIBOR" shall mean the rate per annum at which, as determined by the Bank, U.S. dollars in the amount of $5,000,000 are being offered to leading banks at approximately 11:00 A.M. London time, two (2) Business Days prior to the commencement of the applicable Interest Period for settlement in immediately available funds by leading banks in the London interbank market for a period equal to the Interest Period selected. "LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by the Bank pursuant to the following formula: LIBOR Rate = LIBOR --------------------------------- 1.00 - Eurodollar Reserve Percentage "LIBOR Rate Loan" means Loans hereunder bearing interest at a rate determined by reference to the LIBOR Rate. "Lien" means any mortgage, pledge, hypothecation, assignment, security interest, encumbrance, lien, preference or priority of any kind. "Loan" or "loan" shall mean revolving loans under Section 2.1 hereof. "Person" means any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise (whether or not incorporated) or any Governmental Authority. "PPD Loan Agreement" means that Loan Agreement dated as of June 25, 1997 among the Company, the Guarantors identified therein and the Bank, as amended, modified, extended, renewed or replaced. "Prime Loan" means Loans hereunder bearing interest at a rate determined by reference to the Prime Rate. 5 "Prime Rate" means the rate of interest per annum publicly announced from time to time by the Bank as its prime rate in effect at its principal office in Charlotte, North Carolina, with each change in the Prime Rate being effective on the date such change is publicly announced as effective (it being understood and agreed that the Prime Rate is a reference rate used by the Bank in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged on any extension of credit by the Bank to any debtor). "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or any of its material property is subject. "Termination Date" means June 30, 2000, or such later date as to which the Bank may agree in its sole discretion. SECTION 2. LOAN. 2.1 Loan. During the Commitment Period, subject to the terms and conditions hereof, the Bank agrees to make revolving loans to the Borrower upon request in an aggregate principal amount of up to EIGHT MILLION DOLLARS ($8,000,000) at any time outstanding. The loans hereunder may consist of Prime Loans or LIBOR Rate Loans, or a combination thereof. The obligation of the Bank to make any Loan is subject to the condition that the Representations and Warranties set forth herein are true and correct in all material respects. 2.2 Notices. Requests by the Borrower for Loans hereunder (including extensions or conversions of loans hereunder), shall be made by written notice (or telephone notice promptly confirmed in writing) by 12:00 Noon Charlotte, North Carolina time (i) on the Business Day of the requested borrowing, extension or conversion in the case of Prime Loans, and (ii) on the third Business Day prior to the date of the requested borrowing, extension or conversion in the case of Eurodollar Loans. Each request shall be in a minimum principal amount of $1,000,000 in the case of LIBOR Rate Loans and $100,000 in the case of Prime Loans and, in each case, integral multiples of $100,000 in excess thereof, and shall specify the date of the requested borrowing, extension or conversion, the aggregate amount to be borrowed, extended or converted and if an extension of conversion, the loan which is being extended or converted, and whether the borrowing, extension or conversion shall consist of LIBOR Rate Loans, Prime Loans or combination thereof. If the Borrower shall fail to specify (A) the type of Loan requested for a borrowing, the request shall be deemed a request for a LIBOR Rate Loan with an Interest Period of one month, (B) the duration of the applicable Interest Period in the case of LIBOR Rate Loans, the request shall be deemed to be a request for an Interest Period of one month. Each request for a Loan hereunder shall be deemed a reaffirmation that the Representations and Warranties set forth herein are true and correct in all material respects as of such date. Unless extended in accordance with the provisions hereof, LIBOR Rate Loans shall be converted to Prime Loans at the end of the applicable Interest Period. 6 2.3 Interest Rate. Loans outstanding hereunder shall bear interest at a per annum rate equal to (i) the LIBOR Rate plus five-eighths of one percent (.625%) or (ii) the Prime Rate, as the Borrower may elect; provided that after the occurrence and during the continuance of an Event of Default, the principal and, to the extent permitted by law, interest on the Loans and any other amounts owing hereunder shall bear interest, payable on demand, at a rate equal to the Prime Rate plus two percent (2%). Interest will be payable in arrears on each Interest Payment Date. 2.4 Repayment. Unless sooner paid, the Loans shall be due and payable in full on the Termination Date. 2.5 Note. The Loans shall be evidenced by a promissory note of the Borrower dated as of the Closing Date, in the form of Annex A hereto (as amended, modified, extended, renewed or replaced, the "Note"). 2.6 Fees. In consideration of the commitments hereunder, the Borrower agrees to pay to the Bank a facility fee (the "Facility Fee") equal to ten basis points (.10%) per annum on the average daily unused portion of the commitment for the applicable period. The Facility Fee shall be payable quarterly in arrears on the 15th day following the last day of each calendar quarter for the immediately preceding quarter (or portion thereof) beginning with the first such date to occur after the date hereof. 2.7 Prepayments. The Loans may be prepaid in whole or in part without premium or penalty. LIBOR Rate Loans may not be prepaid in whole or in part prior to the end of the applicable Interest Period. Amounts prepaid may, subject to the terms and conditions hereof, be reborrowed. 2.8 Capital Adequacy. If the Bank shall have reasonably determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof as a consequence of its obligations hereunder or compliance by the Bank or any corporation controlling the Bank with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or Governmental Authority made subsequent to the date hereof as a consequence of its obligations hereunder does or shall have the effect of reducing the rate of return on the Bank's or such corporation's capital as a consequence of its obligations hereunder to a level below that which the Bank or such corporation could have achieved but for such adoption, change or compliance (taking into consideration the Bank's or such corporation's policies with respect to capital adequacy) by an amount reasonably deemed by the Bank to be material, then from time to time, within 15 days after demand by the Bank, the Borrower shall pay to the Bank such additional amount as shall be certified by the Bank as being required to compensate it for such reduction. Such a certificate as to any additional amounts payable under this subsection submitted by the Bank (which certificate shall include a description in reasonable detail of the basis for the computation) to the Borrower shall be conclusive absent manifest error. 2.9 Inability to Determine Interest Rate. Notwithstanding any other provision of this Agreement, if (i) the Bank shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that, by reason of circumstances affecting the relevant market, reasonable and adequate means do not exist for ascertaining LIBOR for 7 such Interest Period, or (ii) the Bank shall reasonably determine (which determination shall be conclusive and binding absent manifest error) that the LIBOR Rate does not adequately and fairly reflect the cost of funding LIBOR Rate Loans, the Bank shall forthwith give telephone notice of such determination, confirmed in writing, to the Borrower, and thereafter the right to request and continue Loans as LIBOR Rate Loans shall be suspended until such time as the conditions giving rise to such notice shall no longer exist. In the event LIBOR Rate Loans are not available on account of operation of this Section, the Bank will endeavor to provide an alternative index or reference rate. 2.10 Illegality. Notwithstanding any other provision of this Agreement, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof, in each case occurring after the Closing Date, by the relevant Governmental Authority shall make it unlawful for the Bank to make or maintain LIBOR Rate Loans as contemplated by this Agreement or to obtain in the interbank eurodollar market through its LIBOR Lending Office the funds with which to make such Loans, (a) the Bank shall promptly notify the Borrower thereof, (b) the commitment of the Bank hereunder to make LIBOR Rate Loans or continue LIBOR Rate Loans as such shall forthwith be suspended until the Bank shall give notice that the condition or situation which gave rise to the suspension shall no longer exist, and (c) Loans then outstanding as LIBOR Rate Loans, if any, shall be converted on the last day of the Interest Period for such Loans or within such earlier period as required by law to Prime Loans. The Borrower hereby agrees promptly to pay the Bank, upon its demand, any additional amounts necessary to compensate the Bank for actual and direct costs (but not including anticipated profits) reasonably incurred in making any repayment in accordance with this subsection including, but not limited to, any interest or fees payable by the Bank to lenders of funds obtained by it in order to make or maintain its LIBOR Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to this subsection submitted by the Bank, to the Borrower shall be conclusive in the absence of manifest error. 2.11 Requirements of Law. If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by the Bank with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the date hereof: (i) shall subject the Bank to any tax of any kind whatsoever with respect to any LIBOR Rate Loan made by it, or change the basis of taxation of payments to the Bank in respect thereof (except for changes in the rate of tax on the net income or franchise tax applicable to the Bank); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of the Bank which is not otherwise included in the determination of the LIBOR Rate hereunder; or (iii) shall impose on the Bank any other condition (excluding any tax of any kind whatsoever); 8 and the result of any of the foregoing is to increase the cost to the Bank of making or maintaining LIBOR Loans or to reduce any amount receivable hereunder or under the Note, then, in any such case, the Borrower shall promptly pay the Bank, within 15 days after its demand, any additional amounts necessary to compensate the Bank for such additional cost or reduced amount receivable as determined by the Bank with respect to its LIBOR Rate Loans. A certificate as to any additional amounts payable pursuant to this subsection submitted by the Bank, describing in reasonable detail the nature of such event and a reasonably detailed explanation of the calculation thereof, to the Borrower shall be conclusive in the absence of manifest error. 2.12 Indemnity. The Borrower hereby agree to indemnify the Bank and to hold the Bank harmless from any funding loss or expense which the Bank may sustain or incur (other than as a result of and to the extent the Bank's gross negligence or willful misconduct) as a consequence of (a) default by the Borrower in payment of the principal amount of or interest on any LIBOR Rate Loan by the Bank in accordance with the terms hereof, (b) default by the Borrower in accepting a LIBOR Rate Loan after the Borrower has given a notice in accordance with the terms hereof, (c) default by the Borrower in making any prepayment of a LIBOR Rate Loan after the Borrower has given a notice in accordance with the terms hereof, and/or (d) the making by the Borrower of a prepayment of a LIBOR Rate Loan, or the conversion thereof, on a day which is not the last day of the Interest Period with respect thereto, in each case equal to (i) the amount of interest which would have accrued on the amount so prepaid, or not so paid, borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to pay, borrow, convert or continue, the Interest Period that would have commenced on the date of such failure), in each case at the applicable rate of interest for such Loans provided for herein (exclusive of any margin), over (ii) the amount of interest (as reasonably determined by the Bank) which would have accrued to the Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any additional amounts payable pursuant to this subsection submitted by the Bank, to the Borrower shall be conclusive in the absence of manifest error. 2.13 Taxes. All payments made by the Borrower hereunder or under any Note will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any Governmental Authority or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding (i) any tax imposed on or measured by the net income or profits of a Lender pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of the Bank is located or any subdivision thereof or therein and (ii) any franchise taxes, branch taxes, taxes on doing business or taxes on the overall capital or net worth of the Bank pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or its applicable lending office is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any such Taxes, will not be 9 less than the amount provided for herein or in such Note. The Borrower will furnish to the Bank as soon as practicable after the date the payment of any Taxes is due pursuant to applicable law certified copies (to the extent reasonably available and required by law) of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless, and reimburse, the Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by the Bank. The agreements in this subsection shall survive termination of this Agreement and payment of the Notes and all other amounts payable hereunder. 2.14 Payments and Computations. Payments shall be made hereunder in U.S. dollars in immediately available funds, without offset, deduction, counterclaim or withholding of any kind at the offices of the Bank provided in the notice section hereof. Payments received after 2:00 P.M. (Charlotte, North Carolina time) will be given credit the next following Business Day. Computations of interest hereunder shall be made on the basis of actual number of days elapsed over a year of 360 days. SECTION 3. GUARANTY 3.1 Guaranty. Each of the Guarantors hereby jointly and severally guarantees to the Bank as hereinafter provided the prompt payment of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise and after giving effect to any grace periods) strictly in accordance with the terms hereof. Each of the Guarantors hereby further agrees that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise and after giving effect to any grace periods), the Guarantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration or otherwise and after giving effect to any grace periods) in accordance with the terms of such extension or renewal. This is a guaranty of payment and not of collection. Notwithstanding any provision to the contrary contained herein or in any other of the Credit Documents, to the extent the obligations of any Guarantor as guarantor hereunder shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder shall be limited to the maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the Bankruptcy Code). 3.2 Obligations Unconditional. The obligations of the Guarantors under Section 3.1 hereof are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of this Agreement or the Note, or any other agreement or instrument referred to herein or therein or relating hereto or thereto, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 3.2 that the obligations of the Guarantors hereunder shall be absolute and unconditional under any and all 10 circumstances. Each of the Guarantors agrees that it shall have no right of subrogation, indemnity, reimbursement or contribution against the Borrower or any other guarantor for amounts paid under this Guaranty until such time as the Bank has been paid in full, all commitments, if any, have been terminated and no Person or Governmental Authority shall have any right to request any return or reimbursement of funds from the Bank in connection with monies received under the Credit Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by law, the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantors hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or the Note or any other agreement or instrument referred to herein or therein or relating hereto or thereto shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Credit Documents or any other agreement or instrument referred to in the Credit Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, the Bank as security for any of the Guaranteed Obligations shall fail to attach or be perfected or shall be released or discharged in whole or in part; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of any Guarantor or any other guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of any guarantor). With respect to its obligations hereunder, each of the Guarantors hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Bank exhaust any right, power or remedy or proceed against any Person under this Agreement or the Note or any other agreement or instrument referred to herein or therein or relating hereto or thereto, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 3.3 Reinstatement. The obligations of the Guarantors under this Section 3 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, and each of the Guarantors agrees that it will indemnify the Bank on demand for all reasonable costs and expenses (including, without limitation, fees and expenses of counsel) incurred by the Bank in connection with such rescission or restoration, including any such costs and expenses incurred in defending 11 against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 3.4 Certain Additional Waivers. Without limiting the generality of the provisions of this Section 3, each of the Guarantors hereby specifically waives the benefits of N.C. Gen. Stat. Sec. 26-7 through 26-9, inclusive. Each of the Guarantors agrees that it shall have no right of recourse to security for the Guaranteed Obligations, except through the exercise of the rights of subrogation pursuant to Section 3.2. 3.5 Remedies. Each of the Guarantors agrees that, to the fullest extent permitted by law, as between the Guarantors, on the one hand, and the Bank, on the other hand, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.2 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.2) for purposes of Section 3.1 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as against any other Person and that, in the event of such declaration (or the Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by the Guarantors for purposes of said Section 3.1. 3.6 Continuing Guarantee. The guarantee in this Section 3 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 3.7 Rights of Contribution. The Guarantors hereby agree, as among themselves, that if any Guarantor shall become an Excess Funding Guarantor (as defined below), each other Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the succeeding provisions of this Section), pay to such Excess Funding Guarantor an amount equal to such Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Guarantor) of such Excess Payment (as defined below). The payment obligation of any Guarantor to any Excess Funding Guarantor under this Section shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Guarantor under the other provisions of this Section 3, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (i) "Excess Funding Guarantor" shall mean, in respect of any obligations arising under the other provisions of this Section 3 (hereafter, the "Guarantied Obligations"), a Guarantor that has paid an amount in excess of its Pro Rata Share of the Guarantied Obligations; (ii) "Excess Payment" shall mean, in respect of any Guarantied Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guarantied Obligations; and (iii) "Pro Rata Share", for the purposes of this Section, shall mean, for any Guarantor, the ratio (expressed as a percentage) of (a) the amount by which the aggregate present fair saleable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (b) the amount by which the aggregate present fair saleable value of all assets and other properties of the Borrower and all of the Guarantors exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Borrower and the Guarantors 12 hereunder) of the Borrower and all of the Guarantors, all as of the Closing Date (if any Guarantor becomes a party hereto subsequent to the Closing Date, then for the purposes of this Section such subsequent Guarantor shall be deemed to have been a Guarantor as of the Closing Date and the information pertaining to, and only pertaining to, such Guarantor as of the date such Guarantor became a Guarantor shall be deemed true as of the Closing Date). 3.8 Joinder of Additional Guarantors. The Borrower may join additional subsidiaries as Guarantors hereunder by way of execution of a Joinder Agreement, a form of which is attached as Annex B. SECTION 4 CONDITIONS TO CLOSING 4.1 Conditions. The effectiveness of this Agreement and extension of the Loans hereunder are conditioned upon satisfaction of the following: (a) Receipt of multiple executed counterparts of this Agreement and the Note, in form and substance satisfactory to the Bank. (b) Receipt of opinions of the general counsel for the Borrower and the Guarantors in the form attached as Annex C hereto. (c) Receipt of corporate documentation for the Credit Parties, including resolutions, bylaws, articles of incorporation, certificates of good standing and certificates of incumbency. SECTION 5 REPRESENTATIONS AND WARRANTIES 5.1 Financial Condition. The consolidated balance sheet of the Company and its consolidated subsidiaries dated as of September 30, 1998, together with related consolidated statements of income and cash flows, is complete and correct in all material respects and presents fairly the financial condition and results from operations of the entities and for the periods specified, subject in the case of interim company-prepared statements to normal year-end adjustments. 5.2 No Change. Since the date of the financial statements identified in Section 5.1, there have been no developments or events which have had, or are likely to have, a material adverse effect on the condition (financial or otherwise), operations, business or prospects of the Company and its subsidiaries taken as a whole. There have been no developments or events which have had, or are likely to have, a material adverse effect on the condition (financial or otherwise), operations, business or prospects of the Borrower and its subsidiaries taken as a whole. 5.3 Corporate Organization. Each of the Credit Parties is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation, is qualified to do business in each jurisdiction where failure to so qualify would have a material adverse effect on the Borrower and its subsidiaries taken as a whole and is in compliance with all Requirements of Law except to the extent that failure to be in compliance would not have a material adverse effect on the Borrower and its subsidiaries taken as a whole. 13 5.4 Enforceable Obligation. Each of the Credit Parties has the power and authority and legal right to enter into, deliver and perform under this Agreement and has taken all necessary action to authorize the execution, delivery and performance by them of this Agreement. This Agreement constitutes a legal, valid and binding obligation of each of the Credit Parties enforceable against them in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 5.5 Legal Proceedings. No claim, litigation or proceeding before any arbitrator or Governmental Authority is pending, or to the knowledge of the Credit Parties, threatened which if adversely determined would reasonably be expected to have a material adverse effect on the Borrower and its subsidiaries taken as a whole. 5.6 No Default. No Event of Default or event or condition which with notice or lapse of time, or both, would constitute an Event of Default, presently exists. 5.7 Federal Regulations. No part of the proceeds of the Loans hereunder will be used, directly or indirectly, for any purpose in violation of Regulation U of the Board of Governors of the Federal Reserve System, as amended, modified or replaced. SECTION 6 COVENANTS The Borrower and the Guarantors covenant and agree to: 6.1 Financial Statements. Furnish, or cause to be furnished, to the Bank: (a) Annual Audited Statements. As soon as available, but in any event within 90 days after the end of each fiscal year, (i) audited consolidated and company-prepared consolidating balance sheets of the Borrower and its subsidiaries and related audited consolidated and company-prepared consolidating statements of income, retained earnings and cash flows, and (ii) audited consolidated and company-prepared consolidating balance sheets of the Company and its subsidiaries and related audited consolidated and company-prepared consolidating statements of income, retained earnings and cash flows, in each case audited by Pricewaterhouse Coopers, or other independent public accounting firm reasonably acceptable to the Bank, setting forth comparative information for the previous year, and reported without a "going concern" or like qualification or exception, or qualification indicating limitation of the scope of the audit; and (b) Quarterly Statements. As soon as available, and in any event within 45 days after the end of each fiscal quarter, (i) a company-prepared consolidated and consolidating balance sheet of the Borrower and its subsidiaries and related company-prepared consolidated and consolidating statements of income, retained earnings and cash flows for the quarter and for the portion of the year with comparative information for the corresponding periods for the previous year and (ii) 14 a company-prepared consolidated and consolidating balance sheet of the Company and its subsidiaries and related company-prepared consolidated and consolidating statements of income, retained earnings and cash flows for the quarter and for the portion of the year with comparative information for the corresponding periods for the previous year. All such financial statements to be complete and correct in all material respects (subject, in the case of interim statements, to normal recurring year-end audit adjustments) and to be prepared in reasonable detail and in accordance with GAAP throughout the periods reflected therein (except as approved by such accountants and disclosed therein) and further accompanied by a description of, and an estimation of the effect on the financial statements on account of, a change in the application of accounting principles from a prior period. (c) Other Information. Promptly upon request, such additional financial and other information as the Bank may reasonably request from time to time. 6.2 Certificates and Notices. Furnish, or cause to be furnished, and give notice to the Bank: (a) Officer's Certificate. (i) Concurrently with the annual and quarterly financial statements of the Borrower and its subsidiaries referenced in Section 6.1 above, a certificate of a responsible officer of the Borrower stating that to the best of his knowledge and belief, (A) the financial statements fairly present in all material respects the financial condition of the parties to which such statements relate and (B) the Borrower and the Guarantors are in compliance with the provisions of this Agreement in all material respects and no Event of Default, or event or condition which with notice or lapse of time, or both, would constitute an Event of Default exists hereunder, and (ii) Concurrently with the annual and quarterly financial statements of the Company and its subsidiaries referenced in Section 6.1 above, a certificate of a responsible officer of the Company stating that to the best of his knowledge and belief, (A) the financial statements fairly present in all material respects the financial condition of the parties to which such statements relate and (B) the Borrower and the Guarantors are in compliance with the provisions of this Agreement in all material respects and no Event of Default, or event or condition which with notice or lapse of time, or both, would constitute an Event of Default exists hereunder (together with a financial covenant calculation worksheet demonstrating compliance therewith in reasonable detail). (b) Public and Other Information. Copies of reports and information which the Borrower or its subsidiaries, or the Company or its subsidiaries, sends to its stockholders or files with the Securities and Exchange Commission, and any other financial or other information as the Bank may reasonably request. 15 (c) Notice of Default. Promptly, upon becoming aware thereof, notice of the occurrence of an Event of Default hereunder. 6.3 Compliance with Laws. Comply will all Requirements of Law applicable to them except to the extent that failure to comply therewith would not have a material adverse effect on the Borrower and its subsidiaries taken as a whole. 6.4 Books and Records. The Credit Parties will keep proper books and records in conformity with GAAP and all Requirements of Law and permit the Bank upon reasonable notice to visit and inspect such books and records. 6.5 Financial Covenants. The Company will comply with the following financial covenants: (a) Consolidated Tangible Net Worth. Consolidated Tangible Net Worth shall not at any time be less than the sum of $75 million plus at the end of each fiscal quarter occurring after March 31, 1997, 50% of Consolidated Net Income (but not less than zero) for the fiscal quarter then ended, such increases to be cumulative. (b) Consolidated Fixed Charge Coverage Ratio. As of the last day of each fiscal quarter, the Consolidated Fixed Charge Coverage Ratio shall be not less than 2.0:1.0. (c) Consolidated Debt to Total Capitalization Ratio. The Consolidated Debt to Total Capitalization Ratio shall not at any time be greater than .45:1.0. 6.6 Incurrence of Funded Debt. The Borrower will not, nor will it permit any of its subsidiaries to, create, assume, incur or suffer to exist any Funded Debt except: (a) Funded Debt arising or existing under this Loan Agreement and the other Credit Documents; and (b) capital lease obligations and other Funded Debt incurred to provide all or a portion of the purchase price or cost of construction of an asset, provided that (i) such Debt when incurred will not exceed the purchase price or cost of construction of the asset, (ii) no such Debt shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing, and (iii) the aggregate principal amount of such Debt shall not exceed $1,000,000 at any time outstanding. 6.7 Restriction on Liens. The Borrower will not, nor will it permit any of its subsidiaries to, create, assume, incur or suffer to exist any Lien on any property or asset of any kind, real or personal, tangible or intangible, now owned or hereafter acquired by it or assign or subordinate any present or future right to receive assets except: (a) Liens securing capital lease obligations and other purchase money Funded Debt permitted under Section 6.6(a); (b) Liens securing taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, 16 landlords and other like persons; provided that (A) with respect to Liens securing state and local taxes, such taxes are not yet payable, (b) with respect to Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and the like, such liens are unfiled and no other action has been taken to enforce the same, or (C) with respect to taxes, assessments or governmental charges or levies or claims or demand secured by such Liens, payment is not at the time required; (c) Liens not securing indebtedness which are incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance, unemployment insurance, social security and other like laws; (d) any Lien arising pursuant to any order of attachment, distraint or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereto are being contested in good faith by appropriate proceedings; and (e) zoning restrictions, easements, licenses, reservations, covenants, conditions, waivers, restrictions on the use of property or other minor encumbrances or irregularities of title which do not materially impair the use of any property in the operation or business of the Borrower or such subsidiary or the value of such property for the purpose of such business. 6.8 Mergers and Acquisitions. The Borrower will not, nor will it permit any of its subsidiaries to, enter into a transaction of merger or consolidation, nor will it acquire all or substantially all of the capital stock (or other equity interest) or assets of any other Person. 6.9 Investments. The Borrower will not, nor will it permit any of its subsidiaries to, make loans or advances or otherwise make an investment in or capital contribution to, (collectively, an "Investment") any other Person, except: (a) cash and cash equivalents and other publicly traded equity and debt instruments reasonably acceptable to the Bank; (b) loans and advances to officers, directors, employees and shareholders not to exceed $250,000; (c) Investments in and to a Credit Party; and (d) other Investments in an aggregate principal amount (on a cost basis) at any time of up to $1,000,000. SECTION 7 EVENTS OF DEFAULT 7.1 Event of Default. Each of the following shall constitute an "Event of Default" hereunder: (i) the failure to make any payment of principal, interest, fees or other amounts owing hereunder when due, (ii) any representation or warranty made herein or in connection herewith shall prove to be false or incorrect in any material respect, (iii) failure to observe or comply with any covenants or provisions contained herein, (iv), the 17 occurrence and continuance of an event of default under any other note or agreement relating to indebtedness for borrowed money owing by the Borrower or any Guarantor which results in, or would permit, acceleration of such indebtedness, or would otherwise cause such indebtedness to become due prior to its stated maturity, (v) the occurrence of an Event of Default (as defined in the PPD Loan Agreement) under the PPD Loan Agreement; (vi) the filing of an action in bankruptcy or insolvency by the Borrower or any Guarantor, (vii) the filing of an action in bankruptcy or insolvency against the Borrower or any Guarantor and (viii) the Borrower or any Guarantor shall fail within 30 days of the due date to pay bond or otherwise discharge any judgment, settlement or order. 7.2 Remedies. Upon the occurrence of an Event of Default, and at any time thereafter, the Bank may by notice to the Borrower (i) terminate the commitments hereunder and declare the unpaid principal of, and any accrued interest owing on, the Loans and all other indebtedness or obligations owing hereunder or under any of the other Credit Documents or in connection herewith or therewith, immediately due and payable, whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, and (ii) enforce any other rights and interests available under the Credit Documents or at law, including rights of set off. Notwithstanding the foregoing, in the case of an Event of Default described in clauses (v) or (vi) of Section 7.1 relating to bankruptcy and insolvency, the commitments hereunder shall immediately terminate and the Loans and all accrued interest and all other indebtedness and other amounts owing hereunder or under any of the other Credit Documents owing to the Bank shall become immediately due and payable without presentment, demand, protest or the giving of any notice or other action by the Bank, all of which are hereby waived by the Borrower. SECTION 8 MISCELLANEOUS 8.1 Notices. Notices and other communications shall be effective, and duly given, (i) when received, (ii) when transmitted by telecopy or other facsimile device to the numbers set out below if transmitted before 5:00 p.m. on a Business Day, or otherwise on the next following Business Day, (iii) the day following the day on which delivered prepaid to a reputable national overnight air courier service, or (iv) the third Business Day following the day sent by certified or registered mail postage prepaid, in each case to the parties at the address shown below, or at such other address as may be specified by written notice to the other parties: Borrower: Pharmaceutical Product Development, Inc. 3151 17th Street Extension Wilmington, North Carolina 28412 Attn: Jimmy Sloan Director of Corporate Finance Phone: (910) 772-7168 Fax: (910) 772-7056 18 Bank: FIRST UNION NATIONAL BANK Corporate Banking, 6th Floor 150 Fayetteville Street Mall Raleigh, North Carolina 27601 Attn: Mendel Lay Phone: (919) 881-7003 Fax: (919) 881-7016 8.2 Right of Set-Off. In addition to other rights now or hereafter available to the Bank under the Credit Documents or under applicable law, the Bank may, after the occurrence of an Event of Default, exercise rights of set-off and may appropriate and apply any and all deposits (general and specific) or other amounts held or owing by the Bank to the Loans and other amounts owing by the Borrower or any Guarantor hereunder or under the other Credit Documents, regardless of whether the Loans or such other amounts are contingent or unmatured, without presentment, demand, protest or notice of any kind (any such rights of presentment, demand, protest or notice being hereby waived). 8.3 Benefit of Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, successors and assigns of the parties hereto; provided that neither the Borrower nor any Guarantor may assign or transfer any its obligations or interests without prior written consent of the Bank. 8.4 No Waiver. No failure or delay on the part of the Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Bank, on the one hand, and the Credit Parties, on the other hand, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which the Bank would otherwise have. 8.5 Payment of Expenses. The Borrower agrees to: (i) pay all reasonable out-of-pocket costs and expenses of the Bank in connection with (A) negotiation, preparation, execution and delivery of the Credit Documents (including reasonable fees and expenses of Bank counsel, Moore & Van Allen, PLLC) and any amendments, waivers or consents relating to the Credit Documents and (B) enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, in connection with any such enforcement, the reasonable fees and disbursements of counsel for the Bank); (ii) pay and hold the Bank harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to the Bank) to pay such taxes; and (iv) indemnify the Bank, its officers, directors, employees and representatives from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of any investigation, litigation or other proceeding (whether or not the Bank is a party thereto) related to the entering into and/or performance of any Credit Document or the use of proceeds of the Loans (including other extensions of credit) hereunder or the consummation of any other transactions contemplated in any Credit Document, including, without limitation, the 19 reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of gross negligence or willful misconduct on the part of the Person to be indemnified). 8.6 Amendments. Neither this Agreement nor any of the other Credit Documents may be amended or modified, nor shall consents or waivers be effective except with the written consent of the parties hereto. 8.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 8.8 Headings. The headings of the sections and subsections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 8.9 Survival. The indemnities and payment obligations hereunder, including those set out in Sections 2.8, 2.9, 2.10, 2.11, 2.12, 2.13 and 8.5, and the representations and warranties made herein or in connection herewith shall survive the making and repayment of the Loans and termination of commitments hereunder. 8.10 Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of North Carolina. 8.11. Arbitration; Consent to Jurisdiction and Service of Process. (a) UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE BEFORE OR AFTER INSTITUTION OF ANY JUDICIAL ACTION, ANY DISPUTE, CLAIM OR CONTROVERSY ARISING OUT OF OR CONNECTED HEREWITH OR WITH THE CREDIT DOCUMENTS ("DISPUTES") SHALL BE RESOLVED BY BINDING ARBITRATION AS PROVIDED HEREIN. DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, CLAIMS BROUGHT AS CLASS ACTIONS AND CLAIMS ARISING HEREFROM OR FROM CREDIT DOCUMENTS EXECUTED IN THE FUTURE. ARBITRATION SHALL BE CONDUCTED UNDER THE COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE AMERICAN ARBITRATION ASSOCIATION AND TITLE 9 OF THE U.S. CODE. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN CHARLOTTE, MECKLENBURG COUNTY, NORTH CAROLINA, OR SUCH OTHER PLACE AS AGREED TO IN WRITING BY THE PARTIES. A JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND ALL DECISIONS SHALL BE IN WRITING. THE PANEL FROM WHICH ALL ARBITRATORS ARE SELECTED SHALL BE COMPRISED OF LICENSED ATTORNEYS HAVING AT LEAST TEN YEARS' EXPERIENCE REPRESENTING PARTIES IN SECURED LENDING TRANSACTIONS. NOTWITHSTANDING THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER OR RELATED TO INTEREST PROTECTION AGREEMENTS. 20 (b) Notwithstanding the preceding binding arbitration provision, the Bank preserves certain remedies that may be exercised during a Dispute. The Bank shall have the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in the Credit Documents or under applicable law, (ii) all rights of self help including peaceful occupation of real property and collection of rents, set-off and peaceful possession of personal property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment and appointment of receiver, (iv) when applicable, a judgment by confession of judgment and (v) other remedies. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. (c) BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE PARTIES HERETO ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION RELATING TO ANY ARBITRATION PROCEEDINGS CONDUCTED UNDER THE ARBITRATION RULES IN CHARLOTTE, MECKLENBURG COUNTY, NORTH CAROLINA AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. Each of the parties hereto irrevocably agrees that all process in any such arbitration proceedings or otherwise may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address set forth in Section 8.1 or at such other address of which such party shall have been notified pursuant thereto, such service being hereby acknowledged by each party hereto to be effective and binding service in every respect. Each party hereto irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens which it may now or hereafter have to the bringing of any such arbitration proceeding in any jurisdiction. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any party to bring proceedings against the Borrower or any party hereto in any court or pursuant to arbitration proceedings in any other jurisdiction. [Remainder of Page Intentionally Left Blank] 21 IN WITNESS WHEREOF, this Loan Agreement has been executed this day by duly authorized officers of the undersigned parties. BORROWER: PPGx, Inc., a Delaware corporation By: /s/ Natalie J. Warner Name: Natalie J. Warner Title: CEO & President GUARANTORS: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation By: /s/ Fred B. Davenport, Jr. Name: Fred B. Davenport, Jr. Title: Vice President & General Counsel BANK: FIRST UNION NATIONAL BANK By: /s/ Shannon Townsend Name: Shannon Townsend Title: Vice President Annex A Form of Note $8,000,000 February __, 1999 PPGx, Inc., a Delaware corporation (the "Borrower"), promises to pay to the order of FIRST UNION NATIONAL BANK, its successor and assigns (the "Bank") on or before the Termination Date the principal sum of EIGHT MILLION DOLLARS ($8,000,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Borrower, in lawful money of the United States in immediately available funds at the office of the Bank as provided in the Loan Agreement referenced below or as otherwise directed by the Bank pursuant to the terms of the Loan Agreement, together with interest, in like money and funds, on the unpaid principal amount hereof at the rates and on the dates as set forth in the Loan Agreement. This Note is issued pursuant to, and is entitled to the benefits of, the Loan Agreement dated as of the date hereof (as the same may be amended or modified and in effect from time to time, the "Loan Agreement") among the Borrower, the Guarantors identified therein and the Bank, to which Loan Agreement reference is hereby made for a statement of the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Loan Agreement. In the event payment of amounts due hereunder are accelerated under the terms of the Loan Agreement, all such amounts shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby waived. Further, in the event this Note is not paid when due at any stated or accelerated maturity, the Borrower agrees to pay, in addition to principal and interest, all costs of collection, including reasonable attorneys' fees. This Note shall be governed by and construed in accordance with the laws of the State of North Carolina. PPGx, Inc., a Delaware corporation By:______________________________ Name: Title: Annex B Form of Joinder Agreement THIS JOINDER AGREEMENT (the "Agreement"), dated as of _____________, 19__, is by and between _____________________, a ___________________ (the "Applicant Guarantor"), and FIRST UNION NATIONAL BANK under that certain Loan Agreement dated as of February __, 1999 (as amended and modified, the "Loan Agreement") by and among PPGx, Inc., a Delaware corporation, as Borrower, the Guarantors identified therein and First Union National Bank. All of the defined terms in the Loan Agreement are incorporated herein by reference. The Applicant Guarantor has indicated its desire to become a Guarantor in accordance with the provisions Section 3.8 of the Loan Agreement to become, a Guarantor under the Loan Agreement. Accordingly, the Applicant Guarantor hereby agrees as follows with the Bank: 1. The Applicant Guarantor hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Applicant Guarantor will be deemed to be a party to the Loan Agreement and a "Guarantor" for all purposes of the Loan Agreement and the other Credit Documents, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Loan Agreement and the other Credit Documents. The Applicant Guarantor agrees to be bound by, all of the terms, provisions and conditions contained in the Credit Documents, including without limitation (i) all of the affirmative and negative covenants set forth in Section 6 the Loan Agreement and (ii) all of the undertakings and waivers set forth in Section 3 of the Loan Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Applicant Guarantor hereby (A) jointly and severally together with the other Guarantors, guarantees to the Bank as provided in Section 3 of the Loan Agreement, the prompt payment and performance of the Guaranteed Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) strictly in accordance with the terms thereof. and (B) agrees that if any of the Guaranteed Obligations are not paid or performed in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise), the Applicant Guarantor will, jointly and severally together with the other Guarantors, promptly pay and perform the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, as a mandatory prepayment, by acceleration, as a mandatory cash collateralization or otherwise) in accordance with the terms of such extension or renewal. 2. The Applicant Guarantor acknowledges and confirms that it has received a copy of the Loan Agreement and the Schedules and Exhibits thereto. The information on the Schedules to the Loan Agreement are amended to provide the information shown on the attached Schedule A. 3. The Applicant Guarantor hereby waives acceptance by the Bank of the guaranty by the Applicant Guarantor under Section 3 of the Loan Agreement upon the execution of this Joinder Agreement by the Applicant Guarantor. 4. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract. 5. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the Applicant Guarantor has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written. APPLICANT GUARANTOR By:___________________________ Name: Title: Address for Notices: Attn: _______________________ Telephone: Telecopy: Acknowledged and accepted: FIRST UNION NATIONAL BANK By:____________________________ Name: Title: Annex C Form of Legal Opinion February __, 1999 First Union National Bank Raleigh, North Carolina Re: $8 million Loan Agreement dated as of the date hereof (the "Loan Agreement") among PPGx, Inc., a Delaware corporation, the Guarantors identified therein and First Union National Bank. Terms used but not otherwise defined shall have the meanings provided in the Loan Agreement. Ladies and Gentlemen: I have acted as counsel to PPGx, Inc., Delaware corporation (the "Borrower"), Pharmaceutical Product Development, Inc., a North Carolina corporation, and those subsidiaries of the Borrower which are Guarantors under the Loan Agreement identified on Schedule A attached hereto (collectively with the Borrower, the "Credit Parties"), in connection with the execution and delivery by them of the Loan Agreement. This opinion is given in accordance with the requirements of Section 4.1(b) of the Loan Agreement. We have participated in the preparation of the Loan Agreement and the other Credit Documents, and have examined copies of each of the foregoing documents executed by the Credit Parties. We have also examined such certificates, documents and records, and have made such examination of law, as we have deemed necessary to enable us to render the opinions expressed below. In addition, we have examined and relied as to matters of fact upon representations and warranties contained in the Credit Documents and in certificates, copies of which have been furnished to you, in connection with the Credit Documents. For purposes of paragraph 4 below, we have assumed that the Credit Documents are the legal, valid and binding obligations of the parties thereto other than the Credit Parties, enforceable against them in accordance with their respective terms. The opinions expressed below are limited to matters governed by the internal laws of the State of North Carolina, the General Corporation Law of the State of Delaware and the federal laws of the United States of America. Whenever the phrase "to the best of our knowledge" is used herein, it refers to the actual knowledge of the attorneys of this firm involved in the representation of the Credit Parties without further investigation. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: 1. Each of the Credit Parties is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, as identified on Schedule A attached hereto, and is qualified to carry on its business in the manner as contemplated under the Credit Documents and as now conducted. 2. Each of the Credit Parties has all requisite corporate power and authority, and the legal right, to make, execute, deliver and perform the Loan Agreement and the other Credit Documents to which it is a party and to borrow and accept extensions of credit or give a guaranty in respect thereof, as appropriate, and has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Agreement and the other Credit Documents to which it is a party. 3. No consent or authorization of, filing with, notice to or other similar act by or in respect of, any federal court or Governmental Authority or any other Person is required to be obtained or made by or on behalf of any Credit Party on or prior to the date hereof in connection with the execution, delivery or performance of the Credit Documents, except for such consents, approvals, authorizations or other actions as have been obtained or made. 4. To the best of our knowledge, no claim, litigation or proceeding before any arbitrator or Governmental Authority is pending or threatened which if adversely determined would reasonably be expected to have a material adverse effect on the Borrower and its subsidiaries taken as a whole. 5. The Loan Agreement, and each of the other Credit Documents to which it is a party, have been duly executed and delivered by each Credit Party and constitute the legal, valid and binding obligations of each Credit Party, enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 6. The execution, delivery and performance by each Credit Party of the Loan Agreement and the other Credit Documents to which it is a party, the borrowings and guaranties thereunder and the use of the proceeds thereof will not violate or otherwise contravene the articles of incorporation or bylaws of any of the Credit Parties or any Requirement of Law or, to the best of our knowledge, any Contractual Obligation of any of the Credit Parties. The opinions expressed herein do not purport to cover, and we express no opinion with respect to, the applicability of Section 548 of the federal Bankruptcy Code or any comparable provision of state law, including the provisions relating to fraudulent conveyances. We call your attention to the fact that certain cases have held that an obligation of a corporation incurred to purchase such corporation's stock is subordinate to the claims of general creditors upon the bankruptcy or insolvency of the corporation. In addition, we express no opinion as to whether a subsidiary may guarantee, become a joint and several obligor or otherwise become liable for, or pledge its assets to secure, indebtedness incurred by its parent or another subsidiary of its parent except to the extent such subsidiary may be determined to have benefited from the incurrence of such indebtedness by its parent or such other subsidiary, or as to whether such benefit may be measured other than by the extent to which the proceeds of the indebtedness incurred by its parent or such other subsidiary are directly or indirectly made available to such subsidiary for its corporate purposes. This opinion is rendered solely for your benefit, and the benefit of your successors and assigns, in connection with the transactions described above. This opinion may not be used or relied upon by any other person without our prior written consent. Very truly yours, /s/ Fred B. Davenport, Jr. Counsel to the Borrower And the Guarantor EX-10 6 EXHIBIT 10.122 AMENDMENT NO. 1 THIS AMENDMENT NO. 1 (the "Amendment") dated as of January 30, 1999, to the Loan Agreement referenced below, is by and among PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation, the subsidiaries and affiliates identified on the signature pages hereto and FIRST UNION NATIONAL BANK. Terms used but not otherwise defined shall have the meanings provided in the Loan Agreement. W I T N E S S E T H WHEREAS, a $50 million credit facility has been established in favor of Pharmaceutical Product Development, Inc., a North Carolina corporation (the "Borrower"), pursuant to the terms of that Loan Agreement dated as of June 25, 1997 (as amended and modified, the "Loan Agreement") among the Borrower, the Guarantors identified therein and First Union National Bank (the "Bank"); WHEREAS, the Borrower has requested certain modifications to Loan Agreement; WHEREAS, the Bank has agreed to the modifications on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The Loan Agreement is amended in the following respects: 1.1 In Section 1, the following definitions are amended to read as follows: "APBI" means APBI Environmental Sciences Group, Inc., a Virginia corporation. "Consolidated Tangible Net Worth" means, on any day Consolidated Net Worth minus the aggregate amount of goodwill, franchises, licenses, patents, trademarks, trade names, copyrights, service marks, brand names, organizational and developmental expenses, covenants not to compete and other intangible assets, in each case as determined in accordance with GAAP applied on a consistent basis. For purposes hereof, Consolidated Tangible Net Worth shall not include that certain seller financing promissory note from current management of APBI in favor of the Company in an aggregate principal amount of up to $18,000,000 in connection with the sale of APBI to current management of APBI. "Termination Date" means June 30, 2000, or such later date as to which the Bank may agree in its sole discretion. 1.2 In Section 6.9, subsections (c) and (d) are renumbered as (f) and (g), respectively, and new subsections (c), (d) and (e) are added to read as follows: (c) Investments in and to Digital Arts & Science in an aggregate principal amount (on a cost basis) not to exceed $1,500,000 at any time; (d) Investments in and to Axys Pharmaceuticals, Inc. and/or PPGx, Inc. in an aggregate principal amount (on a cost basis) not to exceed $3,500,000 at any time; (e) seller financing promissory note from current management of APBI in favor of the Borrower in an aggregate principal amount not to exceed $18,000,000 in connection with the sale of APBI to current management of APBI; 1.3 In Section 6.6, subsections (a) and (b) are renumbered as (b) and (c), respectively, and a new subsection (a) is added to read as follows: (c) guaranty obligations of the Borrower in respect of Funded Debt of PPGx, Inc. in an aggregate principal amount of up to $8,000,000 at any time; 2. The Bank consents to the release of APBI from all of its obligations under the Loan Agreement, the Note and all other documents executed in connection therewith upon consummation of the sale of APBI to current management of APBI. 3. This Amendment shall be effective upon execution of this Amendment by the Credit Parties and the Bank. 4. Except as modified hereby, all of the terms and provisions of the Loan Agreement (including Schedules and Exhibits) shall remain in full force and effect. 5. The Borrower agree to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen, PLLC. 6. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 7. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the State of North Carolina. [Remainder of Page Intentionally Left Blank] 2 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWER: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation By: /s/ Fredric N. Eshelman Name: Fredric N. Eshelman Title: CEO GUARANTORS: PPD PHARMACO, INC., a Texas corporation By: /s/ Fredric N. Eshelman Name: Fredric N. Eshelman Title: CEO BANK: FIRST UNION NATIONAL BANK By: /s/ Shannon Townsend Name: Shannon Townsend Title: Vice President EX-10 7 EXHIBIT 10.123 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of the __30___ day of _January 1999______, by and among PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation (together with its successors, the "Borrower"); the subsidiaries and affiliates identified on the signature pages hereof (collectively, the "Guarantors"); and WACHOVIA BANK, N.A., a national banking association (together with its endorsees, successors and assigns, the "Bank"). R E C I T A L S: The Borrower, the Guarantors and the Bank are parties to a certain Loan Agreement dated as of August 7, 1997, as amended pursuant to an Amendment to Loan Agreement dated as of August 6, 1998 (the "Loan Agreement"). Capitalized terms used in this Amendment which are not otherwise defined in this Amendment shall have the respective meanings assigned to them in the Loan Agreement. The Borrower has requested certain modifications to the Loan Agreement and the Bank is willing to modify the Loan Agreement subject to the terms, provisions and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the Recitals, the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Guarantors and the Bank, intending to be legally bound hereby, agree as follows: SECTION 1. RECITALS. The Recitals are incorporated herein by reference and shall be deemed to be a part of this Amendment. SECTION 2. AMENDMENTS. Effective from and after the date of this Amendment, the Loan Agreement is hereby amended as follows: 2.1 In Section 6.6, subsection (b) is hereby amended and restated to read as follows: "(b) other Consolidated Funded Debt not to exceed $50,000,000, which includes the guaranty obligations of the Borrower in respect of Funded Debt of PPGx, Inc. in an aggregate principal amount of up to $8,000,000 at any time." 2.2 In Section 6.9 subsections (c) and (d) are re-lettered as (f) and (g), respectively, and new subsections (c), (d), and (e) are hereby added to Section 6.9 of the Loan Agreement to read as follows: "(c) Investments in and to Digital Arts & Science in an aggregate principal amount (on a cost basis) not to exceed $1,500,000 at any time; (d) Investments in and to Axys Pharmaceuticals, Inc. and/or PPGx, Inc, in an aggregate principal amount (on a cost basis) not to exceed $3,500,000 at any time; (e) seller financing promissory note from current management of APBI Environmental Sciences Group, Inc. in favor of the Borrower in an aggregate principal amount not to exceed $18,000,000 in connection with the sale of APBI Environmental Sciences Group, Inc. ("APBI") to current management of APBI;" 2.3 Upon consummation of the sale of APBI to current management of APBI, the Bank consents and agrees to the release of APBI from all of its obligations under the Loan Agreement, the Note and all other documents executed in connection therewith. SECTION 3. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment and the obligations of the Bank hereunder are subject to receipt by the Bank of the following: (a) an original Amendment, duly executed by the Borrower and the Guarantors; (b) a certificate of incumbency satisfactory to the Bank, certifying as to the names, true signatures and incumbency of the officer or officers of the Borrower and the Guarantors authorized to execute and deliver this Amendment; (c) such other documents or items as the Bank or its counsel may reasonably request. The effectiveness of this Amendment and the obligations of the Bank hereunder are further subject to the condition that no Event of Default or event or condition which with notice or lapse of time, or both, would constitute an Event of Default under the Loan Agreement, as hereby amended, shall have occurred and be continuing, and the representations and warranties contained in Section 5 of the Loan Agreement, as amended herein, are true on and as of the date hereof. SECTION 4. NO OTHER AMENDMENT. Except for the amendments set forth above, the Loan Agreement shall remain unchanged and in full force and effect. This Amendment is not intended to effect, nor shall it be construed as, a novation. The Loan 2 Agreement and this Amendment shall be construed together as a single agreement. Nothing herein contained shall waive, annul, alter, limit, diminish, vary or affect any provision, condition, covenant or agreement contained in the Loan Agreement, except as herein amended, nor affect or impair any rights, powers or remedies under the Loan Agreement as hereby amended. The Bank does hereby reserve all of its rights and remedies against all parties who may be or may hereafter become secondarily liable for the repayment of the Loan. The Borrower and the Guarantors promise and agree to perform all of the requirements, conditions, agreements and obligations under the terms of the Loan Agreement, as hereby amended, the Loan Agreement, as amended, being hereby ratified and affirmed. The Borrower and Guarantors hereby expressly agree that the Loan Agreement, as amended, is in full force and effect and confirm that they have no set off, counterclaim or defense with respect to the Loan Agreement, the Loan, the Note, the Guaranty contained in the Loan Agreement or the Guaranteed Obligations. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Borrower and the Guarantors hereby represent and warrant to the Bank as follows: (a) No Event of Default or event or condition which with notice or lapse or time, or both, would constitute an Event of Default under the Loan Agreement, as hereby amended, has occurred and is continuing on the date hereof. (b) The representations and warranties contained in Section 5 of the Loan Agreement, as amended herein, are true on and as of the date of this Amendment. (c) This Amendment has been duly authorized, validly executed and delivered by one or more authorized officers of the Borrower and the Guarantors, and constitutes the legal, valid and binding obligation of the Borrower and Guarantors enforceable against them in accordance with its terms. (d) The execution and delivery of this Amendment and the Borrower's and the Guarantors' performance hereunder do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Borrower or any Guarantor, nor be in contravention of or in conflict with the Articles of Incorporation or Bylaws of the Borrower or any Guarantor, or the provision of any statute, or any judgment, order or indenture, instrument, agreement or undertaking to which the Borrower or any Guarantor is party or by which the Borrower's or a Guarantor's assets or properties are or may become bound. SECTION 6. COUNTERPARTS. This Amendment may be executed in counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. 3 SECTION 7. GOVERNING LAW. This Amendment shall be deemed to be made pursuant to the laws of the State of North Carolina with respect to agreements made and to be performed wholly in the State of North Carolina and shall be construed, interpreted, performed and enforced in accordance therewith. SECTION 8. COSTS AND EXPENSES. The Borrower shall pay any and all out-of-pocket expenses in connection with the preparation, execution and delivery of this Amendment, including, without limitation, the fees and expenses of the Bank's counsel in connection therewith. SECTION 9. ENTIRE AGREEMENT. This Amendment contains the entire agreement of the parties with respect to the subject matter hereof, and there are no representations, inducements or other provisions among the parties regarding such subject matter other than those expressed herein in writing. All changes, additions or deletions to this Amendment must be in writing and signed by all parties. 4 IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized officers or representatives to execute and deliver this Amendment as of the day and year first above written. BORROWER: ATTEST: PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. /s/ Fred B. Davenport, Jr. By: /s/ Fredric N. Eshelman Secretary Title: CEO [CORPORATE SEAL] BANK: WACHOVIA BANK, N.A. By: /s/ Keith Sherman Title: SVP 5 GUARANTORS: ATTEST: PPD PHARMACO, INC. /s/ Fred B. Davenport, Jr. By: /s/ Fredric N. Eshelman Secretary Title: CEO [Corporate Seal] ATTEST: APBI ENVIRONMENTAL SCIENCES GROUP, INC. /s/ Fred B. Davenport, Jr. By: /s/ Fredric N. Eshelman Secretary Title:CEO [Corporate Seal] EX-10 8 EXHIBIT 10.124 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into effective as of this 1st day of February, 1999, by and between PPGx, INC., a Delaware corporation whose mailing and notice address is 11099 N. Torrey Pines Road, La Jolla, California 92037 Telephone: (619) and Facsimile: (619) (hereinafter called the "Corporation"), and PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation whose mailing and notice address is 3151 17th Street Extension, Wilmington, North Carolina 28412 Telephone: (910) 251-0081 and Facsimile: (910) 772-6951(hereinafter called "PPD"). RECITALS A. The parties have reached an understanding with respect to the issuance and sale of One Million Eight Hundred Thousand (1,800,000) shares of Series A Preferred Stock, par value $.001 per share, and One Hundred Eighty (180) shares of Common Stock, $.001 par value per share (collectively, the "Shares"), of the Corporation to PPD. B. The Corporation has agreed to issue and sell the Shares to PPD and PPD has agreed to purchase the Shares, all upon and subject to the terms and conditions set forth hereinafter. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements contained herein, and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties agree as follows: 1. Purchase and Sale of Shares. Subject to the terms and conditions of this Agreement, the Corporation agrees to sell and issue to PPD and PPD agrees to purchase the Shares. In connection with the issuance of the Shares, PPD agrees to execute and have the Shares subject to the terms of an Investors' Rights Agreement ("Investors' Rights Agreement") in the form of Exhibit A attached hereto and incorporated herein by reference. 2. Purchase Price. The purchase price to be paid by PPD in exchange for the issuance of the Shares shall be as follows: a. Cash. Payment by PPD to the Corporation of One Million Five Hundred Thousand Dollars ($1,500,000.00) in cash or other immediately available funds at Closing (as hereinafter defined). b. Intek Stock. Transfer by PPD to the Corporation of all of the issued and outstanding shares of capital stock of Intek Labs, Inc., a North Carolina corporation ("Intek"), owned by PPD. Such transfer shall be pursuant to and in accordance with the terms of the PPD Technology Transfer Agreement in the form of Exhibit B attached hereto and incorporated herein by reference. c. Software License. Assignment by PPD to the Corporation of all of PPD's rights, title and interest in and to that certain Software License Agreement dated February 1, 1999 between PPD and Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys"). Such assignment shall be pursuant to and in accordance with the terms of an Assignment and Assumption of License Agreement in the form of Exhibit C attached hereto and incorporated herein by reference. 3. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur contemporaneously with the execution of this Agreement and shall be effective as of the date of this Agreement (the "Closing Date"). 4. Representations, Warranties and Covenants of the Corporation. The Corporation represents and warrants to PPD and covenants with PPD that as of the date of Closing: a. Organization and Standing of the Corporation. The Corporation is duly organized and validly existing and has complied with all requirements to continue its existence under the laws of the State of Delaware, and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted. b. Capitalization. The authorized capital stock of the Corporation consists of Fifteen Million shares (15,000,000) of common stock, $.001 par value per share (the "Common Stock"), and Ten Million (10,000,000) shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"), of which Ten Million (10,000,000) shares of the Preferred Stock have been designated as Series A Preferred Stock. After giving effect to the sale and issuance of the Shares to PPD as contemplated by this Agreement and after giving effect to the sale and issuance of shares of Preferred Stock and Common Stock to Axys pursuant to a Stock Purchase Agreement dated an even date herewith, both of which are to be closed contemporaneously, one thousand (1,000) of the shares of the Common Stock shall be issued and outstanding and all of the Preferred Stock shall be issued and outstanding such that, upon issuance to PPD, the Shares shall represent Eighteen percent (18%) of all of the issued and outstanding shares of capital stock, both the Common Stock and Preferred Stock, of the Corporation as of the Closing. None of the Shares are being issued in violation of the preemptive or other rights of any person. c. Execution and Delivery Authorized. The execution and delivery of this Agreement, the issuance of the Shares to PPD, the adequacy of the consideration paid in exchange for the Shares under applicable law and the consummation of the transactions contemplated by this Agreement have been duly authorized and approved by the board of directors of the Corporation. d. Validity of Agreement. The execution and performance of this Agreement and the actions provided for or contemplated hereunder will not violate the provisions of any agreement, instrument or obligation to which the Corporation is a party or by which it is bound. Assuming due authorization, execution and delivery hereof by PPD, this Agreement constitutes the valid and binding agreement of the Corporation, enforceable against the Corporation 2 in accordance with its terms, subject as to enforceability to general equitable principles and to the laws of bankruptcy, insolvency or similar laws governing the rights of creditors. e. Title to Shares. Upon issuance to PPD, the Shares shall be free and clear from any liens, claims, restrictions or encumbrances of any kind or nature whatsoever, except for: (i) such restrictions contained in the Certificate of Incorporation or the Bylaws of the Corporation, as now in existence or hereafter amended in accordance with their respective terms, (ii) the terms and restrictions contained in the Investors' Rights Agreement attached hereto as Exhibit A, and (iii) any restrictions upon transfer arising under federal or state securities laws. The Corporation is not a party to or bound by any agreement, instrument, trust, proxy or understanding restricting or otherwise binding the ownership, transfer or voting of any of the Shares other than the Investors' Rights Agreement. Upon payment of the purchase price by PPD and issuance of the Shares to PPD, the Shares will be validly issued and will be fully paid and nonassessable. f. Certificate of Incorporation and Bylaws. True and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, as currently in force, have been delivered to PPD. The Certificate of Incorporation and Bylaws have not been and will not be amended prior to the Closing. 5. Representations, Warranties and Covenants of PPD. PPD represents and warrants to the Corporation and covenants with the Corporation that as of the date of Closing: a. Organization and Standing of PPD. PPD is duly organized and validly existing and has complied with all requirements to continue its existence under the laws of the State of North Carolina, and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted. b. Execution and Delivery Authorized. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the board of directors of PPD. c. Validity of Agreement. The execution and performance of this Agreement and the actions provided for or contemplated hereunder will not violate the provisions of any agreement, instrument or obligation to which PPD is a party or by which it is bound. Assuming due authorization, execution and delivery hereof by the Corporation, this Agreement constitutes the valid and binding agreement of PPD, enforceable against PPD in accordance with its terms, subject as to enforceability to general equitable principles and to the laws of bankruptcy, insolvency or similar laws governing the rights of creditors. d. Access and Information. PPD and its representatives have been afforded full and free access to the Corporation's financial statements and other information concerning the Corporation and PPD has been afforded an opportunity to ask such questions of the Corporation's officers, employees, agents, accountants and representatives concerning the Corporation's business, prospects, operations, financial condition, assets, liabilities and other 3 relevant matters, including the rights, preferences and limitations of the Shares, as PPD deems necessary or desirable and has been given all such information as has been requested, in order to evaluate the merits and risks associated with holding the Shares. PPD has conducted its own "due diligence" investigation of the Corporation and its management and business, and its own analysis of the merits and risks of holding the Shares, and its own analysis of the fairness and desirability of the terms governing the purchase of the Shares. PPD is familiar with the business conducted by the Corporation and has such knowledge and experience in financial and business matters that PPD is capable of evaluating the merits and risks of the purchase of the Shares pursuant to the terms of this Agreement and of protecting PPD's interests in connection therewith. e. Investment Intent of PPD. The Shares are being acquired by PPD for its own account and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). PPD understands that the Shares have not been, and will not be, registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, that the Corporation has no present intention of registering the Shares, that the Shares must be held by PPD indefinitely, and that PPD must therefore bear the economic risk associated with holding the Shares indefinitely, unless a subsequent disposition thereof is exempt from registration. PPD is able to bear the economic risk of holding the Shares pursuant to the terms of this Agreement. In addition to any other legends required by the Investors' Rights Agreement, each certificate evidencing the Shares shall be endorsed with the following legend: THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING SUCH SHARES, AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT THE TRANSACTION SHALL NOT RESULT IN A VIOLATION OF FEDERAL OR STATE SECURITIES LAWS. PPD acknowledges that no public market now exists for the Shares and that there can be no assurance that any public market will exist in the future. PPD understands that the Shares will constitute "restricted securities", and under the Securities Act and applicable regulations the Shares may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, PPD represents that it is familiar with Rule 144 under the Securities Act and understands the resale limitations imposed thereby and the Securities Act. 4 f. Accredited Investor Status. PPD represents and warrants that it is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act. 6. Additional Agreements. In addition to any other covenants and agreements of the parties set forth in this Agreement, the parties hereby agree as follows: a. Transfer of Employees by PPD. PPD agrees to use its reasonable best efforts to cause the full time employees with PPD Pharmaco, Inc., a Texas corporation, listed on Schedule 6.a. to accept employment with the Corporation as of the Closing Date and to cause all of the current employees of Intek and Intek Labs Limited, a wholly owned subsidiary of Intek , (except for Richard B. Sheridan III and Rosalee Chingara, both of whom shall resign as employees of Intek or Intek Labs Limited, as applicable effective as of the Closing and PPGx shall have no obligation to pay such employees any severance payments or benefits) to continue employment with Intek or Intek Labs Limited, as applicable, as of the Closing Date. The Corporation agrees to offer employment to any of such employees willing to accept such offer of employment (or to offer terms of continued employment with Intek, in the case of Intek employees) upon such terms and conditions as are mutually acceptable to the Corporation and each of such employees. b. Distributor Agreement. At Closing, PPD, or an affiliate of PPD, and the Corporation shall execute a Distributor Agreement in the form of Exhibit D attached hereto and incorporated herein by reference. c. Lease Assignments/Subleases. At Closing, PPD shall cause its subsidiary, Belmont Research, Inc., to enter into a Sublease with the Corporation for a portion of the building known as the Brickyard Office Park at 84 Sherman Street, Cambridge, Massachusetts (the "Sublease"). In addition, PPD and the Corporation shall execute at Closing a letter agreement (the "Letter Agreement") related to the leasing of space at Research Triangle Park, North Carolina, Cambridge, United Kingdom and Philadelphia, Pennsylvania. The Sublease and the Letter Agreement shall be upon terms and conditions mutually acceptable to PPD and the Corporation. 7. Conditions to PPD's Obligation to Close. The obligations of PPD under this Agreement are subject to the satisfaction, or the waiver thereof by PPD, of the following express conditions precedent on or before the Closing Date: a. Correctness of Warranties. All of the representations and warranties of the Corporation contained in this Agreement were true and correct when made and shall be true and correct at and as of the Closing Date (except such representations, warranties and matters which are specifically limited by reference to an earlier date and were true and correct as of such earlier date). 5 b. Performance of Obligations. The Corporation has performed and complied with all of the obligations, covenants and conditions required to be performed or complied in all material respects with by it at or prior to the Closing. c. No Adverse Change. There shall have been no material adverse change in the prospects for the business contemplated to be conducted by the Corporation. d. Documents to be Delivered by the Corporation at Closing. The Corporation shall deliver, or cause to be delivered, to PPD before or at the Closing the following documents: (i) A certificate in the name of PPD evidencing the Shares. (ii) The Investors' Rights Agreement in the form attached hereto as Exhibit A duly executed by the Corporation and Axys. (iii) The PPD Technology Transfer Agreement in the form attached as Exhibit B duly executed by the Corporation. (iv) The Assignment and Assumption of License Agreement in the form attached as Exhibit C duly executed by the Corporation and Axys. (v) The Distributor Agreement in the form attached hereto as Exhibit D duly executed by the Corporation. (vi) The Sublease and the Letter Agreement, both duly executed by the Corporation. (vii) Such other documents as PPD shall reasonably request, duly executed by all parties thereto, including the Stock Purchase Agreement between the Corporation and Axys, the Axys Technology Transfer Agreement between the Corporation and Axys, the Most Favored Nations Agreement between the Corporation and Axys, the Registration Rights Agreement by and among the Corporation, PPD and Axys and the Equity Incentive Plan for the benefit of the Corporation's employees and consultants. 8. Governing Law. This Agreement shall be governed by and shall be construed in accordance with the laws of the State of Delaware. 9. Entire Agreement. This Agreement contains the entire understanding between the parties and supersedes any prior understandings or agreements between them affecting the subject matter. No changes, alterations, amendments, modifications, additions or qualifications to the terms of this Agreement shall be made or be binding unless made in writing and signed by each of the parties. 6 10. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at their respective addresses first set forth above (or at such other address for a party as shall be specified by like notice. 11. Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties, their heirs, legal representatives, successors and permitted assigns. 12. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 13. Entire Agreement. This Agreement, together with the recitals, exhibits and schedules, contains the entire understanding of the parties hereto with respect to the transactions contemplated herein, and any prior agreements or understandings, whether oral or written, are entirely superseded hereby. 14. Documentation. The parties agree to execute and/or provide any and all other documents, instruments, or other papers and to conduct such transactions as may be reasonably necessary or desirable to effectuate the provisions of this Agreement. 15. Provisions to Survive Closing. All of the representations, warranties, covenants and agreements of the Corporation and PPD set forth in or made pursuant to this Agreement shall survive the Closing and delivery of and payment for the Shares. IN WITNESS WHEREOF, the Corporation and PPD have caused this Agreement to be executed through their duly authorized officers as of the date first written above. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fredric N. Eshelman Name:Fredric N. Eshelman Title:CEO PPGx, INC. By: /s/ Natalie J. Warner Name:Natalie J. Warner Title:CEO & President EX-10 9 EXHIBIT 10.125 SOFTWARE LICENSE AGREEMENT This SOFTWARE LICENSE AGREEMENT (the "Agreement") is made and entered into effective as of the 31st day of January, 1999 (the "Effective Date"), by and between AXYS PHARMACEUTICALS, INC., a Delaware corporation having a principal place of business at 180 Kimball Way, South San Francisco, California 94080 ("Axys"), and PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation having a place of business at 3151 17th Street Extension, Wilmington, North Carolina 28412 ("Licensee"). Axys and Licensee may be referred to herein individually as a "Party" and collectively as the "Parties." RECITALS WHEREAS, Sequana Therapeutics, Inc., as a wholly-owned subsidiary of Axys Pharmaceuticals, Inc., has developed certain software and data relating to the sequencing and study of genes with applications in the field of Pharmacogenomics; and WHEREAS, Axys has licensed (with right of sublicense) all of the intellectual property Controlled by Sequana Therapeutics, Inc., including without limitation rights in the Axys Software (as defined below); and WHEREAS, Licensee desires to obtain certain license rights to such software and database for use in the field of Pharmacogenomics and Axys is willing to grant such rights upon the terms and conditions set forth herein. NOW, THEREFORE, the parties hereby agree as follows: AGREEMENT 1. DEFINITIONS. 1.1 "AXYS DERIVATIVES" means Derivative Works of the Axys Software or Database created by or for Axys including, without limitation, bug fixes, error corrections, new developments and improvements with respect thereto, but specifically excluding any Licensee Derivatives. For clarity, the parties acknowledge that, unless otherwise agreed in writing by the parties, any software code written by Axys for Licensee pursuant to a software development agreement between Axys and the Licensee shall not be deemed to be included within the meaning of the term "Axys Derivatives" and shall not be subject to this Agreement. 1.2 "AXYS SOFTWARE" means the software Controlled by Axys which is set forth in Exhibit 1.3 including, without limitation, the Gene Trials Software, LIMS Software, Target Validation System V.1 and Target Validation System V.2. 1.3 "CONFIDENTIAL INFORMATION" means any and all proprietary and confidential information of either Party, whether technical or non-technical, including patent, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future and proposed products and services, and includes, without limitation, each Party's respective information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing, manufacturing, customer lists, business forecasts, sales and merchandising, and marketing plans and information, whether in oral, written, graphic or electronic form. Notwithstanding the foregoing, the Axys Software and Database shall be deemed the Confidential Information of Axys. In addition, Axys Derivatives shall be deemed the Confidential Information of Axys and Licensee Derivatives shall be deemed the Confidential Information of Licensee. 1.4 "CONTROLLED" means, with respect to any material, information or intellectual property right, that Axys owns, has a license to or otherwise has lawful access to such material, information or intellectual property right, and has the ability to grant to PPGx access, a license, or a sublicense to such material, information or intellectual property right as provided for in the Agreement without violating an agreement with a Third Party as of the Effective Date. 1.5 "DATABASE" means (i) the compilation of data and other information contained in Axys' proprietary Allele Frequency Database as of the date of the initial delivery (as set forth in Section 5.1 (Initial Delivery)) including, without limitation, genetic and associated data, including sequences, pertaining to single nucleotide polymorphisms and medical and general demographic data on reference populations, and (ii) raw uncompiled data collected, as of the date of the initial delivery (as set forth in Section 5.1 (Initial Delivery)), in connection with the compilation of data comprising such Allele Frequency Database, whether collected by questionnaire or otherwise. For clarification, "Database" does not include any Axys Software or Third Party Software. The Database shall include, without limitation, the polymorphisms listed in the schedules delivered to Licensee by Axys by confidential letters dated January 26 and 28, 1999. 1.6 "DERIVATIVE WORK" shall mean a work which is based on one or more pre-existing software programs or other works of authorship, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion or any other form in which such software or work may be recast, transformed, or adapted, and which, if prepared without the authorization of the owner of the copyright in the software, would constitute a copyright infringement. 1.7 "DOCUMENTATION" means any existing and available documentation of Axys for the Axys Software and Database, whether in printed or electronic format. By way of illustration, such Documentation may include a description of the full development environment, revision history, source code control systems, validation test plans, user manuals and all material SOP's in effect during the development of the Axys Software and Database, but only to the extent that such documents are existing and in Axys' possession or control as of the date of the initial delivery (as set forth in Section 5.1 (Initial Delivery)). 1.8 "INTELLECTUAL PROPERTY RIGHTS" means any and all intellectual property rights in any country or jurisdiction worldwide arising under statutory law, common law or by contract and whether or not perfected, including without limitation all (i) patents, patent applications, and patent rights; (ii) rights associated with works of authorship including copyrights, copyright applications, copyright registrations; (iii) rights relating to the production of trade secrets and confidential information; (iv) any rights analogous to these set forth in this Section 1.7 and any other proprietary rights relating to intellectual property; and (v) divisions, continuations, renewals, reissues and extensions of the foregoing (as and to the extent applicable) now existing, hereafter filed, used or acquired. 1.9 "LICENSEE DERIVATIVES" means Derivative Works of the Axys Software or Database created by or for Licensee or its sublicensees and including, without limitation, bug fixes, error corrections, new developments and improvements relating thereto, but specifically excluding the Axys Software, the Database and any Axys Derivatives. A Derivative Work will not be considered a Licensee Derivative if (i) a programmer, reasonably skilled in the art, could not trace the Derivative Work to the Axys Software from either its literal form or based upon its features or functionality; or (ii) the database does not contain substantial elements or portions of the Database. 2 1.10 "LIMS SOFTWARE" shall mean the LIMS Software, a component of the Axys Software, as set forth in Exhibit 1.3. 1.11 "PHARMACOGENOMICS" shall have the meaning set forth in the Technology Transfer and License Agreement executed by and between Axys Pharmaceuticals, Inc. and PPGx, Inc. on February 1, 1999. 1.12 "TARGET VALIDATION SYSTEM V.1" means version 1 of a component of the Axys Software including the human-readable source code, machine-executable object code, compiled database and any related Documentation. 1.13 "TARGET VALIDATION SYSTEM V.2" means version 2 of a component of the Axys Software currently under development by Axys including the human-readable source code, machine-executable object code, compiled database and any related Documentation. 1.14 "THIRD PARTY SOFTWARE" means the third party software required to perform or operate the Axys Software or Database including, without limitation, the third party software described in Exhibit 1.14 (Third Party Software). 2. LICENSE GRANTS AND RESTRICTIONS. 2.1 LICENSE GRANTS. (A) AXYS SOFTWARE AND DATABASE. Subject to the terms and conditions of this Agreement, Axys hereby grants to Licensee a restricted, exclusive (except as set forth in Section 2.3 (Reservation of Rights)), fully-paid, royalty-free, worldwide, nontransferable (except as set forth in Section 12.9 (Assignment)), perpetual, irrevocable (except as set forth in Section 11.2 (Axys Termination for Breach)) license to use, reproduce, perform, display publicly, create Derivative Works of, distribute and sublicense (through multiple tiers of sublicensees) the Axys Software and Database solely for use in the field of Pharmacogenomics. Notwithstanding any contrary provision of this Agreement, Licensee's right to use, reproduce, perform, display publicly, create Derivative Works of, distribute and sublicense (through multiple tiers of sublicensees) the LIMS Software and the Target Validation System V.1 and V.2 shall not be restricted to use in the field of Pharmacogenomics. (B) THIRD PARTY SOFTWARE. Subject to the terms and conditions of this Agreement and the applicable Third Party Software license agreement, Axys hereby grants to Licensee a sublicense to such Third Party Software consistent with the rights granted to, and obligations and restrictions imposed on, Axys by the applicable Third Party Software licensor. In the event Axys does not have the right to grant such sublicenses, Axys shall use commercially reasonable efforts to assist Licensee in obtaining at Licensee's expense such required licenses directly from the Third Party Software licensor. 2.2 LICENSE RESTRICTIONS. Licensee shall not, directly or indirectly, use, distribute or sublicense the Axys Software, Database or Licensee Derivatives (so long as they remain Licensee Derivatives) for use outside of the field of Pharmacogenomics. All proprietary rights notices on the Axys Software and Database shall be reproduced and applied to all authorized copies, including Licensee Derivatives. In addition, Licensee's rights to sublicense the Axys Software, Database and Licensee Derivatives shall be subject to the restrictions imposed in Section 4 (Sublicensing of the Axys Software and Database). 2.3 RESERVATION OF RIGHTS. Notwithstanding any contrary provision of this Agreement, the license of the LIMS Software and the Target Validation System V.1 and V.2 to Licensee is nonexclusive. Axys also hereby expressly reserves the right to use, reproduce, 3 perform, display publicly, create Derivative Works of, distribute and license (through multiple tiers of sublicensees) the Axys Software, Database and any Axys Derivatives for any purpose or activity outside the field of Pharmacogenomics and in Axys' internal drug discovery and development activities. In no event shall Licensee's exclusive rights granted under Section 2.1 affect in any manner any licenses to the Axys Software, Database or Axys Derivatives granted by Axys prior to the Effective Date, it being acknowledged by the parties that Licensee is being granted such exclusive rights under Section 2.1 only as Axys is able to grant as of the Effective Date. To the extent that such information is not confidential, Axys shall identify such licensees and provide to PPGx a summary description of the rights granted to them by Axys, in Schedule 2.3 attached hereto. Any such information disclosed to PPGx shall be deemed to be the Confidential Information (as such term is defined in Article 10 herein) of Axys. 3. OWNERSHIP. 3.1 AXYS OWNERSHIP. Licensee agrees that Axys shall retain its sole and exclusive ownership of all right, title and interest to the Axys Software, Database and any Axys Derivatives, and including all Intellectual Property Rights thereto, but specifically excluding any Third Party Software contained therein. Except for the rights expressly enumerated herein, Axys does not grant any Intellectual Property Rights or any other rights or licenses with respect to the Axys Software and Database. 3.2 LICENSEE OWNERSHIP OF LICENSEE DERIVATIVES. Axys agrees that Licensee shall retain the sole and exclusive ownership of all right, title and interest to any Licensee Derivatives, and including any Intellectual Property Rights thereto, but specifically excluding the Axys Software, Database and any Third Party Software contained therein. 3.3 THIRD PARTY SOFTWARE. Both Parties acknowledge and agree that, except for the licenses granted in the applicable Third Party Software license agreement, the licensors of such Third Party Software shall retain all right, title and interest including any Intellectual Property Rights, to its Third Party Software. 4. SUBLICENSING OF THE AXYS SOFTWARE AND DATABASE. 4.1 LICENSEE SOURCE CODE SUBLICENSE. Licensee acknowledges and agrees that in order to maintain the economic value of the Axys Software, any sublicense entered into by Licensee of all or any portion of the source code of the Axys Software in source code format (herein "Licensee Source Code"), and any sublicense of the source code of the Licensee Derivatives (so long as they remain Licensee Derivatives) where indicated, shall be restricted as follows: (A) All such sublicenses shall be in writing and executed by the third party sublicensee and shall provide, at a minimum, that (i) the Licensee Source Code and any source code of the Licensee Derivatives is licensed, not sold, to the sublicensee and, except for the LIMS Software and Target Validation System V.1 and V.2, is for use solely in the field of Pharmacogenomics; (ii) Axys, as the original licensor, retains ownership of all copies of the Licensee Source Code; (iii) all rights not expressly granted to sublicensee are reserved for Licensee and Axys; (iv) sublicensee shall not sublicense, assign or otherwise transfer the Licensee Source Code to any third party without the prior written consent of Licensee; (v) Licensee shall retain the right to terminate the sublicense in the event the sublicensee materially breaches any term or condition; and (vi) upon termination of the sublicense, the sublicensee shall promptly destroy the Licensee Source Code and all copies. (B) Axys shall be named a third party beneficiary of any sublicenses of the Licensee Source Code; 4 (C) The third party shall agree to use the Licensee Source Code solely for its internal purposes and agrees to maintain written records of the location of each copy of the Licensee Source Code and permit audit of such records by Licensee; (D) Except as related to the LIMS Software and Target Validation System V.1 and V.2, the sublicenses shall restrict the use of the Licensee Source Code, the source code of any Licensee Derivatives, and any Derivative Works created by or for the third party, to the field of Pharmacogenomics. (E) Licensee shall provide Axys the names of all sublicensees of the Licensee Source Code once every six (6) months and, upon Axys' request, will send a copy of all such sublicenses to Axys, although Licensee may delete information relating to the sublicense fees and other financial terms from such copies. The names of the sublicensees and any sublicenses provided to Axys shall be deemed the Confidential Information of Licensee. In the event any sublicensee refuses to agree that Licensee can provide its name to Axys, Licensee shall not be obligated to do so; provided that Licensee shall have to provide a copy of the sublicense with such sublicensee upon any reasonable request of Axys relating to the protection of its property or rights. (F) Licensee agrees to report any violations by any third party of the confidentiality, ownership and other provisions that are important to maintain the value of the Intellectual Property Rights in the Axys Software and agrees to assist Axys at Axys' expense in enforcing such provisions. 4.2 LICENSEE OBJECT CODE SUBLICENSE. Axys acknowledges and agrees that Licensee may sublicense the machine-executable object code of the Axys Software and/or Licensee Derivatives (so long as they remain Licensee Derivatives) in object code format (herein "Licensee Object Code") to third parties in accordance with its standard licensing practices; provided that such sublicenses only grant the third parties sublicensees the right to use such Licensee Object Code (except for the LIMS Software and Target Validation System V.1 and V.2) in the field of Pharmacogenomics and such sublicenses include prohibitions on obtaining the human-readable source code of the Axys Software through reverse engineering. Such Licensee Object Code licenses may include a source code escrow provision; provided that (i) a reputable source code escrow agency will maintain the Licensee Source Code (as defined in Section 4.1 above); (ii) the license to use the Licensee Source Code in the event the licensee rightfully receives the source code from the escrow agent shall be restricted to maintaining the Licensee Object Code (except for the LIMS Software and the Target Validation System V.1 and V.2) for use in the field of Pharmacogenomics; and (iii) Licensee agrees to promptly notify Axys of each release of the Licensee Source Code from the escrow account. 4.3 LICENSEE DATABASE SUBLICENSE. Licensee acknowledges and agrees that in order to maintain the economic value of the Database, any sublicense entered into by Licensee of all or any portion of the Database, or any Licensee Derivatives of the Database (so long as they remain Licensee Derivatives), shall be restricted to use in the field of Pharmocogenomics and shall include prohibitions on reproducing or distributing the Database, its contents, or any part thereof, for other than internal use by the sublicensee. Notwithstanding the restrictions set forth in this Agreement, data retrieved from the Database may be manipulated, analyzed, reformatted, printed and, to the extent necessary for patent applications and for publication in scientific journals, displayed publicly and/or published by Licensee and its sublicensees; provided that the foregoing prohibition shall not preclude Licensee from creating and demonstrating marketing demos of the Database and Licensee Derivatives to third parties under appropriate confidentiality agreements. 4.4 AXYS DATABASE LICENSE. In consideration of the amounts paid to Axys by Licensee for the Axys Software and Database, Axys hereby acknowledges and agrees that it shall 5 not license, publish or otherwise disclose the contents of the Database, in whole or in part, except as set forth in Section 2.3 (Reservation of Rights) and subject to the confidentiality restrictions set forth in Section 10.2 (Axys Software and Database Confidentiality). Any license of the Database by Axys shall include prohibitions on reproducing or distributing the Database, its contents, or any part thereof for any use that is inconsistent with Axys' reserved rights set forth in Section 2.3. Notwithstanding the restrictions set forth in this Agreement, data retrieved from the Database may be manipulated, analyzed, reformatted, printed and, to the extent necessary for patent applications and for publication in scientific journals, displayed publicly and/or published by Axys and its licensees; provided that the foregoing prohibition shall not preclude Axys from creating and demonstrating marketing demos of the Database and Axys Derivatives to third parties under appropriate confidentiality agreements. 4.5 NO OTHER TRANSFER OF RIGHT, TITLE OR INTEREST. Except as set forth in Sections 4.1 (Licensee Object Code Sublicense), 4.2 (Licensee Source Code Sublicense), Section 4.3 (Licensee Database Sublicense) and 12.9 (Assignment), Licensee shall not grant any right, title or interest in or to the Axys Software or the Database without the prior written consent of Axys, which consent shall not be unreasonably withheld. 5. DELIVERY AND ACCEPTANCE. 5.1 INITIAL DELIVERY. Within thirty (30) days of the execution of this Agreement or as otherwise agreed between Axys and Licensee, Axys shall provide to Licensee: (i) one (1) copy of the Axys Software (excluding the Target Validation System V.2) in machine-executable object code; (ii) one (1) copy of the Axys Software (excluding the Target Validation System V.2) in human-readable source code; (iii) one (1) copy of the Database; and (iv) one (1) copy of any related Documentation. Such Axys Software, Database and Documentation shall be provided electronically or in such other form as mutually agreed to by the Parties. 5.2 DELIVERY OF TARGET VALIDATION SYSTEM V.2. Upon its availability for public release, Axys shall deliver to Licensee: (i) one (1) copy of the Target Validation System V.2, in machine-executable object code; (ii) one (1) copy of the Target Validation System V.2, in human-readable source code; and (iii) one (1) copy of any related Documentation. In addition for a period of six (6) months after the delivery of the Target Validation System V.2, Axys shall provide Licensee with bug fixes and error corrections to the Target Validation System V.2 that are developed, at Axys' sole discretion, and publicly released by Axys. 5.3 ACCEPTANCE. Licensee acknowledges and agrees that because Licensee has had the opportunity to inspect the Axys Software, Database and related Documentation prior to execution of this Agreement, the Axys Software, Database and Documentation shall be deemed accepted upon delivery; provided, however, that Axys delivers the Axys Software that is identified in Exhibit 1.3 and the Database and Documentation that conforms to the description set forth herein. Licensee shall have a period of thirty (30) days from the respective delivery dates of the Axys Software, Database and Documentation to notify Axys, in writing, of any discrepancies in the Axys Software, Database and Documentation delivered by Axys to Licensee. Licensee's sole and exclusive remedy, and Axys' sole and exclusive obligation, regarding any identified discrepancies in such delivery shall be for Axys to promptly resolve the discrepancies and redeliver as promptly as practical such of the Axys Software, Database and Documentation to Licensee as is necessary to fulfill Axys' delivery obligations hereunder. 6. PAYMENT AND TAXES. 6.1 LICENSEE FEES. In consideration of the licenses and other rights granted to Licensee herein, Licensee shall pay to Axys a one-time, non-refundable license fee of Two Million Dollars ($2,000,000) immediately upon the execution of this Agreement. 6 6.2 TAXES. Licensee agrees to pay, and to indemnify and hold Axys harmless from, any and all taxes, including without limitation sales taxes, use taxes and filing fees, as well as the collection or withholding thereof, imposed upon or arising out of the licenses granted to Licensee hereunder, but excluding any taxes based on the net income of Axys. 7. REPRESENTATIONS AND WARRANTIES. 7.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Each Party hereby represents and warrants to the other Party that: (A) it has the full corporate power and authority under the laws of the state of its incorporation to enter into this Agreement and to carry out the provisions hereunder; (B) to its knowledge as of the date of this Agreement, the performance by either Party of the activities under this Agreement will not infringe any Intellectual Property Rights owned by a third party; (C) it will not take any material action or fail to take any material action which would be in conflict with its obligations under this Agreement; (D) this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance; and (E) the execution, delivery and performance of this Agreement by it does not materially conflict with any agreement, oral or written, to which it is a Party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. 7.2 AXYS REPRESENTATIONS AND WARRANTIES. Axys represents and warrants to Licensee that: (A) Axys has the full right to grant the licenses set forth in Section 2 (License Grants and Restrictions) hereof, free and clear of any adverse assignment, grant or other encumbrance inconsistent with such grant, subject to Axys' reservation of rights set forth in Section 2.3 (Reservation of Rights); and (B) to Axys' knowledge as of the date of this Agreement, the Axys Software and Database does not contain any Computer Virus and Axys shall use due diligence in screening the Axys Software and Database prior to delivery to Licensee to minimize the possibility of the introduction of an identified and acknowledged Computer Virus into Licensee's systems. For purposes of this Agreement, a "Computer Virus" is an undocumented and unauthorized program designed to cause a loss of, or damage to, data files; or to gain access to, and/or interfere with, the operations of, other programs or computer resources, or any other results not intended by the user of the computer system on which the virus resides. (C) Prior to the Effective Date, Axys has not licensed, sold or transferred, or agreed to license, sell or transfer, the Database to any third party. 7.3 AXYS DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 7 (REPRESENTATIONS AND WARRANTIES), THE AXYS SOFTWARE, DATABASE AND DOCUMENTATION ARE PROVIDED TO LICENSEE ON AN "AS IS" 7 BASIS AND AXYS HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS, IMPLIED AND STATUTORY WHETHER ARISING FROM COURSE OF DEALING OR USAGE OF TRADE INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. AXYS DOES NOT REPRESENT OR WARRANT THAT THE AXYS SOFTWARE AND DATABASE WILL MEET THE LICENSEE'S NEEDS OR WILL BE FREE FROM ERRORS OR OMISSIONS AND AXYS HEREBY EXPRESSLY DISCLAIMS ANY WARRANTY OF SEQUENCE, ACCURACY OR COMPLETENESS OF THE DATA. 8. INDEMNIFICATION. 8.1 LICENSEE INDEMNITY. Licensee acknowledges that Axys is not directly or indirectly engaged in the practice of medicine and that all medical-related information in or provided by the Axys Software or Database is provided for research and informational purposes only. Licensee further acknowledges that the Axys Software and Database is not designed or intended for use in providing advice or opinions on the treatment or care of an individual patient and that all business, research and clinical decisions made using the Axys Software or Database will be Licensee's exclusive responsibility. Licensee hereby agrees to indemnify and defend Axys from any costs, damages, and reasonable attorneys' fees resulting from all claims by third parties (i) arising from any act, omission, failure to act, or misrepresentation by Licensee in its use or sublicense of the Axys Software or Database; (ii) arising, directly or indirectly, out of any medical, health care, clinical trial, drug discovery or drug development decision made by Licensee or any of its sublicensees whether or not such decision arose out of or relates to the use of the Axys Software or Database, in whole or in part; or (iii) any intentional misconduct of Licensee occurring after the Effective Date; provided that Axys gives Licensee prompt written notice of any such claim, tenders to Licensee the defense or settlement of such a claim at Licensee's expense, and cooperates with Licensee, at Licensee's expense, in defending or settling such claim. The rights granted to Axys under this Section 8.1 (Licensee Indemnity) shall be Axys' sole and exclusive remedy and Licensee's sole obligation for any such third party claim. 8.2 AXYS INDEMNITY. Axys hereby agrees to indemnify and defend Licensee from any costs, damages, and reasonable attorneys' fees resulting from all claims by third parties arising from (i) any breach by Axys of any of the representations and warranties made by Axys to Licensee under this Agreement or (ii) any intentional misconduct of Axys occurring after the Effective Date; provided that Licensee gives Axys prompt written notice of any such claim, tenders to Axys the defense or settlement of such a claim at Axys' expense, and cooperates with Axys, at Axys' expense, in defending or settling such claim. The rights granted to Licensee under this Section 8.2 (Axys Indemnity) shall be Licensee's sole and exclusive remedy and Axys' sole obligation for any such third party claim. 8.3 LIMITATION ON INDEMNITY. Neither Party shall be entitled to indemnification under this Article 8, notwithstanding any other provision hereof to the contrary, to the extent that the events giving rise to the claim for which indemnification is sought are due to the intentional misconduct or negligence of the Party seeking indemnification, or any of its officers, directors, employees or agents. 9. LIMITATION OF LIABILITY. Neither Party shall be liable to the other Party or any third party for any loss of use, interruption of business or any indirect, special, incidental or consequential damages of any kind (including lost profits) regardless of the form of action whether in contract, tort (including negligence), strict product liability or otherwise, arising out of this Agreement or the existence, furnishing, functioning or use of or inability to use the Axys Software or Database, or to any third party with respect thereto, even if such Party has been advised of the possibility of such damages. In no event shall either Party's liability under this 8 Agreement, whether in contract, tort (including negligence) or otherwise, exceed the license fee paid by Licensee hereunder. The foregoing limitations shall apply even if the above stated warranties fail of their essential purpose. Notwithstanding the foregoing, Licensee's limitation of liability hereunder shall not apply to any breach of this Agreement related to the scope of the licenses granted in Section 2 (License Grants and Restrictions) or ownership and protection of Axys' proprietary rights set forth in Section 3.1 (Axys Ownership). 10. CONFIDENTIALITY. 10.1 CONFIDENTIALITY. During the term of this Agreement and thereafter, each Party hereto will maintain in confidence all Confidential Information disclosed by the other Party hereto. Neither Party will use, disclose or grant use of such Confidential Information except as expressly authorized by this Agreement. To the extent that disclosure is authorized by this Agreement, the disclosing Party will obtain prior agreement from its employees, agents or consultants to whom disclosure is to be made to hold in confidence and not make use of such information for any purpose other than those permitted by this Agreement. Each Party will use at least the same standard of care as it uses to protect its own Confidential Information to ensure that such employees, agents or consultants do not disclose or make any unauthorized use of such Confidential Information. Each Party will promptly notify the other Party upon discovery of any unauthorized use or disclosure of the Confidential Information. 10.2 AXYS SOFTWARE AND DATABASE CONFIDENTIALITY. Axys hereby agrees to (i) maintain the Axys Software and Database as its Confidential Information; (ii) to obtain prior agreement from any third parties to whom disclosure is made to hold such Confidential Information in confidence and not make use of such Confidential Information for any unauthorized purpose; and (iii) to use at least the same standard of care and due diligence Axys uses to protect its other Confidential Information which Axys has disclosed to third parties to ensure that such third parties do not disclose or make any unauthorized use of the Axys Software and Database. 10.3 EXCEPTIONS. Notwithstanding the other provisions of this Agreement, nothing received by the receiving Party will be considered to be the Confidential Information of the other disclosing Party if: (A) It has been published or is otherwise readily available to the public other than by a breach of this Agreement; (B) It has been rightfully received by the receiving Party from a third party without confidential limitations; (C) It has been independently developed for the receiving Party by personnel or agents having no access to the disclosing Party's Confidential Information; or (D) It was known to the receiving Party prior to its first receipt from the disclosing Party. 11. TERMINATION. 11.1 TERM. The term of this Agreement shall commence as of the Effective Date and shall continue until terminated pursuant to Section 11.2 (Termination for Breach) below. 11.2 TERMINATION FOR BREACH. 9 (A) Axys may terminate this Agreement and all licenses granted by Axys hereunder upon thirty (30) days' written notice of a material breach of this Agreement by Licensee that is likely to cause irreparable damage to Axys' Intellectual Property Rights in the Axys Software or Database for which recovery of money damages would be inadequate, if such breach is not cured within such thirty (30) day period or, if such breach cannot reasonably be expected to be cured within such thirty (30) day period, Licensee has not commenced within such thirty (30) day period best efforts to effect such cure as promptly as possible and has not continued to use its best efforts in the exercise of prudent business judgment until such cure is effected; provided that in no event shall the period in which to cure such breach exceed one hundred eighty (180) days from Axys' written notice of a material breach of this Agreement. (B) Licensee may terminate this Agreement upon thirty (30) days' written notice of a material breach of this Agreement by Axys for which recovery of money damages would be inadequate, if such breach is not cured within such thirty (30) day period or, if such breach cannot reasonably be expected to be cured within such thirty (30) day period, Axys has not commenced within such thirty (30) day period best efforts to effect such cure as promptly as possible and has not continued to use its best efforts in the exercise of prudent business judgment until such cure is effected; provided that in no event shall the period in which to cure such breach exceed one hundred eighty (180) days from Licensee's written notice of a material breach of this Agreement. 11.3 EFFECTS OF TERMINATION. (A) RETURN OF AXYS SOFTWARE, DATABASE AND CONFIDENTIAL INFORMATION. Upon termination of this Agreement pursuant to Section 11.2 (Axys Termination for Breach) above, Licensee will promptly return or destroy the Axys Software and Database and all copies thereof, in its possession, and promptly return to Axys any and all Confidential Information of Axys, existing in tangible form. Upon termination of this Agreement pursuant to Section 11.2 above, Axys will promptly return to Licensee any and all Confidential Information of Licensee, existing in tangible form. (B) LICENSEE DERIVATIVES. Upon termination of this Agreement pursuant to Section 11.2 above, Licensee shall discontinue all use of and shall destroy all copies of the Licensee Derivatives, to the extent that such Licensee Derivatives contain or incorporate the Axys Software, Database, or any component thereof or information therein. (C) EXISTING SUBLICENSES. Termination of this Agreement and the licenses granted to Licensee shall not affect any sublicenses granted by Licensee prior to the date of termination, so long as such sublicensees continue to comply with the restrictions set forth in Section 4 (Sublicensing of Axys Software and Database). (D) NO LIABILITY. Each Party understands that the rights of termination hereunder are absolute. Neither Party shall incur any liability whatsoever for any damage, loss or expenses of any kind suffered or incurred by the other arising from or incident to any termination of this Agreement, by such Party or any expiration hereof which complies with the terms of the Agreement, whether or not such Party is aware of any such damage, loss or expenses. In particular, without in any way limiting the foregoing, neither Party shall be entitled to any damages on account of prospective profits or anticipated sales. (E) SURVIVAL. The provisions of Sections 1 (Definitions), 3 (Ownership), 4 (Sublicensing of the Axys Software and Database), 6 (Payment and Taxes), 7 (Representations and Warranties), 8 (Indemnification), 9 (Limitation of Liability), 10 (Confidentiality), 11.3 (Effects of Termination), and 12 (General Provisions) shall survive termination of this Agreement for any reason. 10 12. GENERAL PROVISIONS. 12.1 NO AGENCY. Each Party shall act solely as an independent contractor and nothing in this Agreement shall be construed to give either Party the power or authority to act for, bind or commit the other Party in any way. Nothing herein shall be construed to create the relationship of partnership, principal and agent or joint venture between the Parties. 12.2 GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware that apply to contracts negotiated, executed and performed within the State of Delaware. 12.3 NOTICES. All notices permitted or required under this Agreement shall be in writing and shall be delivered by registered or certified mail, return receipt requested, to the address set forth in the first paragraph of this Agreement or delivered by hand. All notices shall be deemed to have been given two days after such notice is mailed, as evidenced by the postmark at the point of mailing or on the date of personal delivery, if not mailed. If the notice is to Axys, a copy shall also be sent to its General Counsel. 12.4 INJUNCTIVE RELIEF. It is understood and agreed that, notwithstanding any other provision of this Agreement, breach of the provisions of this Agreement regarding the protection of Confidential Information by Licensee will cause Axys irreparable damage for which recovery of money damages would be inadequate, and that Axys shall therefore be entitled to seek timely injunctive relief to protect Axys' rights under this Agreement in addition to any and all remedies available at law. 12.5 WAIVER. The failure of either Party to require performance by the other Party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either Party of a breach of any provision hereof be taken or held to be a waiver of the provision itself. 12.6 SEVERABILITY. If a court of competent jurisdiction declares any provision of this Agreement invalid or unenforceable, or if any government or other agency having jurisdiction over either Axys or Licensee deems any provision to be contrary to any laws, then that provision shall be severed and the remainder of the Agreement shall continue in full force and effect. The Parties further agree to discuss in good faith an amendment to replace such void, invalid, unenforceable, or unlawful provision with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void, invalid, unenforceable or unlawful provision. 12.7 HEADINGS. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section, or in any way affect this Agreement. 12.8 COMPLIANCE WITH LAWS; EXPORT CONTROLS. Each Party agrees to comply with all applicable laws, rules and regulations in connection with its activities under this Agreement. Each Party further agrees that it will comply with all U.S. export control laws and the applicable regulations thereunder, as well as any other applicable laws of the U.S. affecting the export of technology. 12.9 ASSIGNMENT. Subsequent to the execution of this Agreement, Licensee may assign this Agreement to PPGx, Inc. Upon such assignment, PPGx, Inc. shall agree in writing to be bound by all of Licensee's obligations under this Agreement; thereafter the term "Licensee" as used in this Agreement shall be understood to mean PPGx, Inc., whose rights and obligations shall be governed by this Agreement. Except as expressly set forth above, Licensee shall not 11 assign any rights or obligations arising under this Agreement without the prior written consent of Axys. Notwithstanding the foregoing, PPGx, Inc. may assign this Agreement to a third party in the event of a merger, acquisition, reorganization or recapitalization by or of PPGx, Inc., upon written notice to Axys. Subject to the above restrictions on assignment, this Agreement shall inure to the benefit of and bind the successors and assigns of the Parties. Any attempted assignment in derogation of the foregoing shall be void. 12.10 U.S. GOVERNMENT SUBLICENSEES. The Axys Software and Database are "commercial items," as defined at 48 C.F.R. 2.101 (Oct 1995), consisting of "commercial computer software" and "commercial computer software documentation," as such terms are used in 48 C.F.R. 12.212 (Sep 1995). Consistent with 48 C.F.R. 12.212 and 48 C.F.R. 227.7202-1 through 227.7202-4 (Jun 1995), Licensee will provide the Axys Software and Database to U.S. Government sublicensees (i) only as a commercial end item and (ii) with only those rights as are granted to all other sublicensees pursuant to the terms and conditions of this Agreement. 12.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute together the same document. 12.12 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto constitute the entire, final and complete agreement and understanding between the Parties, and replaces and supersedes all prior discussions and agreements between them, with respect to the subject matter hereof. No amendment, modification or waiver of any terms or conditions hereof shall be effective unless made in writing and signed by a duly authorized officer of each Party. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective authorized representatives. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same original. AXYS: LICENSEE: AXYS PHARMACEUTICALS, INC. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. /s/ John P. Walker /s/ Fredric N. Eshelman - -------------------------- ------------------------------- Authorized Signature Authorized Signature John P. Walker Fredric N. Eshelman - -------------------------- ------------------------------- Printed Name Printed Name Chairman / CEO CEO - -------------------------- ------------------------------- Title Title January 31, 1999 January 31,1999 - -------------------------- ------------------------------- Date Date 12 EXHIBIT 1.3 AXYS SOFTWARE 1 EXHIBIT 1.14 THIRD PARTY SOFTWARE 1 EX-10 10 EXHIBIT 10.126 PPD TECHNOLOGY TRANSFER AGREEMENT THIS PPD TECHNOLOGY TRANSFER AGREEMENT (the "Agreement") is made and entered into effective as of this 1st day of February, 1999, by and between PPGx, INC., a Delaware corporation whose mailing and notice address is 11099 N. Torrey Pines Road, La Jolla, California 92037 (hereinafter called the "Corporation"), and PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation whose mailing and notice address is 3151 17th Street Extension, Wilmington, North Carolina 28412 Telephone: (910) 251-0081 and Facsimile: (910) 772-6951(hereinafter called "PPD"). RECITALS: A. The Corporation has agreed to issue to PPD One Million Eight Hundred Thousand (1,800,000) shares of Series A Preferred Stock of the Corporation and One Hundred Eighty (180) shares of the Common Stock of the Corporation (collectively, the "Shares"), pursuant to the terms and conditions set forth in that certain Stock Purchase Agreement dated February 1, 1999 (the "Purchase Agreement") by and between the Corporation and PPD. B. PPD presently owns all of the issued and outstanding shares of capital stock of Intek Labs, Inc., a North Carolina corporation ("Intek"). C. Pursuant to the terms of the Purchase Agreement, PPD has agreed to transfer to the Corporation all of its shares of Intek (the "Intek Shares") in partial consideration and exchange for the Shares to be issued to PPD. D. The transfer of the Intek Shares shall be made upon and subject to the terms and conditions set forth hereinafter. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements contained herein, and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties agree as follows: 1. Definitions. The terms used in this Agreement shall be defined as follows, unless the context in which they are used requires otherwise: a. Benefit Plans. All employee and welfare benefit plans maintained by Intek, including all qualified and nonqualified pension or profit sharing plans, any deferred compensation, consultant, bonus or group insurance contract, or any other incentive, welfare or employee benefit plan or agreement maintained for the benefit of employees or former employees of Intek. Benefit Plans specifically exclude all stock option, stock bonus or other equity-based compensation plans of Intek. b. General Losses of PPD. All losses, liabilities, damages, deficiencies, costs or expenses (including interest, penalties and reasonable attorneys' fees and 1 disbursements) incurred by PPD and arising out of or based upon (i) a material breach of the representations, warranties, covenants, conditions and agreements of the Corporation set forth in this Agreement, or (ii) the operation of Intek's business by the Corporation from and after the Transfer Date. c. General Losses of the Corporation. All losses, liabilities, damages, deficiencies, costs or expenses (including interest, penalties and reasonable attorneys' fees and disbursements) incurred by the Corporation and arising out of or based upon (i) a material breach of the representations, warranties, covenants, conditions and agreements of PPD set forth in this Agreement, or (ii) the operation of Intek's business on or before the Transfer Date, but excluding liabilities and obligations reflected in Intek's Financial Statements (as defined in Section 3.n. hereof) and liabilities and obligations of Intek incurred in the ordinary course of its business from and after the date of such Financial Statements of a nature and amount consistent with those incurred historically by Intek. d. [INTENTIONALLY OMITTED]. e. Intek Intellectual Property. All patents, trademarks, trade names, service marks, copyrights, and any applications therefor, mask works, schematics, technology, know- how, trade secrets, inventory, algorithms, processes, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material used in the Company's business as of the Transfer Date other than off-the-shelf office software applications. f. Intek Shares. Ten (10) shares of common stock, no par value, of Intek owned by PPD and being transferred pursuant to this Agreement. The Intek Shares represent all of the issued and outstanding shares of capital stock of Intek. g. Knowledge. A party's actual knowledge after due inquiry of officers, directors and other employees of such party and its subsidiaries reasonably believed to have knowledge of such matters. h. Material Adverse Effect. With respect to any entity or group of entities any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, prospects, operations or results of operations of such entity and its subsidiaries, taken as a whole. i. Permits. All certificates, authorizations, licenses and permits issued by federal, state or other regulatory authorities that are necessary for the ownership and conduct of the business of Intek. j. Tax. Any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real 2 property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. k. Tax Return. All required Tax returns and schedules, statements, reports, estimates, declarations, forms and information returns, including any schedule or attachment thereto, and including any amendment thereof, relating to Intek's business operations required by foreign, federal, state and local governments and subdivisions or agencies thereof due on or before the Transfer Date. l. Transfer. The transfer of the Intek Shares pursuant to the terms of this Agreement. m. Transfer Date. The date the Transfer of the Intek Shares occurs, which shall be contemporaneously with the execution of this Agreement and the Transfer shall be effective as of the date of this Agreement. 2. Exchange of Intek Shares. Subject to the terms and conditions of this Agreement, PPD hereby agrees on the Transfer Date to irrevocably and unconditionally transfer and assign all of its right, title and interest in and to the Intek Shares to the Corporation in partial consideration and exchange for the Shares of the Corporation being issued to PPD pursuant to the Purchase Agreement. On the Transfer Date, PPD shall cause a certificate evidencing the Intek Shares to be prepared in the name of the Corporation and shall deliver such certificate to the Corporation on such date. 3. Representations, Warranties and Covenants of PPD. PPD represents and warrants to the Corporation and covenants with the Corporation that as of the Transfer Date(except where the context otherwise requires in Sections 3(a), 3(e) and 3(f), all references to "Intek" shall be deemed to be references to Intek and its wholly-owned subsidiary, Intek Labs Ltd.): a. Organization and Standing of PPD and Intek. PPD is duly organized and validly existing and has complied with all requirements to continue its existence under the laws of the State of North Carolina, and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted and is duly qualified as a foreign corporation in each jurisdiction where the character of its properties it owns, leases or licenses or the nature of its business makes such qualification necessary. Intek is a duly organized and validly existing corporation, and has complied with all requirements to continue its existence under the laws of the State of North Carolina, and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted and is duly qualified as a foreign corporation in each jurisdiction where the character of its properties it owns, leases or licenses or the nature of its business makes such qualification necessary. Intek Labs Ltd. ("Intek Labs") is duly organized and validly existing and has complied with all the requirements to continue its existence under the laws of England and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted. 3 b. Execution and Delivery Authorized. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the board of directors of PPD and by PPD as the sole shareholder of Intek. No approval of the shareholders of PPD is required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement. c. Validity of Agreement. Except for customer contracts of Intek which contain provisions requiring consent to change of control, the execution and performance of this Agreement and the actions provided for or contemplated hereunder will not violate the provisions of any agreement, instrument or obligation to which either PPD or Intek is a party. Assuming due authorization, execution and delivery hereof by the Corporation, this Agreement constitutes the valid and binding agreement of PPD, enforceable against PPD in accordance with its terms, subject as to enforceability to general equitable principles and to the laws of bankruptcy, insolvency or similar laws governing the rights of creditors. d. Title to Intek Shares. The Intek Shares are now and shall be, upon the Transfer, free and clear from any liens, claims, restrictions or encumbrances of any kind or nature whatsoever, except for such restrictions contained in the Articles of Incorporation or the Bylaws of Intek, as now in existence or restrictions upon transfer arising under federal or state securities laws. Neither PPD nor Intek is a party to or bound by any agreement, instrument, trust, proxy or understanding restricting or otherwise binding the ownership, transfer or voting of any of the Intek Shares. Upon completion of the Transfer, the Intek Shares shall be validly issued and will be fully paid and nonassessable. e. Capitalization of Intek. Intek's entire authorized capital stock consists solely of One hundred thousand (100,000) shares of common stock, no par value per share, of which ten (10) shares are presently issued and outstanding. As of the date of this Agreement, the Intek Shares comprise all of the issued and outstanding shares of Intek. All of the issued and outstanding shares of Intek have been duly authorized and validly issued, are fully paid and are nonassessable. None of the outstanding shares of Intek were issued in violation of the preemptive rights of any shareholder and none will be subject to any preemptive or similar rights. There are no outstanding subscriptions, options, warrants, contracts or any other commitments or rights (including rights to distributions or payments) of any character with respect to, or obligating Intek to issue any of, the authorized capital stock of Intek (including the Intek Shares). Intek Lab's entire authorized share capital consists of 50,000 ordinary shares, of which 1,500 comprise all of the issued and fully paid up shares. Said 1,500 shares have been duly authorized and validly issued. There are not outstanding subscriptions, options, warrants, contracts or other commitments or rights (including rights to distributions or payments) on any character with respect to the authorized share capital of Intek Labs. Said 1,500 shares are free and clear of all liens, encumbrances and other claims. f. Corporate Records. PPD previously has delivered to the Corporation true and complete copies of the Articles of Incorporation of Intek and all 4 amendments thereto, the Bylaws of Intek as currently in effect, a copy of the stock record of Intek, and true and complete copies of the minutes of Intek's shareholders, board of directors and all committees thereof. All books of account and other records (financial or otherwise) of Intek previously available or provided to the Corporation are each true, correct and complete in all material respects as of the date of such records. PPD has previously delivered to the Corporation true and complete copies of the charter documents of Intek Labs, of a copy of the stock records of Intek Labs and of the minutes of Intek Lab's minutes of Board and shareholder meetings. g. No Other Interests. Except as set forth on Schedule 3.g., Intek has no subsidiaries and does not own any other direct or indirect interest in any firm, corporation or other entity (including any joint venture, limited liability company or partnership). h. Compliance With Laws. Intek is now and will be at all times through the Transfer Date conducting its business in compliance in all material respects with all foreign, federal, state and local laws, regulations or orders applicable to Intek or to the operation of its business, including, without limitation, compliance with the Foreign Corrupt Practices Act. Intek is not in default with respect to any material order, writ, injunction or decree applicable to Intek, its properties or business. i. Material Contracts. PPD has made available to the Corporation copies of all of Intek's material notes, mortgages, licenses, leases, subleases, documents, instruments, contracts and agreements to which Intek is a party or by which it or its properties is bound. Each such note, mortgage, document, instrument, contract or agreement is valid, in full force and effect and binding upon Intek and, to the best of PPD's Knowledge, all other parties thereto in accordance with its terms. Intek is not in default under nor has any event occurred which, with a lapse of time or notice or both, could result in a default under any outstanding note, mortgage, document, instrument, contract or agreement to which Intek is a party or by which its properties may be bound, and neither Intek nor PPD has received any notice from any other party that a default exists under any of the foregoing. Set forth on Schedule 3.i. is a list of all third party and governmental consents or approvals required in connection with the transactions contemplated pursuant to this Agreement, other than customer contracts entered into in the ordinary course of business for which no consent of any customer, if required at all , will be obtained. j. No Default Upon Execution and Performance of Agreement. The execution, delivery and performance of this Agreement do not, and the consummation of the transactions contemplated hereby will not: (i) result in the creation of any lien, charge or encumbrance upon any of the Intek Shares or any property or assets of Intek, (ii) except as otherwise disclosed in this Agreement, conflict with, result in any default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under any material note, mortgage, document, instrument, contract or agreement to which Intek is a party or by which its properties are bound, or (iii) result in a violation of any provision of the Articles of Incorporation or Bylaws of Intek. 5 k. Litigation. Except as set forth on Schedule 3.k., there is no litigation, proceeding (including administrative proceeding) or other action (including arbitration) pending or, to PPD's Knowledge, threatened against or relating to Intek or its properties, nor does PPD have Knowledge of any basis for any such action, or of any governmental investigation relative to Intek, its properties or business. l. Licenses, Permits, etc. Schedule 3.l. hereto accurately lists and reflects all Permits, together with a description of each, including the terms under which each is held, the date of issuance and the dates during which each has been continuously in force. All the Permits are valid and outstanding, and as of the Transfer Date Intek is in compliance in all material respects with all of the terms and conditions of each Permit held by it. There are no other Permits required by Intek to lawfully conduct its business. To PPD's Knowledge, the Transfer of the Intek Shares shall not require that Intek obtain new or amended Permits to conduct its business as presently being conducted. m. Tax Matters. (1) Filings. Intek has filed all Tax Returns required to be filed before the Transfer Date. All such Tax Returns were correct and complete in all material respects. All Taxes owed by Intek (whether or not shown on any Tax Return) have been paid when due. Intek is not the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where Intek does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of Intek that arose in connection with any failure (or alleged failure) to pay any Tax. (2) Withholding. Except as described in Schedule 3.m., Intek has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (3) Assessments and Disputes; Audit. There are no assessments or additional Taxes owing for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax liability of Intek either (i) claimed or raised by any authority in writing or (ii) as to which any of PPD and the directors and officers (and employees responsible for Tax matters) of Intek has Knowledge based upon personal contact with any agent of such authority. PPD has delivered to the Corporation correct and complete in all material respects copies of all income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by Intek for any Tax periods beginning on or after its incorporation on March 12, 1997. (4) Statutes of Limitation. Intek has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. 6 (5) Unpaid Taxes. The unpaid Taxes of Intek did not, as of November 30, 1998 exceed the estimate for Tax liability set forth on the face of the November 30, 1998 balance sheet or in notes thereto. n. Financial Statements. PPD has furnished the Corporation with true and complete copies of Intek's financial statements for the year ending December 31, 1997 and the balance sheet and income statement for the year ending December 31, 1998 (collectively, the "Financial Statements") which are attached hereto as Schedule 3.n. Intek's Financial Statements: (a) were prepared from and in accordance with the books and records of Intek; (b) present fairly the financial condition and results of operation of Intek at the dates and for the periods indicated therein; and (c) were prepared in accordance with generally accepted accounting principles applied on a consistent basis except as otherwise disclosed on Schedule 3.n. There are not and will not be at the Transfer Date any material adverse changes in the business or in the condition (financial or otherwise) or the operations or prospects of Intek as a whole not adequately disclosed on said Financial Statements. o. Absence of Undisclosed Liabilities. Except as disclosed on Schedule 3.o., Intek does not have any material liability or obligation of any nature (whether accrued, fixed, contingent or otherwise), including any liability to customers or suppliers, which is not fully disclosed, reflected or adequately reserved against or otherwise provided for in its Financial Statements. Except as specifically disclosed on Schedule 3.o., Intek has not incurred since November 30, 1998 any material indebtedness, liabilities, obligations or liens against its properties or assets. p. Title to Properties. Except as disclosed in its Financial Statements and except as listed on Schedule 3.p., Intek has good, valid and marketable title to all of its respective properties and assets, real and personal, tangible and intangible, which it purports to own and use in conducting its business, free and clear of any liens, claims, charges, pledges, security interests, options to purchase, encumbrances or equitable interests of any nature whatsoever except for (i) liens for current year taxes not yet due and (ii) de minimus liens that do not materially detract from or materially impair the value of the properties, assets or operations of Intek. q. Condition of Property. All buildings, offices, and other structures and all machinery, equipment, fixtures, vehicles, and other tangible personal property owned, leased or used by Intek are and will be on the Transfer Date in good operating condition and repair, reasonable wear and tear excepted, and are reasonably adequate and sufficient for all operations presently conducted by it. Intek has the right to use its properties for all operations presently conducted by Intek and, to the Knowledge of PPD, the present uses of its properties are in conformity in all material respects with applicable zoning provisions and in compliance in all material respects with all applicable laws, ordinances and regulations, including without limitation, building codes except where the failure to be in conformity does not result in a Material Adverse Effect on Intek. 7 r. Real Property. Schedule 3.r. accurately lists and reflects as of the Transfer Date all real property owned, leased or subleased by Intek, together with a description of the location of such property. PPD previously has delivered to the Corporation copies of all leases, subleases and agreements for the rental of real property to which Intek is a party (as lessor or lessee) or by which its properties or assets may be bound, together with all amendments and modifications thereto. s. Personal Property. Schedule 3.s. hereto accurately lists and reflects in all material respects as of the Transfer Date (i) all of the equipment of Intek with a fair market value greater than $1,000 including, without limitation, equipment, machinery, vehicles, office and plant furniture, furnishings and fixtures, and leasehold improvements; (ii) all other items of tangible personal property with a fair market value greater than $1,000 owned by Intek; and (iii) all equipment, machinery, vehicles, office and plant furniture, furnishings and fixtures, leasehold improvements and all other items of tangible personal property with a fair market value greater than $1,000 leased by Intek from or to any third party, together with the location and terms under which each is leased. t. Intellectual Property. (1) Intek owns or is licensed or otherwise possesses legally enforceable rights to use all Intek Intellectual Property that is used in the business of Intek as currently conducted by Intek. Schedule 3.t. lists (i) all patents and patent applications and all registered and unregistered trademarks, trade names and service marks, registered and unregistered copyrights, and mask works that are included in the Intek Intellectual Property, including the jurisdictions in which each such Intek Intellectual Property right has been issued or registered or in which any application for such issuance and registration has been filed, (ii) all licenses, sublicenses and other agreements as to which Intek is a party and pursuant to which any person is authorized to use any Intek Intellectual Property, and (iii) all licenses, sublicenses and other agreements as to which Intek is a party and pursuant to which Intek is authorized to use any third party patents, trademarks or copyrights, including software, which are incorporated in, are, or form a part of any Intek product or service that is material to its business. (2) To the Knowledge of PPD, there is no material unauthorized use, disclosure, infringement or misappropriation by any third party (including employees and former employees of Intek) of any Intek Intellectual Property rights. Intek has not entered into any agreement to indemnify any other person against any charge of infringement of any Intek Intellectual Property, other than standard indemnification provisions contained in contracts arising in the ordinary course of business. (3) All patents, registered trademarks, service marks and copyrights held by Intek are valid and subsisting, and, to the Knowledge of PPD, the marketing, licensing or sale of Intek's products or services does not infringe any patent, trademark, service mark, copyright, trade secret or other proprietary right of any third party. Intek has not brought any action, suit or proceeding for infringement of Intek Intellectual Property or breach of any license or agreement involving Intek Intellectual Property against any third party. 8 (4) Intek has secured from all consultants and employees who contributed in a material manner to the creation or development of Intek Intellectual Property valid written assignments of the rights to such contributions that Intek does not already own by operation of law. (5) All use, disclosure or lawful appropriation of any Intek Intellectual Property owned by Intek and licensed to a third party has been licensed pursuant to the terms of a written agreement between Intek and such third party. All use, disclosure or lawful appropriation of such Intek Intellectual Property not owned by Intek and licensed from a third party has been pursuant to the terms of a written agreement between Intek and the owner of such Intek Intellectual Property, or is otherwise lawful. u. Certain Employee Matters. Except as set forth on Schedule 3.u., Intek has complied in all material respects with all applicable laws, rules and regulations relating to the employment of labor, the violation of which could have a Material Adverse Effect on Intek. Except as set forth on Schedule 3.u., there are no controversies pending or, to the Knowledge of PPD, threatened between Intek and any employee or former employee. v. Labor Relations; Employee Benefit Plans. None of the employees of Intek are represented by a labor union, and no petition has been filed or proceeding instituted with any labor relations boards seeking recognition of a bargaining representative. w. Benefit Plans. Schedule 3.w. lists all Benefit Plans of Intek and all of the Benefit Plans available to Intek employees. Intek is not obligated to provide any post-retirement welfare benefits to its employees, including post-retirement health or life insurance coverage. Intek has fully complied in all material respects with all provisions of ERISA and any and all other laws, rules, and regulations applicable to the Benefit Plans. Intek has no material liability under any plan or arrangement that is not reflected on the Financial Statements of Intek. To the Knowledge of PPD, each of the Benefit Plans is and has been administered in accordance with its provisions and applicable law. All contributions, premiums or payments required to be made with respect to the Benefit Plans have been made on or before their due dates. x. Environmental Matters. Schedule 3.x. lists all environmental Permits and approvals related to the business and operations of Intek. Intek has all necessary environmental Permits and approvals to conduct its business. Intek has operated, and is presently operating, in compliance in all material respects with all applicable federal, state, and local environmental laws, rules and regulations. PPD has no Knowledge or notice of any existing environmental regulatory requirement with a future compliance date that will require operational changes or capital expenditure at the facilities owned by or used by Intek in its business. Except for products and substances which Intek is authorized by law to use in its business, all of which products and substances have been and are being properly handled, stored, used and disposed of in accordance with all applicable laws, regulations and rules, to the Knowledge of PPD, no "hazardous substance", no petroleum or petroleum products and no "solid waste", is present, has 9 been leaked, spilled, deposited or otherwise released on the real property owned or used by Intek in its business as a result of Intek's activities. To the Knowledge of PPD, no "asbestos material", "PCBs" or underground storage tanks are present on or in the real property owned or used by Intek in its business. PPD has no Knowledge of any violation by Intek of any environmental laws, rules and regulations as of the Transfer Date with respect to the real property owned or used by Intek in its business. y. Absence of Specified Changes. Since November 30, 1998, there has not been any: (i) transaction by Intek except in the ordinary course of business as conducted by Intek through that date; (ii) capital expenditure or commitment to make any capital expenditure exceeding $5,000; (iii) destruction, damage to or loss of any uninsured assets that are material to the business of Intek; (iv) change in Intek's accounting methods or practices; (v) sale or transfer of any asset of Intek except in the ordinary course of Intek's business; (vi) execution, amendment or termination of, or release or waiver of any right or claim under, any contract or agreement to which Intek is a party except in the ordinary course of Intek's business; (vii) increase in any salary or other compensation payable or to become payable to any Intek officer, director or employee, or the declaration, payment or commitment to pay any bonus or other additional salary or compensation to any such person, except such increases, payments or commitments made in the ordinary course of Intek's business consistent with prior practices; (viii) loan by Intek to any person or guaranty by Intek of any loan; (ix) mortgage, pledge or encumbrance of any material assets of Intek; (x) dividend, distribution or other inter-company payment by Intek to PPD or any of its affiliates; or (xi) other event or condition of any character that has or might reasonably have a Material Adverse Effect on Intek. 10 z. Employment Agreements. Schedule 3.z. to the Agreement is a list of all employment contracts and all bonus, profit-sharing stock option or other agreements or arrangements (other than Benefit Plans) providing for employee remuneration or benefits to any and all Intek employees. All such contracts are in full force and effect and neither Intek nor any employee is in default thereunder. Intek has previously delivered to the Corporation a true, correct and complete list stating the rates of compensation and other material benefits (including stock options) presently being paid or given to all Intek employees. aa. Accounts. Schedule 3.aa. lists (i) the names and addresses of all banks and other financial institutions in which Intek has an account, deposit or safe-deposit box, together with the names of all persons authorized to draw on these accounts or deposits or who have access to these boxes, and (ii) the names and addresses of all persons holding a power of attorney on behalf of Intek. bb. No Disputes. There are no presently existing or threatened disputes pertaining or related to PPD's acquisition of Intek. cc. Full Disclosure. None of the representations and warranties made by PPD contains or will contain any untrue statement of a material fact or omits any material fact the omission of which would make the statements made misleading. dd. As of the Transfer Date, all of the directors of Intek Labs have resigned and new directors of Intek Labs selected by the Corporation have been duly and validly appointed. 4. Representations, Warranties and Covenants of the Corporation. The Corporation represents and warrants to PPD and covenants with PPD that as of the Transfer Date: a. Organization and Standing of the Corporation. The Corporation is duly organized and validly existing and has complied with all requirements to continue its existence under the laws of the State of Delaware, and has the corporate power and authority to own, lease and use its properties and to transact its business where and as now conducted. b. Execution and Delivery Authorized. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the board of directors of the Corporation. c. Validity of Agreement. The execution and performance of this Agreement and the actions provided for or contemplated hereunder will not violate the provisions of any agreement, instrument or obligation to which the Corporation is a party or by which it is bound. Assuming due authorization, execution and delivery hereof by PPD, this Agreement constitutes the valid and binding agreement of the Corporation, enforceable against the Corporation in accordance with its terms, subject as to enforceability to general equitable principles and to the laws of bankruptcy, insolvency or similar laws governing the rights of creditors. 11 d. Access and Information. The Corporation and its representatives have been afforded full and free access to Intek's financial statements and other information concerning Intek and the Corporation has been afforded an opportunity to ask such questions of Intek's officers, employees, agents, accountants and representatives concerning Intek's business, prospects, operations, financial condition, assets, liabilities and other relevant matters, including the rights, preferences and limitations of the Intek Shares, as the Corporation deems necessary or desirable and has been given all such information as has been requested, in order to evaluate the merits and risks associated with holding the Intek Shares. The Corporation has conducted its own "due diligence" investigation of Intek and its management and business, and its own analysis of the merits and risks of holding the Intek Shares, and its own analysis of the fairness and desirability of the terms governing the transfer of the Intek Shares. The Corporation is familiar with the business conducted by Intek on and has such knowledge and experience in financial and business matters that the Corporation is capable of evaluating the merits and risks of the transfer of the Intek Shares pursuant to the terms of this Agreement and of protecting the Corporation's interests in connection therewith. e. Investment Intent of the Corporation. The Intek Shares are being acquired by the Corporation for its own account and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The Corporation understands that the Intek Shares have not been, and will not be, registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act, that Intek has no present intention of registering the Intek Shares, that the Intek Shares must be held by the Corporation indefinitely, and that the Corporation must therefore bear the economic risk associated with holding the Intek Shares indefinitely, unless a subsequent disposition thereof is exempt from registration. The Corporation is able to bear the economic risk of holding the Intek Shares pursuant to the terms of this Agreement. Each certificate evidencing the Intek Shares shall be endorsed with the following legend: THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING SUCH SHARES, AND APPLICABLE STATE SECURITIES LAW, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT THE TRANSACTION DOES NOT VIOLATE FEDERAL OR STATE SECURITIES LAWS. The Corporation acknowledges that no public market now exists for the Intek Shares and that there can be no assurance that any public market will exist in the future. The Corporation understands 12 that the Intek Shares will constitute "restricted securities", and under the Securities Act and applicable regulations the Intek Shares may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, the Corporation represents that it is familiar with Rule 144 under the Securities Act and understands the resale limitations imposed thereby and the Securities Act. f. Accredited Investor Status. The Corporation represents and warrants that it is an "accredited investor" as defined in Rule 501 of Regulation D of the Securities Act. 5. Indemnification. Notwithstanding anything in this Agreement to the contrary and subject to a time limit of eighteen (18) months following the Transfer Date, PPD shall indemnify, defend, and hold harmless the Corporation, its affiliates, successors and assigns from and against all General Losses of the Corporation. Notwithstanding anything in this Agreement to the contrary and subject to a time limit of eighteen (18) months following the Transfer Date, the Corporation shall indemnify, defend, and hold harmless PPD, its affiliates, successors and assigns from and against all General Losses of PPD. 6. Governing Law. This Agreement shall be governed by and shall be construed in accordance with the laws of the State of Delaware. 7. Entire Agreement. This Agreement contains the entire understanding between the parties and supersedes any prior understandings or agreements between them affecting the subject matter. No changes, alterations, amendments, modifications, additions or qualifications to the terms of this Agreement shall be made or be binding unless made in writing and signed by each of the parties. 8. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at their respective addresses first set forth above (or at such other address for a party as shall be specified by like notice. 9. Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties, their heirs, legal representatives, successors and permitted assigns. 10. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 11. Entire Agreement. This Agreement, together with the recitals, exhibits and schedules, contains the entire understanding of the parties hereto with respect to the transactions contemplated herein, and any prior agreements or understandings, whether oral or written, are entirely superseded hereby. 13 12. Documentation. The parties agree to execute and/or provide any and all other documents, instruments, or other papers and to conduct such transactions as may be reasonably necessary or desirable to effectuate the provisions of this Agreement. 13. Survival of Representations, Warranties, Covenants. Notwithstanding any investigation by either party or any knowledge of facts uncovered pursuant to any such investigation, each party shall have the right to rely fully upon the representations, warranties, covenants, conditions and agreements of the other party contained in this Agreement. All such representations, warranties, covenants, conditions and agreements contained in this Agreement shall survive the Transfer for a period of eighteen (18) months from the Transfer Date. IN WITNESS WHEREOF, the Corporation and PPD have caused this Agreement to be executed and delivered by their respective officers, duly authorized, all as of the date first written above. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fredric N. Eshelman --------------------------- Name: Fredric N. Eshelman --------------------------- Title: CEO --------------------------- PPGx, INC. By: /s/ Natalie J. Walker --------------------------- Name: Natalie J. Walker --------------------------- Title: CEO & President --------------------------- EX-10 11 EXHIBIT 10.127 ASSIGNMENT AND ASSUMPTION OF LICENSE AGREEMENT THIS ASSIGNMENT AND ASSUMPTION OF LICENSE AGREEMENT ("Agreement") is made to be effective as of this 1st day of February, 1999, by and between PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., a North Carolina corporation ("PPD") and PPGx, INC., a Delaware corporation (the "Corporation"). This Agreement is made pursuant and subject to the terms, covenants and conditions of that certain Stock Purchase Agreement dated February 1, 1999 by and between PPD and the Corporation (the "Purchase Agreement"). All capitalized terms used but not defined herein shall have the same meanings assigned to them in the Purchase Agreement. RECITALS WHEREAS, PPD is a party to that certain Software License Agreement as more fully described on Exhibit A attached hereto and incorporated herein by reference (the "License Agreement"); and WHEREAS, in partial consideration for the purchase price to be paid to the Corporation for issuance of the Shares to PPD pursuant to the Purchase Agreement, PPD has agreed to assign and transfer the License Agreement to the Corporation, and the Corporation has agreed to accept such assignment and to assume PPD 's obligations thereunder pursuant and subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, PPD and the Corporation hereby covenant and agree as follows: 1. Assignment of License Agreement. PPD hereby exchanges, transfers, conveys and assigns unto the Corporation, its successors and assigns, all of PPD 's right, title and interest in and to the License Agreement and all of PPD's rights and benefits thereunder. PPD delivers herewith to the Corporation the original License Agreement, or a true copy thereof, and all amendments thereto. 2. Assumption of Obligations. The Corporation hereby undertakes, assumes and agrees to perform, pay and discharge in a timely manner all of the duties, responsibilities and obligations of PPD under the License Agreement (collectively, the "Assumed Obligations"). 3. No Representation or Warranty by PPD. Notwithstanding any provision herein or in the Purchase Agreement to the contrary, PPD makes no representation or warranty, express or implied, with respect to the License Agreement or regarding the validity or enforceability of the License Agreement or any of its rights or obligations thereunder. 4. Consent to Transfer; Novation. Axys Pharmaceuticals, Inc., a Delaware Corporation, hereby joins as a party to this Agreement to evidence its consent to the assignment and assumption of the License Agreement to and by the Corporation pursuant to this Agreement. In consideration of such assumption by the Corporation, Axys further hereby releases and discharges PPD from any further liability under the License Agreement, it being understood that this Agreement constitutes a novation as to PPD and a substitution of the Corporation in place of PPD as a party to the License Agreement. 5. Miscellaneous. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware. The obligations of the parties hereto shall be binding upon each of them and their respective successors, legal representatives and assigns. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered through their duly authorized officers effective as of the day and year first written above. PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. By: /s/ Fredric N. Eshelman Name: Fredric N. Eshelman Title: CEO PPGx, INC. By: /s/ Natalie J. Walker Name: Natalie J. Walker Title: CEO & President AXYS PHARMACEUTICALS, INC. By: /s/ John P. Walker Name: John P. Walker Title: Chairman / CEO EX-10 12 EXHIBIT 10.128 CREDIT AND SECURITY AGREEMENT BETWEEN APPLIED BIOSCIENCE INTERNATIONAL INC. (LENDER) AND ENVIRON HOLDINGS, INC., AND APBI ENVIRONMENTAL SCIENCES GROUP, INC. (BORROWER) DATED AS OF FEBRUARY 2, 1999 (EFFECTIVE DATE) TABLE OF CONTENTS
PAGE NO. -------- ARTICLE I CONSTRUCTION AND DEFINED TERMS............................................................1 SECTION 1.01.Articles and Sections..............................................................1 SECTION 1.02.Exhibits and Schedules.............................................................1 SECTION 1.03.Credit Documents...................................................................1 SECTION 1.04.Discretionary Consents.............................................................1 SECTION 1.05.Accounting Terms...................................................................1 SECTION 1.06.Time...............................................................................1 SECTION 1.07.Defined Terms......................................................................1 ARTICLE II-A CREDIT FACILITY - REVOLVING CREDIT LOANS..............................................23 SECTION 2A.01. Revolving Credit Loans.......................................................23 SECTION 2A.02. Requests.....................................................................23 SECTION 2A.03. Covenant to Pay; Revolving Credit Notes.....................................24 SECTION 2A.04. Interest Payments............................................................24 SECTION 2A.05. Principal Payments...........................................................24 SECTION 2A.06. Collateral Account Payments..................................................24 SECTION 2A.07. Use of Revolving Credit Loan Proceeds........................................25 ARTICLE II-B CREDIT FACILITY - TERM LOAN...........................................................25 SECTION 2B.01. Term Loan....................................................................25 SECTION 2B.02. Covenant to Pay; Term Note..................................................25 SECTION 2B.03. Payment Schedule.............................................................25 SECTION 2B.04. Use of Term Loan Proceeds....................................................25 ARTICLE II-C CREDIT FACILITY - LETTERS OF CREDIT...................................................26 SECTION 2C.01. Letter of Credit Applications................................................26 SECTION 2C.02. Letter of Credit Expiry Dates................................................26 SECTION 2C.03. Letter of Credit Fees........................................................26 SECTION 2C.04. Letter of Credit Reserves....................................................26 SECTION 2C.05. Payments on Letters of Credit................................................26 SECTION 2C.06. Instruction to Pay; Indemnification..........................................27 SECTION 2C.07. Use of Letters of Credit.....................................................29 SECTION 2C.08. Letters of Credit Denominated in Other Than U.S. Dollars.....................29 ARTICLE II-D CREDIT FACILITY - GENERAL CREDIT PROVISIONS...........................................29 SECTION 2D.01. Lender Records...............................................................29 SECTION 2D.02. Computation of Interest......................................................29 SECTION 2D.03. Late Charges; Default Interest...............................................29 -i- SECTION 2D.04. Commitment Fee.....................................ERROR! BOOKMARK NOT DEFINED SECTION 2D.05. Unused Credit Fee............................................................30 SECTION 2D.06. Mandatory Additional Payments................................................30 SECTION 2D.07. Prepayments..................................................................30 SECTION 2D.08. Manner of Payments...........................................................30 SECTION 2D.09. Application of Payments......................................................30 SECTION 2D.10. Capital Adequacy.............................................................31 SECTION 2D.11. Rate Adequacy................................................................31 SECTION 2D.12. Regulatory Change............................................................31 SECTION 2D.13. Designation of Agent and Attorney-in-Fact....................................32 SECTION 2D.14. Net Payments.................................................................32 ARTICLE II-E CREDIT FACILITY - CONDITIONS..........................................................33 SECTION 2E.01. Fulfillment of Conditions....................................................33 SECTION 2E.02. Conditions to all Loans and Letters of Credit................................33 SECTION 2E.03. Conditions to Term Loan......................................................34 SECTION 2E.04. Conditions to All Revolving Credit Including the Initial Revolving Credit....36 ARTICLE III REPRESENTATIONS AND WARRANTIES.........................................................37 SECTION 3.01.Conditions........................................................................37 SECTION 3.02.Existence.........................................................................37 SECTION 3.03.Action............................................................................38 SECTION 3.04.Approvals.........................................................................38 SECTION 3.05.Ownership.........................................................................38 SECTION 3.06.Subsidiaries......................................................................38 SECTION 3.07.Financial Statements..............................................................39 SECTION 3.08.Solvency..........................................................................39 SECTION 3.09.Investments.......................................................................39 SECTION 3.10.Deposit Accounts..................................................................39 SECTION 3.11.Indebtedness......................................................................39 SECTION 3.12.Liens.............................................................................40 SECTION 3.13.Material Agreements...............................................................40 SECTION 3.14.Legal Proceedings.................................................................40 SECTION 3.15.Accounts..........................................................................40 SECTION 3.16.Insurance.........................................................................40 SECTION 3.17.Intellectual Property.............................................................40 SECTION 3.18.Special Property..................................................................41 SECTION 3.19.Margin Stock......................................................................41 SECTION 3.20.Tax Identification Numbers........................................................41 SECTION 3.21.Business..........................................................................41 SECTION 3.22.Name, Structure...................................................................41 SECTION 3.23.Designated Locations..............................................................41 -ii- SECTION 3.24.Labor Status......................................................................41 SECTION 3.25.ERISA Status......................................................................42 SECTION 3.26.Environmental Status..............................................................44 SECTION 3.27.Investment Company Act............................................................45 SECTION 3.28.Public Utility Holding Company Act.(Omitted)......................................45 SECTION 3.29.Commercial Loan...................................................................45 SECTION 3.30.No Broker.........................................................................45 SECTION 3.31.Obligor Information...............................................................46 SECTION 3.32.Independent Access................................................................46 SECTION 3.33.Taxes.............................................................................46 SECTION 3.34.Applicable Laws...................................................................46 SECTION 3.35.Risk Management Agreements........................................................46 SECTION 3.36.Year 2000 Issues..................................................................46 SECTION 3.37.Direct Obligation; Full Faith and Credit..........................................46 SECTION 3.38.No Recordation Necessary..........................................................47 SECTION 3.39.Wages, Severance Pay, Etc.........................................................47 SECTION 3.40.Stock Purchase Agreement..........................................................47 SECTION 3.41.On-Going Business. (Omitted).....................................................47 SECTION 3.42.Regulation O. (Omitted)........................................................47 ARTICLE IV AFFIRMATIVE COVENANTS...................................................................47 SECTION 4.01.Information.......................................................................47 SECTION 4.02.Reporting Notification Events.....................................................49 SECTION 4.03.Existence.........................................................................49 SECTION 4.04.Places of Business................................................................49 SECTION 4.05.Property..........................................................................49 SECTION 4.06.Insurance.........................................................................50 SECTION 4.07.Taxes.............................................................................50 SECTION 4.08.Compliance with Laws..............................................................51 SECTION 4.09.Material Agreements...............................................................51 SECTION 4.10.Permitted Indebtedness............................................................51 SECTION 4.11.Maintenance of Primary Account.(Omitted)..........................................51 SECTION 4.12.Credit Administration Costs; Brokers.............................................51 SECTION 4.13.Review and Audit..................................................................51 SECTION 4.14.Rate Hedging......................................................................51 SECTION 4.15.Use of Loan Proceeds..............................................................52 SECTION 4.16.ERISA and Related Matters.........................................................52 SECTION 4.17.Environmental Matters.............................................................52 SECTION 4.18.Year 2000 Compatibility...........................................................53 SECTION 4.19.Consolidated Funded Debt to EBITDA................................................53 SECTION 4.20.Senior Funded Debt to EBITDA......................................................53 SECTION 4.21.Net Worth.........................................................................53 SECTION 4.22.Debt Service Coverage.............................................................54 -iii- SECTION 4.23.Negative Net Income...............................................................54 SECTION 4.24.Key Principals....................................................................54 ARTICLE IV-A ADDITIONAL SECURITY PROVISIONS........................................................54 SECTION 4A.01. Security Interest............................................................54 SECTION 4A.02. Chattel Paper and Instruments................................................56 SECTION 4A.03. Borrower's Collection Privileges.............................................57 SECTION 4A.04. Collateral Account...........................................................57 SECTION 4A.05. Lock-Box.....................................................................57 SECTION 4A.06 Additional Collateral........................................................57 SECTION 4A.07 Further Assurances of Collateral.............................................57 ARTICLE V NEGATIVE COVENANTS.......................................................................58 SECTION 5.01.Restricted Payments...............................................................58 SECTION 5.01.Investments.......................................................................58 SECTION 5.02.Indebtedness......................................................................58 SECTION 5.03.Maintenance of Permitted Indebtedness.............................................58 SECTION 5.04.Judgments.........................................................................58 SECTION 5.05.Selling Shareholder Transactions; Affiliate Transactions..........................58 SECTION 5.07.Line of Business; Name; Structure.................................................59 SECTION 5.08.Stock.............................................................................59 SECTION 5.09.Dividends; Distributions; Repurchases.............................................59 SECTION 5.10.Subsidiaries......................................................................59 SECTION 5.11.Control...........................................................................59 SECTION 5.12.Consolidations; Mergers; Dispositions; Acquisitions...............................59 SECTION 5.13.Liens; Bailments; Certain Sales...................................................60 SECTION 5.14.Risk Management Agreements........................................................60 ARTICLE VI EVENTS OF DEFAULT; CERTAIN REMEDIES UPON DEFAULT.......................................60 SECTION 6.01.Events of Default.................................................................60 SECTION 6.02.Acceleration......................................................................63 SECTION 6.03.Other Remedies....................................................................63 SECTION 6.04.Receiver..........................................................................65 SECTION 6.05.Waivers...........................................................................65 SECTION 6.06.Arbitration.......................................................................66 ARTICLE VII MISCELLANEOUS..........................................................................67 SECTION 7.01.Further Assurances................................................................67 SECTION 7.02.Successors and Assigns............................................................67 SECTION 7.03.Severability......................................................................67 SECTION 7.04.Governing Law.....................................................................68 SECTION 7.05.Jurisdiction; Venue; Service......................................................68 SECTION 7.06.Counterparts......................................................................68 SECTION 7.07.Survival..........................................................................68 -iv- SECTION 7.08.Notices...........................................................................69 SECTION 7.09.Lender Appointed Attorney-in-Fact.................................................69 SECTION 7.10.Remedies Cumulative...............................................................70 SECTION 7.11.Amendments, Waivers and Consents..................................................70 SECTION 7.12.Waivers of Claims; Consequential and Punitive Damages.............................70 SECTION 7.13.No Third Party Beneficiaries......................................................70 SECTION 7.14.Entire Agreement..................................................................71 SECTION 7.16.WAIVER OF JURY TRIAL..............................................................71 SECTION 7.17.Judgment Currency.................................................................71 SECTION 7.18.Waiver of Immunity................................................................72 SECTION 7.19.Publicity.........................................................................72
-v- SCHEDULES SCHEDULE 3.05 Ownership Disclosure SCHEDULE 3.09 Investment Disclosure SCHEDULE 3.10 Deposit Accounts Disclosure SCHEDULE 3.11 Indebtedness Disclosure SCHEDULE 3.12 Lien Disclosure SCHEDULE 3.13 Material Agreements Disclosure SCHEDULE 3.14 Proceedings Disclosure SCHEDULE 3.16 Insurance Disclosure SCHEDULE 3.17 Intellectual Property Disclosure SCHEDULE 3.18 Special Property Disclosure SCHEDULE 3.19 Margin Stock Disclosure SCHEDULE 3.20 Tax Identification Number Disclosure SCHEDULE 3.21 Business Disclosure SCHEDULE 3.22 Name, Structure Disclosure SCHEDULE 3.23 Designated Locations Disclosure SCHEDULE 3.24 Labor Disclosure SCHEDULE 3.25 ERISA Disclosure SCHEDULE 3.25A UK Plan Disclosure SCHEDULE 3.26 Environmental Disclosure SCHEDULE 3.35 Risk Management Agreements Disclosure SCHEDULE 3.39 Benefits Disclosure SCHEDULE 3.43 Principals Disclosure SCHEDULE I -vi- CREDIT AND SECURITY AGREEMENT THIS AGREEMENT made as of the 2nd day of February, 1999, (the "EFFECTIVE DATE") among APPLIED BIOSCIENCE INTERNATIONAL INC. , ("LENDER"); ENVIRON HOLDINGS, INC., a Delaware corporation ("EHI"); and APBI ENVIRONMENTAL SCIENCES GROUP, INC.), a Virginia corporation ("US CORPORATION"). In consideration of the mutual promises herein contained, the parties intending to be legally bound agree as follows: ARTICLE I CONSTRUCTION AND DEFINED TERMS SECTION 1.01. ARTICLES AND SECTIONS. The Article and Section headings and captions in this Agreement are for convenience only and shall not affect the construction or interpretation of this Agreement. The references in this Agreement to Articles and Sections shall be read as Articles or Sections of this Agreement unless otherwise specifically provided. SECTION 1.02. EXHIBITS AND SCHEDULES. The references in this Agreement to specific Exhibits and Schedules shall be read as references to such specific Exhibits and Schedules attached, or intended to be attached, to this Agreement and any counterpart of this Agreement and regardless of whether they are in fact attached to this Agreement, and including any amendments, supplements, and replacements thereto from time to time. SECTION 1.03. CREDIT DOCUMENTS. References in this Agreement to Credit Documents, and any of the documents that are included within the definition of Credit Documents, shall include such amendments, supplements, and replacements as may be made thereto or therefor from time to time. SECTION 1.04. DISCRETIONARY CONSENTS. Wherever a provision of this Agreement or any other Credit Document provides for Lender's consent, any such consent may be provided or withheld in Lender's reasonable discretion (unless otherwise expressly provided herein or in such other Credit Document) and the granting of consent in one instance shall not constitute or imply the granting of consent in any similar or other instance. SECTION 1.05. ACCOUNTING TERMS. Accounting terms used but not otherwise defined in this Agreement shall have the meanings provided by, and be construed in accordance with, GAAP. SECTION 1.06. TIME. Time is of the essence of this Agreement. SECTION 1.07. DEFINED TERMS. Unless otherwise expressly stated in this Agreement, capitalized terms used in this Agreement shall have the following meanings: -1- "ACCOUNT DEBTOR" Any Person as to whom any Borrower is a creditor, and including any person obligated to any Borrower pursuant to any Account, Instrument, Chattel Paper, General Intangible, Document, Investment Property, charter or lease, and including any guarantor, endorser, or surety of any of the foregoing Property, and any Person that provides security for any of the foregoing Property, and any maker or endorser of any Item of Payment given to Debtor other than cash. "ACCOUNTS" As defined in Section 4A.01. "ACQUISITION LOAN". The acquisition loan referred to in Article II-B of this Agreement. "ADDITIONAL LIBOR COSTS" Costs that Lender determines are attributable to Lender's making or maintaining Loans based upon the LIBOR Rate or its obligation to make Loans based upon the LIBOR Rate under this Agreement, or any reduction in any amount receivable by Lender under this Agreement in respect of any such Loans or such obligation. "AFFILIATE" means, as to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person, and including any Subsidiary of such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by," and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of voting securities, by agreement or otherwise; provided that legal or beneficial ownership of thirty percent (30%) or more of the voting securities (or other ownership interests other than limited partnership interests) of a Person shall in any event be deemed to be control. "APPLICABLE LAW" As to any Person, all Laws applicable to such Person and all Laws applicable to any Property of such Person. "APPLICABLE REVOLVING CREDIT LOAN INTEREST RATE" The floating and fluctuating interest rate per annum at all times equal to the LIBOR Market Index Rate plus the Applicable Revolving Credit Loan Margin. The Applicable Revolving Credit Loan Interest Rate shall increase or decrease, as the case may be, with increases and decreases in the LIBOR Market Index Rate. "APPLICABLE REVOLVING CREDIT LOAN MARGIN" Two percent (2.00%) per annum. "APPLICABLE TERM LOAN INTEREST RATE" The floating and fluctuating interest rate per annum at all times equal to the LIBOR Rate plus the Applicable Term Loan Margin. At the commencement of each Interest period, the Applicable Term Loan Interest Rate shall increase or decrease, as the case may be, with increases and decreases in the LIBOR Rate. -2- The Applicable Term Loan Interest Rate shall remain in effect, subject to the provisions of this Agreement, from and including the first day of the Interest Period to and excluding the last day of the Interest Period for which it is determined. "APPLICABLE TERM LOAN MARGIN" As set forth in the following schedule: -------------------------------------- ------------------------------------ CONSOLIDATED FUNDED DEBT TO EBITDA APPLICABLE TERM LOAN MARGIN -------------------------------------- ------------------------------------ => 4.0:1 235 basis points -------------------------------------- ------------------------------------ => 3.0:1, but < 4.0:1 225 basis points -------------------------------------- ------------------------------------ => 2.5:1, but < 3.0:1 215 basis points -------------------------------------- ------------------------------------ <2.5:1 175 basis points -------------------------------------- ------------------------------------ "ARTICLE 8" Article 8 of the UCC. "ARTICLE 9" Article 9 of the UCC. "ARTICLES OF INCORPORATION" As to any corporation, the Articles of Incorporation or Certificate of Incorporation, or similar charter document, and all amendments thereto. "AVAILABLE LETTER OF CREDIT AMOUNT" The amount equal to the lesser of (a) the Letter of Credit Maximum Amount, or (b) the Available Revolving Credit Amount. "AVAILABLE REVOLVING CREDIT AMOUNT" As of any date of determination, the amount equal to (a) the Revolving Credit Committed Amount less (b) the aggregate of the outstanding principal balances of any Revolving Credit Loans and the aggregate face amounts of any outstanding Letters of Credit. "LENDER ACCOUNTS" As defined in Section 4A.01. "BORROWER" or "BORROWERS" EHI and US Corporation, individually or collectively. "BORROWER GROUP" The Borrowers and their Consolidated Subsidiaries. "BORROWER GROUP AGENT" As defined in Section 2D.13. "BUSINESS DAY" Any day other than a Saturday, Sunday or legal holiday on which Lender is open for the transaction of a substantial part of its business. "CAPITAL ADEQUACY REQUIREMENT" Any law, rule, regulation or guideline regarding capital adequacy (including any law, rule, regulation or guideline adopted pursuant to or arising out of the report of the Basle Committee on Lending Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards" -3- dated July 1988 (as amended, modified and supplemented and in effect from time to time or any replacement thereof)), or the adoption or implementation of any Regulatory Change regarding capital adequacy, or any change in the interpretation or administration of any thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by Lender (or Lender's holding company) with any request or directive, regarding capital adequacy (whether or not having the force of law) of any Governmental Authority. "CAPITAL EXPENDITURE" For any Person, expenditures (including the aggregate amount of Capital Lease Obligations incurred during such period) made by such Person to acquire, use, or construct fixed assets, plant or equipment (including office equipment, software, hardware and other computer equipment), or Real Estate Property and including renewals, improvements and replacements, but excluding repairs, computed in accordance with GAAP. "CAPITAL LEASE OBLIGATIONS" For any Person, all obligations of such Person to pay rent or other amounts under a lease of Property, or other agreement conveying the right to use Property, to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. Notwithstanding the foregoing, Capital Lease Obligations shall also include so-called synthetic leases that would not otherwise be classified as capital leases under GAAP and the amount of such obligations shall be the capitalized amount thereof determined as though such obligations were classified as capital leases under GAAP. "CHANGE OF CONTROL" A change in the power to direct or cause the direction of the management or policies of any Obligor, whether through ownership of voting securities, by agreement or otherwise. Without limiting the generality of the foregoing, each of the following shall be deemed to constitute a Change in Control: (a) a change in the legal or beneficial ownership of fifty percent (50%) or more of the voting securities (or other ownership interests other than limited partnership interests) of any Obligor, or (b) except as contemplated in the Shareholder Agreement, if any Obligor is a corporation, the replacement of a majority of the Board of Directors of such Obligor from the Directors who constituted the Board of Directors of such Obligor on the later of (i) the date of election of the original Board of Directors of such Obligor, or (ii) the Effective Date, or (c) if any Obligor is a partnership or limited liability company, the replacement of the managing general partner or managing member, as the case may be, or (d) the sale, transfer, or other disposition of all or substantially all of such Obligor's assets in one or a series of transactions to the extent such sale, transfer or other disposition constitutes a material portion of Borrower Group's business.. "CHATTEL PAPER" As defined in Section 4A.01. "CODE" means the Internal Revenue Code of 1986, as amended. "COLLATERAL" As defined in Section 4A.01. -4- "COLLATERAL ACCOUNT" A non-interest bearing deposit account, or at Lender's election, an interest-bearing deposit account, , controlled by Lender, into which Items of Payment processed through the Lock-Box or otherwise received by any Borrower or Lender are to be deposited after an Event of Default and demand by Lender. "COLLECTION COSTS" All commercially reasonable costs and expenses of administering and enforcing this Agreement and the other Credit Documents, and including any and all costs and expenses of collecting the Obligations and exercising Lender's rights and remedies under the Credit Documents as against the Collateral and any other Property intended by this Agreement and the other Credit Documents to be given to Lender as security for the Obligations. "CONSOLIDATED" When used with reference to the Consolidated financial statements of the Borrower Group, shall mean the financial statements of EHI and its Consolidated Subsidiaries as consolidated in accordance with GAAP, after the elimination of inter-company items. "CONSOLIDATED FUNDED DEBT" The sum of all indebtedness for borrowed money, including, without limitation, capital lease obligations, subordinated debt (including debt subordinated to Lender), and unreimbursed drawings under letters of credit, or any other monetary obligation evidenced by a note, bond, debenture or other agreement of that person or entity. "CONSOLIDATED SUBSIDIARIES" Any Person the assets and liabilities of which are required to be consolidated with those of any Borrower in its consolidated financial statements in accordance with GAAP. "CONSOLIDATED TANGIBLE NET WORTH" The sum of the following in respect of the Borrower Group (on a consolidated basis and excluding intercompany items): (i) the amount of issued and outstanding share capital, plus (ii) the amount of additional paid-in-capital and retained income (or, in the case of a deficit, minus the amount of such deficit), minus (iii) the sum of the following (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earning): the book value of all assets which would be treated as intangibles under the generally accepted accounting principles and practices in the United States of America including, without limitation, capitalized expenses, goodwill, trademarks, trade names, franchises, copyrights, patents and unamortized debt discount and expenses. "CREDIT COMMENCEMENT DATE" The Effective Date. "CREDIT DOCUMENT" or "CREDIT DOCUMENTS" This Agreement, the Notes, each Pledge Agreement, each Seller Subordination Agreement, each UK Credit Document, and each and every other agreement (of any kind), promissory note, instrument, allonge, letter of -5- credit application, assignment, certificate, guaranty, indemnity, bond, financing statement, annex, exhibit, schedule, notice, request or other document that evidences, secures, guarantees or otherwise relates directly or indirectly to the Obligations or Lender's rights and remedies with respect thereto, or that is given to Lender to induce Lender to make, issue or extend the Obligations or any thereof. "Credit Document" shall not include any swap agreement (as defined in 11 U.S.C. ss.101. "CREDIT TERMINATION DATE" March 1, 2002, as the same may be extended with respect to the Revolving Credit Loans pursuant to this Agreement. "DEFAULT" Any event, occurrence, circumstance, act, or failure to act which is or with the giving of notice and/or the passage of time would become an Event of Default. "DEFAULT RATE" As applicable to any Loan, the interest rate per annum that is three percent (3.00%) per annum greater than the interest rate that would be applicable to such Loan prior to the occurrence of an Event of Default. "DEPOSITARY LENDER" The Lender and each other Lender or other financial institution at which any Borrower has a deposit account or a securities account or a Lender Account. "DEPOSITARY LENDER AGREEMENT" A written agreement, satisfactory to Lender in form and substance, among Borrower, Lender and a Depositary Lender. "DESIGNATED LOCATION" Any place of business or other location for each Borrower Group member listed on Schedule 3.23. "DISCLOSURE LETTER" The disclosure letter delivered by Selling Shareholders to EHI pursuant to and concurrently with the Stock Purchase Agreement. "DOCUMENTS" As defined in Section 4A.01. "DOLLARS" The lawful currency of the United States of America. "EAGL" Environmental Assessment Group Limited, a private company limited by shares incorporated in England and Wales, which, upon consummation of the purchase of the Shares, shall be wholly owned by EHI. "EBITDA" For any period, on a rolling four (4) quarter period basis, the consolidated net income of the Borrower Group for such period, after all expenses and other proper charges, except interest, depreciation, amortization and income taxes, determined in accordance with GAAP, and net of incentive compensation, and eliminating, without duplication: (i) all intercompany items, (ii) all earnings attributable to equity interests in persons that are not subsidiaries unless actually received by the Borrower Group, (iii) all income arising from the forgiveness, adjustment, or negotiated settlement of any indebtedness (except for the -6- recovery of trade account receivables previously charged off directly against income in the ordinary course of business not to exceed three percent (3%) of EBITBA for such period), (iv) any extraordinary items of income or expense, (v) any increase or decrease in income arising from any change in the Borrower Group's method of accounting, and (vi) any interest income. "EHI PRINCIPALS" Mitchell B. Smith, Joseph H. Highland, Ph.D., and the other individuals listed in Schedule 3.43, who are residents of the United States and management employees of the U.S. Corporation as of the Effective Date and are the sole shareholders of EHI. "EIL" Environ International Limited, a private company limited by shares incorporated in England and Wales, which, upon consummation of the purchase of the Shares, shall be wholly owned by EHI. "EFFECTIVE DATE" The Effective Date as set forth on the first page of this Agreement. "ENVIRONMENTAL AFFILIATE" As to any Person (referred to in this definition as the "successor"), any other Person whose liability (contingent or otherwise) for an Environmental Claim the successor has retained, assumed or otherwise become or remained liable for, whether by contract, operation of law or otherwise. "ENVIRONMENTAL CLAIM" With respect to any Person, any written notice, claim, suit, order, information request, demand or other communication (referred to in this definition collectively as a "claim") by any other Person alleging, asserting or relating to such first Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other Property, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, release, or threatened release into the environment, of any Regulated Substance at any location, whether or not owned by such Person, or (ii) circumstances forming the basis of any liability or violation under any Environmental Law. Environmental Claim shall include any claim by any governmental authority or other person for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Regulated Substances or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL LAWS" Any statute, regulation, rule, permit, code, common law, judicial decision, order or judgment of any applicable federal, state, local or foreign jurisdiction relating to pollution, hazardous substances, hazardous wastes, petroleum or otherwise relating to protection of the environment, natural resources or human health, including, by way of example and not by way of limitation, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Toxic Substances Control Act, and the Emergency Planning and Community Right-to-Know Act, all as amended. -7- "ENVIRONMENTAL PERMITS" All registrations, licenses, permits, authorizations and approvals that are required by any Environmental Laws or any Governmental Authority responsible for the administration of any Environmental Laws, including any necessary National Pollution Discharge Elimination System Permits. "ERISA" The Employee Retirement Income Security Act of 1974 and the regulations promulgated and rulings issued thereunder, as amended from time to time. "ERISA AFFILIATE" Any trade or business (whether or not incorporated) which is treated as a single employer with any Borrower under Section 414 of the Code. "ERISA EVENT" Any of the following: (i) a Reportable Event with respect to a Qualified Plan or a Multiemployer Plan; (ii) any prohibited transaction described in Section 406 of ERISA which is not exempt by reason of Section 408 of ERISA, or any prohibited transaction described in Section 4975(c) of the Code which is not exempt by reason of Section 4975(c) or (d) of the Code, with respect to any Plan (other than a Multiemployer Plan); (iii) a complete or partial withdrawal from a Multiemployer Plan by any Borrower or any ERISA Affiliate; (iv) the complete or partial withdrawal of any Borrower or an ERISA Affiliate from a Qualified Plan during a plan year in which the withdrawing entity was, or was treated as, a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (v) a failure to pay when due any amount which, under the provisions of any Plan or applicable law relating to any Plan, Borrower or any ERISA Affiliate is required to pay; (vi) the filing of a notice of intent to terminate, or the treatment of a plan amendment as a termination, under Sections 4041 or 4041A of ERISA; (vii) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Qualified Plan or Multiemployer Plan; (viii) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate; (ix) a violation of Sections 404 or 405 of ERISA, or of the exclusive benefit rule under Section 403(c) of ERISA, by any fiduciary (as defined in Section 3(21) of ERISA) or disqualified person (as defined in Section 4975(e) of the Code) with respect to any Plan for which any Borrower or any ERISA Affiliate may be directly or indirectly liable; (x) the incurrence by any Borrower or any ERISA Affiliate of an obligation to pay additional premiums to the PBGC under Section 4006(a)(3)(E) of ERISA with respect to any Plan; and (xi) any lien on the assets of any Borrower arising in connection with any Plan. "EQUIPMENT" As defined in Section 4A.01. "EVENT OF DEFAULT" An Event of Default set forth in Article VI "FINANCIAL COVENANTS" The financial covenants of the Borrower Group set forth in Section 4.19 through 4.23 of this Agreement. "GAAP OR GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" Generally accepted accounting principles in the United States of America as in effect from time to time as set forth in -8- the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied. For Persons incorporated outside the United States, "GAAP" shall mean the accounting principles that are generally accepted within the jurisdiction of such Person's incorporation. "GENERAL INTANGIBLES" As defined in Section 4A.01. "GOVERNMENTAL AUTHORITY" Any executive, judicial, legislative or other branch, department, office, commission, board, bureau, agency, or instrumentality of the government of any jurisdiction, including the federal government of the United States and any foreign country, and any state, provincial, local or municipal government, and including any monetary authority, and including the Persons holding or exercising the powers, privileges, discretions, titles, offices or authorities of any thereof, and including any central Lender or comparable authority or agency. "GUARANTEE" A guaranty or endorsement of, contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, or an agreement to purchase, sell, lease (as lessee or lessor), or license (as licensee or licensor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including causing a Lender or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. "GUARANTOR" Any Person other than Borrower who at any time provides to Lender collateral security or other credit support for the Obligations, including any co-borrower, endorser, guarantor, surety, or accommodation party, any Person who furnishes, issues, confirms, or advises any letter of credit for the benefit of Lender, any Person who furnishes any bond for the benefit of Lender, any person who makes any guaranty, security agreement, pledge agreement, negative pledge agreement, collateral assignment, indemnity agreement, deed of trust, or similar collateral security arrangement for the benefit of Lender, any Person who hypothecates, pledges or delivers any Property to Lender to secure the Obligations. "GUARANTY AGREEMENT" With regard to each Guarantor, a Guaranty Agreement satisfactory to Lender in form and substance. "HELD ITEMS" As defined in Section 4A.01. "INCLUDE AND INCLUDING" Unless otherwise expressly limited herein, the words "include" and "including" shall be read to mean "include, without limitation," and "including, without limitation," as the case may be. -9- "INDEBTEDNESS" As applied to any Person, and as measured without duplication, all items (except items of capital stock, capital or paid-in-surplus or of retained earnings) (a) which in accordance with GAAP, would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person, and (b) to the extent not otherwise included in clause (a) of this definition, all of such Person's (i) Indebtedness for Borrowed Money, (ii) trade accounts payable, and (iii) indebtedness of another Person secured by any Lien to which any Property owned or held by such Person is subject, whether or not the indebtedness secured thereby shall have been assumed, and (v) obligations under any Guarantee. "INDEBTEDNESS FOR BORROWED MONEY" As applied to any Person, and as measured without duplication, all of such Person's Indebtedness from (a) obligations in respect of money borrowed, and including those evidenced by bonds, debentures, notes and other debt instruments, (b) Capital Lease Obligations, (c) Indebtedness on which interest is accrued or charged, (d) reimbursement obligations under letters of credit, liquidated, contingent or otherwise, (e) obligations of, or indebtedness issued or assumed by, such Person, to pay the deferred purchase price or acquisition price of Property or services, and including (i) Capital Expenditures, (ii) trade accounts that are payable more than thirty (30) days after the date the respective goods are delivered or the respective services are rendered, and (iii) trade accounts payable that have been outstanding more than thirty (30) days, and (f) obligations as a guarantor, surety, or accommodation party of items of another Person that as to such other Person would constitute Indebtedness for Borrowed Money of such other Person under the preceding clauses of this definition. "INSTRUMENTS" As defined in Section 4A.01. "INTELLECTUAL PROPERTY" Patents, trademarks, service marks, collective marks, certification marks, trade names, commercial names, brand names, copyrights, and mask works, and including other intangible Property with respect to which a security interest in such Property would be subject to a statute of the United States or any Law of any foreign jurisdiction (to the extent that such statute or Law governs the rights of parties to, and third parties affected by, transactions in such particular types of Property), and rights relating to any of the foregoing, and applications, registrations, re-applications, and re-registrations for any of the foregoing, and amendments, reissues, renewals, or supplementations of, or substitutions or replacements for, any of the foregoing, and including other rights or interests in any of the foregoing, and rights to sue for past, present or future violations or infringements of any of the foregoing, and including any agreements, rights, options, or licenses to purchase or otherwise acquire or use or benefit from (or to sell or otherwise permit any other Person to acquire or use or benefit from) any of the foregoing, and goodwill associated with or related to any of the foregoing or any Borrower or any Borrower's business. Intellectual Property includes manufacturing formulas, trade secrets, know how, shop rights, designs, logos, tags, labels, franchises, distributorships, customer lists, rights to contract and/or insurance expirations and renewals, personal services contracts, employment contracts, confidentiality agreements and similar covenants, rights under agreements not to compete and similar covenants of any Person regarding any of the foregoing, and including opinions and advice of counsel, consultants, -10- advisors, and experts (including research materials, engineering reports and other work product of employees), as memorialized in any form, regarding any of the foregoing. "INTEREST PERIOD" Initially, the period commencing on the date hereof and ending on the first Payment Date, and thereafter, each period commencing on the first day after the last day of the immediately preceding Interest Period and ending on the next Payment Date, provided, (i) any Interest Period that would otherwise end on a day that is not a New York business day shall be extended to the next New York business day, unless such extension would carry such Interest Period into the next month, in which event such Interest Period shall end on the preceding New York business day; (ii) any Interest Period that ends in a month for which there is no day which numerically corresponds to the Payment Date shall end on the last New York business day of such month, and (iii) any Interest Period that would otherwise extend past the maturity date of the applicable Loan shall end on the maturity date of such Loan. "INVENTORY" As defined in Section 4A.01. "INVESTMENT PROPERTY" As defined in Section 4A.01. "INVESTMENTS" With respect to any Person: , (a) any Indebtedness for Borrowed Money of any other Person owed to such Person; (b) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership interests or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (c) acquire by purchase or otherwise any of the outstanding capital stock of, or all or substantially all of the business, property or assets of, any Person, (d) the making of any deposit with, or advance, loan or extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person, but excluding trade credit extended by a Person arising from inventory sold or services provided in the ordinary course of such Person's business). "ITEM OF PAYMENT" As to any Person, all checks, drafts, cash, and other remittances of payment of, or on account of, any Accounts, Instruments, Chattel Paper, Documents, or General Intangibles, or Investment Property or received as proceeds of the sale or lease of any Property or as payment for any services rendered. "LAWS" At any time, all laws, statutes, regulations, ordinances, rules, codes, decrees, orders, and other directives of any federal, state, district, territorial, or local government within the United States of America (or any national, state, provincial or local government outside the United States), or any branch, department, agency or office thereof, applicable to any party to any Credit Document, or to any Property (including any Collateral) of any party to any Credit Document, or to any business, industry, or other activity in which any party to the Credit Documents may be engaged from time to time, including all Environmental Laws. -11- "LETTER OF CREDIT" Any standby letter of credit issued by Lender under this Agreement or any other Credit Document in a face amount denominated in Dollars or British currency for Borrower's account. "LETTER OF CREDIT APPLICATION" A letter of credit application completed on Lender's customary form, or such other form that Lender may find satisfactory in Lender's discretion, and executed and submitted to Lender by Borrower, together with such other information, documents, and instruments as Lender may request Borrower to submit to Lender with such application form. "LETTER OF CREDIT COLLATERAL ACCOUNT" Any deposit account, at and/or for the benefit of Lender, into which Borrower may be required by Lender, from time to time, and in accordance with the terms of this Agreement, to make cash deposits to be held by Lender as cash collateral to secure Borrower's contingent and other reimbursement obligations to Lender under outstanding Letters of Credit. "LETTER OF CREDIT FEE" The amount equal to two percent (2.0%) per annum of the face amount of each Letter of Credit (with a minimum fee of Three Hundred Dollars ($300). "LETTER OF CREDIT MAXIMUM AMOUNT" Five Hundred Thousand Dollars ($500,000). "LETTER OF CREDIT RESERVE AMOUNT" An amount reasonably determined by Lender to reserve against fluctuations in conversion rates between U.S. Dollars and Other Currency in the event Lender issues Letters of Credit in Other Currency. Such amount shall reduce the Letter of Credit Maximum Amount and shall be subject to recalculation from time to time in Lender's reasonably discretion whenever there are outstanding Letters of Credit in Other Currency. "LIBOR BUSINESS DAY" Any Business Day that is also a day for trading by and between Lenders in Dollar deposits in the London interbank market. "LIBOR MARKET INDEX RATE" For any day, the rate for 1-month U.S. dollar deposits as reported on Telerate page 3750 as of 11:00 a.m., London time, on such day, or if such day is not a London business day, then the immediately preceding London business day (or if not so reported, then as determined by Lender from another recognized source or interLender quotation). "LIBOR RATE" With respect to each day during each Interest Period, the rate for U.S. dollar deposits of 1-month maturity as reported on Telerate page 3750 as of 11:00 a.m., London time, on the second London business day before the relevant Interest Period begins (or if not so reported, then as determined by Lender from another recognized source or interLender quotation). -12- "LIBOR RATE LOANS" Loans bearing interest at a rate determined on the basis of the LIBOR Rate. "LIBOR RESERVE REQUIREMENT" For any day as used in the determination of the LIBOR Rate, the aggregate (without duplication) of the rates (expressed as a decimal fraction) or reserve requirements in effect on such day under any regulations of the Board of Governors of the Federal Reserve System (or other Governmental Authority having jurisdiction with respect thereto) prescribed for eurocurrency funding (currently referred to as Eurocurrency liabilities in Regulation D) maintained by a member Lender of such system. "LIEN" means any security interest, security agreement, real estate mortgage, chattel mortgage, deed of trust, title retention contract, security title, factor's lien, assignment, pledge, grant or conveyance for security purposes or in settlement of debt, or other arrangement for security purposes, deed-in-lieu of foreclosure or to secure debt, judgment lien or other lien, charge or encumbrance of any kind, or condemnation or other taking of Property by any Governmental Authority (and including the commencement or pendency of any proceedings relating to any proposed condemnation or other taking) and including any of the foregoing arising by operation of statute or other law or the application of equitable principles, whether perfected or unperfected, avoidable or unavoidable, consensual or nonconsensual. "LIEN NOTICE" means any instrument, document, agreement, or notice given to, or filed, recorded, or registered with, any Person (including any Governmental Authority), and regardless of whether required by any Law, for the purpose of effecting, perfecting, protecting, maintaining, registering, or giving notice of any Lien (or the possibility of a Lien and regardless of whether any Lien other than the Lien Notice exists or the effect of the Lien Notice) upon any of any Borrower's Property, or for any precautionary purposes, including any of the following that may be given to, or filed, recorded, or registered with, any Person (including any Governmental Authority) for any of the foregoing purposes, financing statements, vehicle security interest or lien filings, mortgages, deeds of trust, judgments, leases, indentures, security agreements, collateral assignments, and notices of any of the foregoing. "LOAN REQUEST" Any written request for a Revolving Credit Loan substantially in the form of Exhibit A and executed and delivered to Lender by Borrower. "LOANS" Individually and collectively, the Revolving Credit Loans, Term Loan and the Acquisition Loan made under this Agreement. "LOCK-BOX" Any Obligor's lock-box administered by Lender, in accordance with the terms of a lock-box agreement with such Obligor in form and substance satisfactory to Lender, to which address such Obligor instructs Account Debtors to mail or deliver Items of Payment. -13- "MARGIN STOCK" means margin stock within the meanings of Regulations G, T, U and X of the Board of Governors of the Federal Reserve System (or any successor) as the same may be modified and supplemented and in effect from time to time. "MATERIAL ADVERSE EFFECT" A material adverse effect on (a) the property, business, operations, financial condition, prospects, liabilities or capitalization of the Obligors on a consolidated basis, (b) the ability of the Obligors on a consolidated basis to perform their obligations under any of the Credit Documents, (c) the validity or enforceability of any of the Credit Documents, or (d) the rights and remedies of Lender under any Credit Documents. "MATERIAL AGREEMENT" Any contract or agreement if the breach of such contract or agreement by any Person or the modification or termination of such contract or agreement by any Person would be likely to have a Material Adverse Effect. "MULTIEMPLOYER PLAN" A multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414 of the Code in which employees of any Borrower or an ERISA Affiliate participate or to which any Borrower or any ERISA Affiliate contribute or are required to contribute. "NET INCOME" For any period, as applied to any Person, the net income (or deficit) of such Person for such period (taken as a cumulative whole), after giving effect to deduction of or provision for all operating expenses, all taxes and all other proper deductions, for such period, all as determined in accordance with GAAP. "NET WORTH" At any date, total assets minus total liabilities. For the purposes of this computation, total liabilities shall include all subordinated debt. "NON-LOAN LENDER CREDIT RESERVE" A non-cash reserve required by Lender in its reasonable discretion for indebtedness, liabilities and other obligations to Lender arising out of automated clearing house transactions, cash management transactions, swap agreements, or other non-loan credit risks. "NOTES" The Term Note, Revolving Credit Notes and Seller Note under this Agreement. "NOTIFICATION EVENT" Any of the following events or occurrences: (a) any Default or Event of Default; or (b) any Lien or Lien Notice upon any Property of any Borrower other than Permitted Liens; or (c) any Proceedings other than those disclosed on Schedule 3.13 are commenced or Threatened if such pending or Threatened Proceeding could reasonably be expected to have a Material Adverse Effect; or (d) any ERISA Event; or (e) the occurrence of any event or condition that, with respect to any Borrower, gives rise to unfunded pension liabilities or similar liabilities, severance liabilities, unemployment liabilities, wage claims, or the like, in favor of any Person, including without limitation, any tax authority or Governmental Authority, if such claims or liabilities could, individually or in the aggregate, have a Material -14- Adverse Effect; or (f) any Environmental Claim; or (g) the occurrence of any event or condition that constitutes a default or event of default under any Indebtedness of any Borrower (other than the Obligations) if the acceleration of such Indebtedness as a result of such default or event of default would have a Material Adverse Effect; or (h) any event or fact (or change of fact) or any circumstance (or change of circumstance) that warrants the revision of any Obligor Information in order to cause such Obligor Information to be, and to continue to be, true, accurate and complete in all material respects at all times; or (i) any change in incumbency in one or more of the following offices of any Borrower's management: Chief Executive Officer, Chief Operating Officer, Treasurer, or Director of Finance; or (j) any occurrence, that would not otherwise be a Notification Event within the scope of the foregoing clauses of this definition of Notification Event, which has or reasonably may have a Material Adverse Effect. "OBLIGATIONS" All now existing and hereafter arising obligations, indebtedness, and liabilities of any Borrower to Lender of any kind, whether primary, secondary, contingent, direct or indirect, joint or several, or for payment or for performance, and including any Borrower's obligations to pay to Lender as and when due all principal, interest, costs and expenses, and fees arising from or relating to loans made, or other credits granted or created, or financial accommodations extended, by Lender to any Borrower at any time and in any amount, and including such thereof as may arise in respect of letters of credit issued, advised, confirmed, or paid by Lender on any Borrower's application or for any Borrower's account, and including all of any Borrower's obligations, indebtedness, and liabilities to Lender for payment or performance under this Agreement and the other Credit Documents, and including any other claims or judgments that Lender may have against any Borrower at any time, and including all of each Borrower's now existing or future obligations to Lender under or in connection with any swap agreements (as defined in 11 U.S.C. Section 101), and including any of the foregoing arising before, during, or after the initial or any renewal term of the Credit Documents after the commencement of any case with respect to any Borrower under the United States Lenderruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement and pendency of such case). Without limiting the generality of the foregoing, the Obligations include the Loans. "OBLIGOR INFORMATION" Any information furnished to Lender by or on behalf of any Obligor at any time, including all such information furnished to Lender in connection with Borrower's application for the credits and other accommodations contemplated by this Agreement and the other Credit Documents, including any information contained in any credit or loan application, or letter of credit application, and in any financial statements, tax returns, appraisals, environmental audits, reports, correspondence, opinion letters, annexes, schedules, lists and exhibits relating to such application or otherwise relating to the matters and transactions contemplated by the Credit Documents, and including all representations and other information made to or furnished to Lender in the Credit Documents and in the Exhibits, Schedules and certificates relating thereto, and including any and all financial statements, tax returns, reports, certificates, notices, annexes, schedules, lists and exhibits, furnished to Lender -15- from time to time in accordance with the terms of the Credit Documents or otherwise relating to any Obligor. "OBLIGORS" Each Borrower and any Guarantor. "OPENING DAY BALANCE SHEETS" The opening day balance sheets of each Borrowing Group member, which are more specifically described in Section 2E.03 and 4.01. "OPERATING LEASE" Any lease of Property other than a lease that is a Capital Lease Obligation. "OPERATING LEASE OBLIGATIONS" For any Person, expenditures made by such Person or any of its Subsidiaries to lease any Property, other than expenditures under Capital Lease Obligations. "ORIGINAL CURRENCY" As defined in Section 7.17. "OTHER CURRENCY" As defined in Section 7.17. "OTHER PERSONALTY" As defined in Section 4A.01. "PAYMENT DATE" As defined in Section 2A.04. "PAYMENT OFFICE" Lender's office at 3151 Seventeenth Street Extension, Wilmington, North Carolina 28412, or such other location as may be designated by Lender upon written notice to Borrower. "PBGC" The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED INDEBTEDNESS" Any of the following Indebtedness of any Borrower: (a) Indebtedness arising in the ordinary course of business, other than Indebtedness for Borrowed Money, that is classified as a current liability under GAAP, (b) Indebtedness arising in the ordinary course of business, other than Indebtedness for Borrowed Money, that is not classified as a current liability under GAAP, (c) Permitted Indebtedness for Borrowed Money, (d) Indebtedness under swap agreements (as defined in 11 U.S.C. ss.101) with Lender or any of its Affiliates and any swap agreements (as defined in 11 U.S.C. ss.101) executed in conformance with Section 4.14; (e) Indebtedness under the Seller Note; (f) purchase of EHI stock pursuant to the Shareholder Agreement; and (g) any other Indebtedness specifically listed on Schedule 3.11 on the Effective Date. "PERMITTED INDEBTEDNESS FOR BORROWED MONEY" Collectively, the Obligations and any other Indebtedness for Borrowed Money specifically listed on Schedule 3.11 on the Effective Date. -16- "PERMITTED INVESTMENTS" With respect to any Borrower (a) any Investment in any Person that is a direct wholly-owned Subsidiary of such Borrower on the Effective Date; (b) loans in the ordinary course of business to employees of any Borrower or any direct wholly-owned Subsidiary of any Borrower for any Borrower's or such Subsidiary's business purposes and not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate outstanding at any time; (c) normal and customary advances of sales commissions to employees of any Borrower; (d) endorsements of negotiable instruments and similar negotiable documents in the ordinary course of any Borrower's business; (e) deposits with, including certificates of deposit issued by, Lender or Lender's parent; (f) Investments made through Lender, which must be reasonably acceptable to Lender; (g) swap agreements (as defined in 11 U.S.C. ss.101) with Lender or any of its Affiliates and any swap agreements (as defined in 11 U.S.C. ss.101) executed in conformance with Section 4.14; (h) any Investments specifically listed on Schedule 3.09 on the Effective Date; and (i) purchases of EHI stock pursuant to the Shareholder Agreement; and (i) any Investments which, during any twenty-four (24) month period, do not exceed in the aggregate Five Hundred Thousand Dollars ($500,000). "PERMITTED LICENSE" With regard to any Obligor, the use by any other Person of Intellectual Property of such Obligor in accordance with an arms-length written license agreement pursuant to which royalties are paid to such Obligor in the ordinary course of business. "PERMITTED LIEN" Each Lien listed on Schedule 3.12 and any of the following Liens: (i) any Lien in favor of Lender; (ii) Liens for taxes which are not yet delinquent; (iii) security interests that secure the Seller Note that are (1) by their terms expressly subordinate to the security interests of Lender, (2) if recorded, subordinate of record to the security interests of Lender, and (3) subject to the terms of the Seller Subordination Agreement; (iv) on a consolidated basis, (1) Liens on equipment and other personal property (which Liens secure only such purchase-money financing) or (2) capital leases, the sum of which Liens on equipment and other personal property and capital leases not to exceed in the aggregate Five Hundred Thousand Dollars ($500,000) in any fiscal year or Two Million Dollars ($2,000,000) cumulatively between the Effective Date and the maturity of the Loans; and (v) customary landlord Liens under Operating Leases, which Liens are limited to tangible personal property on the leased premises and security deposits. "PERSON" Any natural person, corporation, limited liability company, partnership, joint venture, entity, association, joint-stock company, trust or unincorporated organization and any Governmental Authority. "PLAN" An employee benefit plan (as defined in Section 3(3) of ERISA) which any Borrower or any ERISA Affiliate sponsors or maintains or to which any Borrower or any ERISA Affiliate is making or is obligated to make contributions, including any Multiemployer Plan or Qualified Plan. -17- "PLEDGE AGREEMENT" Any written pledge agreement in form and substance satisfactory to Lender, given by any Person to pledge to Lender such Person's capital stock in Borrower or any other Person to secure all or any part of the Obligations. "PPDI" Pharmaceutical Product Development, Inc., the parent corporation of Selling Shareholders. "PRIMARY RESPONSIBLE OFFICER" As to any Obligor, the Chief Executive Officer, the President, the Treasurer and the Director of Finance of such Obligor. "PRIME RATE" The rate of interest announced by a bank identified by Lender from time to time as its prime rate. Such Prime Rate is not represented to be the lowest rate of interest offered by any such bank. The rate of interest shall change automatically and immediately as of the date of any change in the Prime Rate, without notice to Borrower or any endorser, surety or guarantor. "PRINCIPALS" Collectively, the EHI Principals and the UK Principals. "PROCEEDINGS" Any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving any Governmental Authority or arbitrator. "PROCEEDS" As defined in Section 4A.01. "PRODUCTS" As defined in Section 4A.01. "PROPERTY" Any right or interest in or to property of any kind whatsoever, whether real, personal, or mixed, and whether tangible or intangible. "PURCHASE PRICE" The purchase price payable by EHI to acquire the Shares pursuant to the Stock Purchase Agreement. "QUALIFIED PLAN" A pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the Code which any Borrower or any ERISA Affiliate sponsors or maintains, or to which any such person is making, or is obligated to make, contributions, or, in the case of a multiple-employer plan (as described in Section 4064(a) of ERISA), has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. "QUARTERLY PAYMENT DATES" January 10, April 10, July 10, and October 10 of each year prior to the Credit Termination Date. "REAL ESTATE PROPERTY" As to any Person, any now owned or hereafter acquired right, title or interest in, and any right to occupy or to use, any Property that is land, -18- improvements to land (and/or space in such improvements), any condominium unit or cooperative unit, or fixtures, and any equipment and other personal property used or useful in the connection with the occupancy, use, improvement or operation thereof, including any fee interest and any leasehold interest, and including all easements and other appurtenances relating thereto, and all rents, incomes, and profits arising therefrom from time to time, and including any rights (but not any duties) arising under any deeds, leases, contracts or other instruments relating thereto. "RECEIVER" Any receiver, trustee, custodian, liquidator or similar fiduciary. "RECORDS" As defined in Section 4A.01. "REGULATED SUBSTANCE OR REGULATED SUBSTANCES" Any substance, material, or waste that is regulated or listed under any Environmental Laws, and such substances, materials, or wastes include, but are not limited to, any whose release or threatened release may pose a risk to human health or the environment, and also include (a) asbestos in any form, (b) urea formaldehyde foam insulation, (c) paint containing lead, (d) transformers or other equipment that contain dielectric fluid polychlorinated biphenyls at levels of fifty (50) parts per million or more, (e) radioactive materials, and (f) petroleum or petroleum hydrocarbons in any form. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements "REGULATORY CHANGE" Any change after the Effective Date in United States federal, state or foreign law or regulation (including Regulation D), including the issuance of any final regulations or guidelines, or the adoption or making of any interpretation, directive or request applying to a class of Lenders, including Lender, of or under any United States federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be illegal) by any Governmental Authority charged with the interpretation or enforcement thereof. "REPORTABLE EVENT" Any event described in Section 4043 of ERISA or in regulations of the PBGC (other than an event for which the thirty (30) day notice to the PBGC is waived by regulations). "RESPONSIBLE OFFICER" With respect to the subject matter of any representation, warranty, covenant, agreement, obligation, notification requirement, or certificate contained in or delivered to Lender pursuant to any of the Credit Documents, the President, the Chief Financial Officer, or the Treasurer of any Obligor, or any other corporate officer of such Obligor who in the normal performance of his or her operational responsibilities should have knowledge of such matter and the requirements with respect thereto. -19- "RESPONSIBLE OFFICER'S CERTIFICATE" A certificate in form and substance satisfactory to Lender and signed by a Responsible Officer to the effect that to the best knowledge and belief of such Responsible Officer, after due inquiry of each Primary Responsible Officer, no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action Borrower proposes to take with respect thereto, and which certificate shall also demonstrate compliance with the financial covenants of this Agreement. "REVOLVING CREDIT" Revolving Credit Loans and Letters of Credit. "REVOLVING CREDIT COMMITTED AMOUNT" The lesser of (a) Three Million Five Hundred Thousand Dollars ($3,500,000) or (b) the sum of (X) Two Million Dollars ($2,000,000) plus (Y) the amount equal to one-third (1/3) of the amount of the principal payments made by Borrower to Lender on the Term Loan. "REVOLVING CREDIT LOANS" The revolving credit loans referred to in Section 2A.01. "REVOLVING CREDIT NOTE" Any promissory note, in form and substance satisfactory to Lender, executed and delivered to Lender by the Borrowers to further evidence the Borrowers' agreement and obligation to repay Revolving Credit Loans. "RISK MANAGEMENT AGREEMENT" Any interest rate swap agreement, basis swap, forward rate agreement, commodity swap, interest rate option, forward foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option, equity or equity index option, bond option, or any similar agreement or derivative product (including any option to enter into any of the foregoing and including any master agreement for any of the foregoing together with all supplements) or similar arrangement between any Borrower and one or more financial institutions or other intermediaries, counterparties or participants. "SELLER NOTE" The Promissory Note dated of even date from EHI made payable to the Selling Shareholders in the amount of Eighteen Million Dollars ($18,000,000). "SELLER SUBORDINATED OBLIGATIONS" All now existing and hereafter arising indebtedness and other obligations of the Borrowers or the Guarantors to the Lender under the Seller Note which are subordinated in accordance with the terms of this Agreement upon and subject to the terms generally set forth on Schedule 1 attached hereto. Lender agrees to subordinate the Seller Note in accordance with terms and conditions to be set forth in the Subordination Agreement, which terms and conditions must be reasonably acceptable to Lender. The Subordination Agreement must contain provisions reflective of the general terms set forth on Schedule 1 and such other terms and conditions required by Lender. -20- "SELLER SUBORDINATION AGREEMENT" The Subordination Agreement described on Schedule 1 attached hereto. "SELLING SHAREHOLDERS" Collectively, (1) Applied Bioscience International, Inc., a Delaware corporation and seller of all of the shares in the US Corporation and (2) PPD UK Holding Limited, a private company incorporated in England and Wales and seller of all of the shares of the UK Corporations. "SHAREHOLDER AGREEMENT" The Shareholder Agreement dated as of January 31, 1999 among the Principals. "SHARES" Collectively, all of the capital stock in the US Corporation and the UK Corporations. "SOLVENT" (a) The fair market value of each Borrower's Property is greater than the total amount of such Borrower's liabilities (including such Borrower's contingent liabilities), (b) the present fair salable value of each Borrower's assets is not less than the amount that will be required to pay such Borrower's probable liabilities on its debts as they become absolute and matured, (c) each Borrower does not intend to, and does not believe that it will, incur debts or liabilities beyond such Borrower's ability to pay as such debts and liabilities mature, and (d) each Borrower is not engaged in business or a transaction for which such Borrower's assets would constitute unreasonably small capital. For such purposes, any contingent liability (including pending litigation, Guarantees, other off-balance-sheet liabilities, unfunded vested liabilities under Plans and claims for federal, state, local and foreign taxes, if any) is to be valued at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "SPECIAL PROPERTY" Vehicles, trailers, rolling stock, shipping containers, airplanes, ships, boats, barges and other vessels, broadcasting and other communications transmission equipment, satellites, and any engines, parts, components, or accessories to any of the foregoing, farm products, minerals, and timber, goods that are or are to become fixtures, Intellectual Property, any property with respect to which a security interest in such property would be subject to any statute of the United States or any statute or other law of any foreign jurisdiction, to the extent that such statute or law governs the rights of parties to any third parties affected by transactions in particular types of property, and any tangible personal property not located at a Designated Location. "STOCK PURCHASE AGREEMENT" The Stock Purchase Agreement dated January 31, 1999 among the Selling Shareholders, as sellers, and EHI, as purchaser. "SUBSIDIARY" As to any Person, (i) any corporation or limited liability company (A) that is directly or indirectly controlled by such Person or any Subsidiary of such Person or (B) if more than fifty percent (50%) of the voting and/or non-voting stock or other -21- ownership shares of such corporation or limited liability company is owned by such Person or any Subsidiary of such Person, (ii) any joint venture or partnership (A) in which such Person or any Subsidiary of such Person is a general partner or (B) if more than fifty percent (50%) of the partnership interests in such venture or partnership are owned by such Person or any Subsidiary of such Person, (iii) any trust for the benefit of such Person or any Subsidiary of such Person, or any other organization, trust or other entity as to which such Person or any Subsidiary of such Person is in control, and (iv) to the extent not otherwise included by the preceding clauses, any Subsidiary of any corporation, limited liability company, partnership, organization, trust or other entity described in clauses (i), (ii), or (iii). "TERM LOAN" The term loan referred to in Article II-B of this Agreement. "TERM NOTE" A term promissory note, in form and substance satisfactory to Lender, executed and delivered to Lender by Borrower to further evidence the Borrowers' agreement and obligation to repay the Term Loan. "THREATENED" A claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made in writing or any notice has been given in writing, or if any other event has occurred or any other circumstance exists, that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future. "UCC" The Virginia Uniform Commercial Code. "UK CORPORATIONS" Collectively EAGL and EIL. "UK CREDIT DOCUMENTS" The Guaranty Agreements executed by each of the UK Corporations and any other documents executed by the UK Corporation in connection with the Guaranty Agreements and for the benefit of Lender. "UK PRINCIPALS" The individuals listed on Schedule 3.43, who are residents of the United Kingdom and management employees of EHI or EAGL and EIL upon and after the Effiective Date. "UK TRANSACTION" The purchase of all of the Shares in the UK Corporations by EHI pursuant to the Stock Purchase Agreement. "UNFUNDED BENEFIT LIABILITY" The excess of a Plan's benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the current value of such Plan's assets, determined in accordance with the assumptions used by the Plan's actuaries for funding the Plan pursuant to Section 412 of the Code for the applicable plan year. "UNUSED CREDIT FEE" A fee payable on the unused portion of the Revolving Credit in accordance with the following schedule: -22- - ---------------------------------------- -------------------------------------- CONSOLIDATED FUNDED DEBT TO EBITDA UNUSED CREDIT FEE - ---------------------------------------- -------------------------------------- => 4.0:1 50 basis points - ---------------------------------------- -------------------------------------- => 3.0:1, but < 4.0:1 37.5 basis points - ---------------------------------------- -------------------------------------- => 2.5:1, but < 3.0:1 25 basis points - ---------------------------------------- -------------------------------------- <2.5:1 25 basis points - ---------------------------------------- -------------------------------------- "US TRANSACTION" The purchase of all of the Shares in the US Corporation by EHI pursuant to the Stock Purchase Agreement. "YEAR 2000 ISSUES" With respect to any Person, anticipated costs, problems and uncertainties associated with the inability of certain computer applications and imbedded systems to effectively handle data, including dates, on and after January 1, 2000, as it affects the business, operations, and financial condition of such Person, and such Person's customers, suppliers and vendors. ARTICLE II-A CREDIT FACILITY - REVOLVING CREDIT LOANS In the event Lender subordinates the Seller Note to a revolving credit facility in accordance with Schedule 1 attached hereto, then the provisions of this Article II-A shall cease to be of further force and effect, and in such event all amounts outstanding under the Revolving Credit Loans and the Term Loan shall be repaid in full prior to Lender's subordination of the Seller Note to any revolving credit facility. SECTION 2A.01. REVOLVING CREDIT LOANS. Lender shall, upon the terms and subject to the conditions hereinafter set forth, and from time to time on or after the Credit Commencement Date and before the Credit Termination Date, make Revolving Credit Loans to the Borrower in an aggregate amount not to exceed, at any time, the Revolving Credit Committed Amount less the sum of (a) the aggregate face amounts of all outstanding Letters of Credit caused to be issued by the Lender under this Agreement or any other Credit Documents, (b) the Letter of Credit Reserve Amount, if any, and (c) the Non-Loan Lender Credit Reserve, if any. With the written consent of each Borrower and each Guarantor, Lender may, in Lender's sole and absolute discretion, extend the Credit Termination Date at any time for up to an additional twelve (12) months. SECTION 2A.02. REQUESTS. From time to time on or after the Credit Commencement Date and before the Credit Termination Date, Borrower may request Revolving Credit Loans by giving Loan Requests to Lender, provided that: -23- (a) Borrower shall not request Revolving Credit Loans in an amount which, if advanced, would cause the Available Revolving Credit Amount to be less than One Dollar ($1.00); (b) each Loan Request shall be given to Lender at least one (1) Business Day prior to the proposed date of such Revolving Credit Loan and shall state the proposed Business Day on which to make the Revolving Credit Loan; and (c) all Revolving Credit Loans shall be made in amounts of even multiples of Fifty Thousand Dollars ($50,000). SECTION 2A.03. COVENANT TO PAY; REVOLVING CREDIT NOTES. Borrower jointly and severally covenants and agrees to repay the Revolving Credit Loans to Lender, together with all accrued interest and late charges thereon, and all out-of-pocket expenses of Lender and fees relating thereto, without set-off, defense or counterclaim of any kind, in accordance with the terms of this Agreement, the Revolving Credit Notes and the other Credit Documents. Borrower's agreement and obligation to pay Revolving Credit Loans, together with all accrued interest and late charges thereon, and all out-of-pocket expenses of Lender and fees relating thereto, shall in Lender's discretion be further evidenced by one or more Revolving Credit Notes, and each Revolving Credit Note may evidence one or more Revolving Credit Loans, and Borrower shall promptly, upon Lender's request from time to time, execute and deliver to Lender Revolving Credit Notes as further evidence of Borrower's agreement and obligation to pay the Revolving Credit Loans. Lender is irrevocably authorized but not obligated to record the date and amount of each Revolving Credit Loan, and each payment made to Lender on the Revolving Credit Loans, on the Revolving Credit Notes or on schedules attached to the Revolving Credit Notes or otherwise in Lender's discretion, provided that the failure to record such information shall not affect the Borrower's obligation to repay the Revolving Credit Loans. SECTION 2A.04. INTEREST PAYMENTS. Interest on the outstanding principal balances of Revolving Credit Loans shall accrue and be payable at the Applicable Revolving Credit Loan Interest Rate, and payments of accrued and unpaid interest on the Revolving Credit Loans shall be made monthly in arrears on the first (1st) day of each month (the "Payment Date"). SECTION 2A.05. PRINCIPAL PAYMENTS. Unless otherwise set forth in any applicable Revolving Credit Note, and subject to acceleration upon the occurrence of an Event of Default and such mandatory prepayments as may be required in accordance with the terms of this Agreement, unless sooner paid in full, the outstanding balances of all Revolving Credit Loans shall be due and payable on the Credit Termination Date. SECTION 2A.06. COLLATERAL ACCOUNT PAYMENTS. Upon and after the occurrence of an Event of Default, Lender shall be entitled to apply the collected balances in the Collateral Account, or any portion thereof, at any time and from time to time, against the outstanding balance of any Loans, and/or to make deposits to the Letter of Credit Collateral Account in -24- accordance with the terms of this Agreement, in such order as Lender may determine in Lender's discretion. SECTION 2A.07. USE OF REVOLVING CREDIT LOAN PROCEEDS. The proceeds of the Revolving Credit Loans shall be used solely to provide working capital to the US Corporation in the ordinary course of its business. The proceeds of the Revolving Credit Loans shall not be used for any acquisition-related costs or expenses in connection with the acquisition of the Shares. ARTICLE II-B CREDIT FACILITY - TERM LOAN AND ACQUISITION LOAN SECTION 2B.01. TERM LOAN. Lender agrees, upon the terms and subject to the conditions of this Agreement, to make a Term Loan to Borrower in the amount of up to Seven Million Dollars ($7,000,000). Bank further agrees, upon the terms subject to the conditions of this Agreement, to make an Acquisition Loan to Borrower in the amount of Eighteen Million Dollars ($18,000,000). SECTION 2B.02. COVENANT TO PAY; TERM NOTE. Borrower jointly and severally covenants and agrees to execute and deliver to Lender the Term Note and the Seller Note immediately upon the execution and delivery of this Agreement and to repay the Term Loan and Acquisition Loan to Lender, together with all accrued interest and late charges thereon, and all expenses, costs and fees relating thereto, without set-off, defense or counterclaim of any kind, in accordance with the terms of this Agreement and the Term Note and the Seller Note. SECTION 2B.03. PAYMENT SCHEDULE. The Term Loan shall be repayable beginning on March 1, 1999 in forty-seven (47) equal consecutive monthly payments of principal in the amount of One Hundred Forty-Five Thousand Eight Hundred Thirty-Three and 33/100 Dollars ($145,833.33) each, plus, on each Payment Date, a payment of interest on the unpaid principal balance at the Applicable Term Loan Interest Rate, and one final installment of the entire unpaid principal balance and all accrued but unpaid interest thereon due and payable on February 1, 2003. The Acquisition Loan shall be repayable in accordance with the terms set forth in the Seller Note to be delivered upon execution of this Agreement. SECTION 2B.04. USE OF TERM LOAN AND ACQUISITION LOAN PROCEEDS. The proceeds of the Term Loan and the Acquisition Loan shall be used solely to pay a portion of the Purchase Price. -25- ARTICLE II-C CREDIT FACILITY - LETTERS OF CREDIT SECTION 2C.01. LETTER OF CREDIT APPLICATIONS. Each Letter of Credit issued under this Agreement shall be issued pursuant to a Letter of Credit Application and shall be issued in form and substance satisfactory to Lender in Lender's discretion. In the event of a conflict between the terms of this Agreement and the terms of a Letter of Credit Application, the terms of this Agreement shall control unless otherwise expressly stated in the Letter of Credit Application accepted by Lender. Borrower may from time to time submit Letter of Credit Applications to Lender in accordance with the terms of this Agreement, and upon such applications Lender may cause to be issued Letters of Credit for Borrower's account. Letter of Credit Applications shall be submitted to Lender not later than 10:00 a.m., Eastern Time, at least five (5) Business Days prior to the Business Day on which Borrower requests that the Letter of Credit be issued. Borrower shall not submit any Letter of Credit Application to Lender for a Letter of Credit in a face amount that, if issued, would cause the aggregate face amounts of all outstanding Letters of Credit to exceed the Available Letter of Credit Amount. SECTION 2C.02. LETTER OF CREDIT EXPIRY DATES. Each Letter of Credit shall expire on a date not more than one (1) year after the date that the Letter of Credit is issued, provided that no Letter of Credit shall be issued with an expiration date on or after the Credit Termination Date. SECTION 2C.03. LETTER OF CREDIT FEES. Borrower shall pay to Lender a Letter of Credit Fee for each Letter of Credit issued under this Agreement, and such Letter of Credit Fee shall be due and payable at the time of issuance of the Letter of Credit. Borrower shall also pay to Lender on demand such issuance, amendment, and letter of credit transaction fees as may be announced by Lender from time to time. SECTION 2C.04. LETTER OF CREDIT RESERVES. If any change in any Law or in the interpretation thereof by any court or other governmental authority charged with administration thereof shall either (a) impose, modify or deem applicable any reserve, special deposit or similar requirement against any Letter of Credit, or (b) impose on Lender any other condition regarding this Agreement or any Letter of Credit, and the result of any event referred to in clauses (a) or (b) of this Section shall be to increase the cost to Lender of issuing any Letter of Credit, then upon demand by Lender, Borrower shall pay to Lender such additional amounts as may be necessary to compensate Lender for such increased costs. A certificate submitted by Lender to Borrower, stating such increased costs of issuing Letters of Credit, shall be conclusive, absent manifest error, as to the amount of such increased costs. SECTION 2C.05. PAYMENTS ON LETTERS OF CREDIT. (a) Borrower covenants and agrees to immediately and without demand, and without set-off, defense or counterclaim of any kind, reimburse Lender in Dollars in immediately available funds all amounts drawn under Letters of Credit. -26- (b) Prior to the occurrence of an Event of Default, and unless otherwise immediately reimbursed to Lender in Dollars in immediately available funds by Borrower, but only to the extent that Revolving Credit Loans may be made under this Agreement in the necessary amounts at such times, all amounts drawn under Letters of Credit may be reimbursed to Lender with proceeds of Revolving Credit Loans made by Lender to Borrower (and regardless of whether Borrower shall have requested such Revolving Credit Loans) for the purpose of making such reimbursements. All such amounts reimbursed with the proceeds of Revolving Credit Loans shall be repayable in accordance with the terms of this Agreement and the other Credit Documents. (c) Upon the occurrence of an Event of Default, all of Borrower's reimbursement obligations under Letters of Credit, including Borrower's obligations to reimburse Lender for amounts drawn under Letters of Credit and Borrower's contingent obligations for amounts not yet drawn under outstanding Letters of Credit, whether then due or otherwise, shall be immediately due and payable by Borrower. All amounts paid to Lender in respect of such contingent obligations for amounts not yet drawn shall be held by Lender in the Letter of Credit Collateral Account as cash collateral and applied by Lender to reimburse Lender from time to time for amounts drawn under Letters of Credit until all Letters of Credit have expired and Lender shall have been reimbursed for all amounts drawn under Letters of Credit, and Borrower hereby assigns to Lender and grants Lender a security interest in all amounts so held in any Letter of Credit Collateral Account as cash collateral for Borrower's reimbursement obligations under Letters of Credit. If Borrower fails to pay such reimbursement obligations immediately, including such amounts as are required to be held in the Letter of Credit Collateral Account, Lender may, in Lender's discretion and without any obligation to do so, and regardless of whether Borrower shall have requested such Revolving Credit Loans or given Lender instructions to the contrary, make Revolving Credit Loans to Borrower and directly apply the proceeds of such Revolving Credit Loans to the payment of some or all of such reimbursement obligations and to the funding of some or all such amounts to be held in, and disbursed to Lender from, the Letter of Credit Collateral Account. All such amounts paid or held from the proceeds of Revolving Credit Loans shall be repayable in accordance with the terms of this Agreement and the other Credit Documents. (d) Borrower's agreement and obligation to reimburse Lender for amounts due and payable as set forth in the preceding clauses of this Section (including all such amounts in respect of contingent obligations) shall be absolute and unconditional under all circumstances and shall be paid without set-off, counterclaim, or defense to payment that Borrower may have against the beneficiary of any such Letter of Credit or Lender or any other Person, including any set-off, counterclaim or defense based on any drawing documents proving to be forged, fraudulent or invalid, or the legality, validity, regularity or enforceability of such Letter of Credit or any Letter of Credit Application, this Agreement, the Notes, or any other Credit Documents. SECTION 2C.06. INSTRUCTION TO PAY; INDEMNIFICATION. -27- (a) Borrower hereby irrevocably instructs Lender to pay any draft complying with the terms of any Letter of Credit. Borrower assumes all risks of the acts and omissions of the beneficiary and other users of any Letter of Credit. (b) Lender and its branches, affiliates and/or correspondents shall not be responsible for and Borrower shall indemnify and hold Lender and its branches, affiliates and correspondents harmless from and against all liability, loss and expense (including reasonable attorney's fees and costs) incurred by Lender or its branches, affiliates or correspondents relative to or as a consequence of (i) any failure of Borrower to perform the agreements hereunder and under any Letter of Credit Application, (ii) any Letter of Credit Application, this Agreement, any Letter of Credit and any drafts and acceptances under or purporting to be under any Letter of Credit, (iii) any action taken or omitted by Lender or its branches, affiliates or correspondents at the request of the Revolving Credit Loan Borrower Group, (iv) any failure or inability to perform in accordance with the terms of any Letter of Credit by reason of any control or restriction rightfully or wrongfully exercised by any de facto or de jure government, group or individual asserting or exercising governmental powers, and (v) any consequences arising from causes beyond the control of Lender or its branches, affiliates or correspondents. (c) Except for gross negligence and willful misconduct of Lender, and its branches, affiliates and correspondents, Lender and its branches, affiliates and correspondents, shall not be liable or responsible in any respect for any (i) error, omission, interruption or delay in transmission, dispatch or delivery of any one or more messages or advices in connection with any Letter of Credit, whether transmitted by cable, telegraph, mail or otherwise and despite any cipher or code which may be employed, or (ii) action, inaction or omission which may be taken or suffered by it or them in good faith or through inadvertence in identifying or failing to identify any beneficiary or otherwise in connection with any Letter of Credit. (d) Any Letter of Credit may be amended, modified or revoked only upon the receipt by Lender from Borrower and the beneficiary (including any transferees and assignees of the original beneficiary), of a written consent and request for such amendment, modification or revocation, and then only on such terms and conditions as Lender may prescribe in Lender's discretion. (e) If any Laws, orders of court and/or rulings or regulations of any governmental authorities of the United States, any state, or foreign government permits the beneficiary under a Letter of Credit to require Lender or its branches, affiliates or correspondents to pay drafts under or purporting to be under a Letter of Credit after the expiration date of the Letter of Credit, Borrower shall reimburse Lender for any such payment pursuant to Section 2C.05. (f) Except as may otherwise be specifically provided in a Letter of Credit or Letter of Credit Application, the laws of the Commonwealth of Virginia and the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500 shall govern the Letters of Credit. In the event of a conflict -28- between the Uniform Customs and Practice for Documentary Credits and the laws of the Commonwealth of Virginia, the Uniform Customs and Practice for Documentary Credits shall prevail. SECTION 2C.07. USE OF LETTERS OF CREDIT. Each Letter of Credit shall be used solely for a general corporate purposes of the US Corporation. In addition, the US Corporation may have Letters of Credit issued on behalf of the UK Corporations in other than U.S. Dollars. SECTION 2C.08 LETTERS OF CREDIT DENOMINATED IN OTHER THAN U.S. DOLLARS. For purposes of determining the outstanding balance of Letters of Credit, the aggregate principal amount of Letters of Credit issued and outstanding in other than U.S. Dollars shall be converted to the U.S. Dollar equivalent amount, as calculated by Lender in Lender's reasonable discretion, on the date of such determination. ARTICLE II-D CREDIT FACILITY - GENERAL CREDIT PROVISIONS SECTION 2D.01. LENDER RECORDS. Absent manifest error, Lender's records of Loans made and payments received in respect of Loans, including Lender's entries on any Revolving Credit Notes or schedules that may be attached to Revolving Credit Notes from time to time, and of Letters of Credit, and all amounts drawn thereunder and all reimbursements thereof, shall be presumed correct. Notwithstanding the foregoing, the absence of a Revolving Credit Note or Lender's failure to record loan amounts or payments or other related information (or any error in recording such amounts or other information) shall not limit or affect any Borrower's agreement and obligation to repay the Loans, and all accrued interest and other amounts on the Loans, in accordance with the terms of this Agreement, the Notes, and the other Credit Documents. SECTION 2D.02. COMPUTATION OF INTEREST. All interest shall accrue based on a 360-day year for the actual number of days outstanding. SECTION 2D.03. LATE CHARGES; DEFAULT INTEREST. If any payment of principal or interest due on either of the Loans, or any payment under any reimbursement obligation in respect of any Letter of Credit, is not paid to Lender within ten (10) days after the date that such payment is due, then Lender, in Lender's sole discretion, shall be entitled to impose on Borrower a "late charge" equal to five percent (5%) of the amount not paid when due, and Borrower and the Guarantors shall be obligated to pay each such late charge to Lender immediately upon the imposition thereof by Lender. In Lender's discretion, upon and after the occurrence of an Event of Default, interest on the outstanding principal balances of all Loans shall accrue and be payable at the Default Rate. SECTION 2D.04. Omitted. -29- SECTION 2D.05. UNUSED CREDIT FEE. Borrower shall pay to Bank the Unused Credit Fee for each year or portion thereof prior to the termination of Bank's obligations to extend Revolving Credit under this Agreement. The accrued portion of the Unused Credit Fee shall be due and payable to Bank in arrears on each Quarterly Payment Date. Borrower hereby authorizes Bank to debit Borrower's account maintained with Bank to pay the Unused Credit Fee on each Quarterly Payment Date. For purposes of the calculation of the Unused Credit Fee, the unused portion of the Revolving Credit shall be the average daily Available Revolving Credit Amount during the applicable quarter. The Unused Credit Fee shall be based upon the Consolidated Funded Debt to EBITDA ratio for the preceding fiscal quarter for which Bank shall have received quarterly financial statements pursuant to this Agreement, E.G. the Unused Credit Fee for the period from January through March of a particular year shall be based upon the quarterly financial statements for the fiscal quarter ending the immediately preceding December. SECTION 2D.06. MANDATORY ADDITIONAL PAYMENTS. At any time that the aggregate outstanding principal balance of Revolving Credit Loans, plus the aggregate face amounts of outstanding Letters of Credit, exceeds the Revolving Credit Committed Amount, Borrower shall immediately and without demand, and without set-off, defense or counterclaim of any kind, make payments to Lender of Revolving Credit Loans in the amount necessary in order to reduce the aggregate outstanding balance of Revolving Credit Loans so that the aggregate outstanding balance of Revolving Credit Loans, plus the aggregate face amounts of outstanding Letters of Credit, will not exceed the Revolving Credit Committed Amount. SECTION 2D.07. PREPAYMENTS. Borrower may prepay Revolving Credit Loans, the Term Loan and the Acquisition Loan in whole or in part at any time without premium or penalty. All prepayments of the Term Loan or the Acquisition Loan shall be applied in inverse order of the maturity of the scheduled payments. Any prepayment of the Loans shall not affect Borrower's obligation to continue to make payments under and in accordance with any swap agreement (as defined in 11 U.S.C. ss.101), which payments shall be governed exclusively by the term of such swap agreement. SECTION 2D.08. MANNER OF PAYMENTS. All payments to be made to Lender shall be made in Dollars in immediately available funds without set-off, defense, counterclaim or deduction of any kind, not later than 12:00 noon, Eastern Time, at the Payment Office on the dates specified for such payments under this Agreement, the Revolving Credit Notes, the Term Note, the Seller Note or the other Credit Documents. Borrower's failure to make any such payments by 12:00 noon, Eastern Time, on the dates on which such payments are due shall not be an Event of Default so long as such payments are made later on the day that such payments are due provided that any such payments made after 12:00 noon, Eastern Time, on the dates such payment are due shall be deemed to have been made on the next Business Day thereafter for purposes of calculating interest on amounts outstanding under the Loans. Payments made in other than Dollars shall be accepted subject to collection. SECTION 2D.09. APPLICATION OF PAYMENTS. Payments made by Borrower to Lender shall be applied in such order as Lender may determine in Lender's discretion. -30- SECTION 2D.10. CAPITAL ADEQUACY. Borrower shall pay to Lender from time to time upon Lender's demand such additional amounts as Lender may determine in Lender's discretion to be necessary to compensate Lender for any reduction in the rate of return on Lender's capital (or on the capital of Lender's holding company, if any) due to the applicability of any Capital Adequacy Requirement, as a consequence of the existence of Lender's obligations under this Agreement, to a level below, by an amount reasonably deemed by Lender to be material, that which Lender (or Lender's holding company) could have achieved but for such Capital Adequacy Requirement. SECTION 2D.11. RATE ADEQUACY. If Lender reasonably determines in Lender's reasonable discretion that (a) deposits in Dollars (in the applicable amounts) or quotations of interest rates for the relevant deposits are not being offered to Lender in the relevant amounts or for the relevant maturities for purposes of determining the rates of interest on LIBOR Rate Loans under this Agreement, or (b) the applicable LIBOR Rate will not adequately and fairly reflect Lender's cost of funding LIBOR Rate Loans for such Interest Periods, then any obligation to make such LIBOR Rate Loans under this Agreement shall be suspended until such time as the inadequacy or unavailability of LIBOR Rate Loans no longer exists. In the event LIBOR Rate Loans are not available on account of operation of this Section, Lender shall use the Prime Rate as an alternate index or reference rate. SECTION 2D.12. REGULATORY CHANGE. Borrower shall pay to Lender from time to time, upon Lender's demand, such additional amounts as Lender may determine in Lender's reasonable discretion to be necessary to compensate Lender for any Additional LIBOR Costs resulting from any Regulatory Change that: (a) subjects Lender to any tax, duty or other charge in respect of the LIBOR Rate Loans (or the Notes evidencing LIBOR Rate Loans) or subjects the Lender to changes in the basis of taxation of any amounts payable to Lender under this Agreement (or the Notes) in respect of any LIBOR Rate Loans or Lender's obligations to make LIBOR Rate Loans (excluding changes in the rate of tax on the overall net income of Lender by the jurisdiction in which Lender has its principal office); or (b) imposes, modifies, or deems applicable any reserve, special deposit or similar requirements (other than the LIBOR Reserve Requirements used in the calculation of the LIBOR Rate under this Agreement) relating to any extensions of credit or against assets of, or any deposits with, or other liabilities of, Lender (including any LIBOR Rate Loans or any deposits referred to in the definition of LIBOR Base Rate in this Agreement), or Lender's commitment to make LIBOR Rate Loans under this Agreement; or (c) imposes any other condition affecting this Agreement or the Notes (or any of such extensions or credit or liabilities) or Lender's commitment to make LIBOR Rate Loans under this Agreement. Additionally, if any Regulatory Change or any event affecting the United States money markets or the London interLender market, causes Lender to either (X) incur Additional LIBOR Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of Lender that includes deposits by reference to which the interest rate on LIBOR Rate Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of Lender that includes LIBOR Rate Loans, or (Y) become subject to restrictions on the amount of such category of liabilities or assets that it may hold, then, if Lender -31- so elects, the obligation of Lender to make or renew LIBOR Rate Loans under this Agreement shall be suspended until such Regulatory Change ceases to be in effect or the effects of such other event cease. SECTION 2D.13. DESIGNATION OF AGENT AND ATTORNEY-IN-FACT. Each Borrower that is a party to any Credit Document hereby irrevocably appoints EHI (referred to herein as the "BORROWER GROUP AGENT") as the agent and attorney-in-fact for such Borrower with full power and authority to act on behalf of such Borrower in all respects with respect to any actions, waivers, consents, payments, receipts, or notices, whether or not required under this Agreement or the other Credit Documents, or as the Borrower Group Agent may engage in, provide, give or take in its sole and unfettered discretion. Each such Borrower agrees that all actions taken, waivers or consents provided, payments made or received, or notices given or received, by Lender, in each case by or to the Borrower Group Agent, shall be effective as to such Borrower regardless of whether such action, waiver, consent or notice was taken or approved by, or given or received by, any Person other than the Borrower Group Agent. In all respects and circumstances, Lender is entitled to rely without limitation on any and all actions, waivers, consents, and notices of the Borrower Group Agent as actions, waivers, consents or notices of all such Borrowers, including any and all agreements to modify or amend in any respect, or grant any waiver or consent under, or to give or receive any notice with respect to, this Agreement or any other Credit Documents, and Lender is under no expectation or obligation whatsoever to inquire as to whether any such action or waiver was approved or ratified by, or notice given or received by, any such Borrower, and may act as if any such action, waiver, consent, or notice was engaged in, provided, taken, given or received by each such Borrower. In this respect, absent written notice to the contrary with respect to a specified matter, it is agreed that, in each and every circumstance insofar as Lender is concerned, any action taken, waiver or consent given, or notice given or received by the Borrower Group Agent, shall be deemed taken, given or received by each such Borrower even absent an express indication that such action is taken, such waiver or consent is given, or such notice is given or received by any such Borrower. SECTION 2D.14. NET PAYMENTS. Any and all payments of principal, interest, fees and other Obligations by Borrower hereunder and under the Notes and the other Credit Documents shall be made free and clear of and without deduction for any and all Taxes. As used herein, "TAXES" means (a) All present or future taxes, levies, imposts, deductions, charges or withholding, and all liabilities, imposed by any taxing authority in any jurisdiction (other than the United States, except as otherwise provided in clause (b) of this sentence) by reason of the payment of principal, interest, fees and other Obligations hereunder, and (b) shall also include taxes imposed by any United States taxing authority by reason of the payment of increased amounts pursuant to clause (i) of the next sentence, but only to the extent attributable to such increase. If any such Taxes shall be required by law to be deducted from or in respect of any principal, interest, fees or other Obligations payable to Lender hereunder: (i) the sum payable by Borrower shall be increased as necessary so that after taking all such Taxes into account, Lender shall receive an amount equal to the sum it would have received had no such deductions been made; (ii) the applicable Borrower Group shall make all required deductions for such -32- Taxes; and (iii) the applicable Borrower Group shall pay the full amount deducted to the relevant taxing authority in accordance with applicable law and shall furnish Lender with proof of such payment. The term "Taxes" shall not include any taxes imposed on the income of the Lender. ARTICLE II-E CREDIT FACILITY - CONDITIONS SECTION 2E.01. FULFILLMENT OF CONDITIONS. In requesting, applying for, or taking the Term Loan or any Revolving Credit Loan or any Letter of Credit from Lender, Borrower shall be deemed to have represented and warranted to Lender that each of the following conditions in this Article have been fulfilled. Borrower's failure to fulfill one or more of the following conditions shall not be relieved by the making of any Loan or the issuance of any Letter of Credit. Neither the making of any Loan nor the issuance of any Letter of Credit shall constitute a waiver of any of the following conditions. SECTION 2E.02. CONDITIONS TO ALL LOANS AND LETTERS OF CREDIT. The following are conditions precedent to the making of the Term Loan and all Revolving Credit and must be fulfilled to Lender's satisfaction: (a) On and as of the date each Loan is made, and on and as of the date each Letter of Credit is issued, each representation and each warranty made in this Agreement and in any other Credit Documents shall be true, accurate, and complete; (b) On and as of the date each Loan is made, and on and as of the date that each Letter of Credit is issued, no Default or Event of Default shall have occurred and be continuing; (c) All Credit Documents required by Lender from time to time shall have been fully executed by the parties thereto and delivered to Lender; stock certificates representing all of the Shares and stock powers for such Shares signed in blank shall have been delivered to Lender; and all actions necessary for the perfection and protection of Lender's security interests under this Agreement and the other Credit Documents, and all actions necessary to maintain the first priority of such security interests, shall have been taken and completed; notwithstanding the foregoing, execution and delivery of the UK Credit Documents shall not be required as a condition to funding of the Term Loan; (d) Borrower shall have paid to Lender in the manner described herein all out-of-pocket expense of Lender and all fees then due and payable through the date of the making of such Loan or the issuance of such Letter of Credit; (e) After the Effective Date, and as of the date each Loan is made or Letter of Credit is issued, there shall not have occurred any material and adverse change in the -33- Obligors' consolidated financial position, nor any condition, event, or act which would have a Material Adverse Effect; and (f) Lender shall have received certificates of insurance, satisfactory to Lender in form and substance with copies of each insurance policy required under this Agreement or any of the other Credit Documents endorsed in favor of Lender as required by the Credit Documents to be delivered promptly following the Effective Date, and such insurance shall be in full force and effect. SECTION 2E.03. CONDITIONS TO TERM LOAN AND THE ACQUISITION LOAN. The following are conditions precedent to the making of the Term Loan and the Acquisition Loan and must be fulfilled to Lender's satisfaction: (a) Lender shall have received the following: (i) copies of resolutions of the Board of Directors of each Borrower, authorizing the execution, delivery and performance of this Agreement and the other Credit Documents, and the borrowing hereunder, and such other matters as Lender may require, in form and substance satisfactory to Lender, certified by the Secretary or Assistant Secretary of such Borrower; (ii) a certificate of the Secretary or Assistant Secretary of each Borrower as to the correctness and completeness of the copy of the By-laws of such Borrower attached thereto and as to the incumbency and signatures of the officers of such Borrowers who execute the Credit Documents; (iii) a copy of the Articles of Incorporation of each Borrower, certified by an officer of such Borrower as being correct and complete, together with a certificate of the appropriate officer or department of the state in which such Borrower is incorporated as to the good standing and, if applicable, authority of such Borrower, with copies of the Articles of Incorporation of such Borrower on file; (iv) certificates of the appropriate officers or departments of the states in which each Borrower is not incorporated but does business as to such Borrower's qualification and good standing to conduct business as a foreign corporation in such states; (v) an opinion letter or opinion letters from counsel (including Virginia counsel) to each Obligor in form and substance satisfactory to Lender; (vi) Omitted. (vii) unless otherwise provided in accordance with preceding clauses (i) through (vi), the corresponding certificates, documents, and opinion letters required in the foregoing clauses (i) through (vi), as applicable, for TAS; and -34- (viii) such additional supporting certifications and other documents as Lender may reasonably request. (b) The US Transaction and the UK Transaction shall each have occurred subject only to the funding of the Term Loan and the Acquisition Loan. The Borrowers shall have delivered to Lender a complete copy of the fully executed Stock Purchase Agreement, with complete copies of all exhibits (executed, as applicable) and schedules, and complete copies of all documents, letters, disclosures (including all Disclosure Letters referred to in the Stock Purchase Agreement), certificates, instruments (including instruments or certificates representing the Shares) and any other materials delivered to the Obligors in connection with or pursuant to the terms of the Stock Purchase Agreement, and Lender shall have found such items to be satisfactory in the Lender's sole discretion. The Stock Purchase Agreement shall not have been amended, nor shall any obligations, rights, or remedies thereunder have been waived, without prior written notice to, and the prior written consent of, Lender. (c) The Collateral has a value acceptable to Lender. (d) Omitted. (e) Lender shall have received the estimated Opening Day Balance Sheets prepared by Borrower. (f) Lender shall have received such information regarding the Principals as Lender may have requested. All information provided to Lender regarding the Principals shall be subject to Lender's review and must be satisfactory to Lender in Lender's sole discretion. (g) Lender shall have received for each Borrower, and for each of the Principals, copies of all shareholder agreements, employment agreements, confidentiality agreements, information protection agreements and the like, which shareholder agreements, employment agreements, non-competition agreements, confidentiality agreements, information protection agreements and the like in form and substance satisfactory to Lender. (h) Omitted. (i) Obligors' intangible assets shall include, without limitation, on the Effective Date the worldwide trademark rights to the use (and to license others to use) the names "Environ" and "Environ International" and "Environ International Corporation" (and any related tradenames) in the same manner in which they are currently used by the US Corporation and the UK Corporations, which rights must be unencumbered except by the security interests and collateral assignments in favor of Lender or by Permitted Liens. As used in the preceding sentence, "worldwide" means the United States of America, and its territories and possessions (and the Commonwealth of Puerto Rico), the United Kingdom and any other jurisdictions in which any of the Obligors does business. -35- (j) The Principals shall have made a minimum cash equity contribution to EHI of One Million Dollars ($1,000,000) in the aggregate prior to the purchase of the Shares and the funding of the Term Loan and the Acquisition Loan. SECTION 2E.04. CONDITIONS TO ALL REVOLVING CREDIT INCLUDING THE INITIAL REVOLVING CREDIT. The following are conditions precedent to the making of all Revolving Credit Loans and the issuance of all Letters of Credit and must be fulfilled to Lender's satisfaction: (a) The Term Loan and the Acquisition Loan shall not be in default. (b) With respect to the UK Corporations, Lender shall have received each of the following: (i) Guarantor Board Resolutions - In respect of each Guarantor, a copy, certified as true, complete and up-to-date, of minutes of the meeting(s) of the Board of Directors of such Guarantor at which valid resolutions were adopted approving the Credit Documents to which it is party and the assumption of its obligations thereunder and authorizing a person or persons to execute and deliver such Credit Documents and all notices, communications or documents to be given by such Guarantor or on its behalf pursuant to or in connection therewith, together with certified copies of unanimous shareholders resolutions approving and authorizing the execution of such Credit Documents; (ii) Shareholder Resolutions - certified copies of shareholder resolutions of the Guarantors [and their subsidiaries] resolving to make such amendments to their Memoranda and Articles of Association as Lender shall have specified prior to the Effective Date; (iii) Legal Due Diligence Report - an original copy of the legal due diligence report, if any, prepared by Allen & Overy on behalf of the Borrowers and addressed to, among others, Lender; (iv) Pension Report - an original copy of the actuarial report prepared by an actuary (or other person in Lender's discretion) acceptable to Lender on behalf of the Borrowers and addressed to, among others, Lender; (v) Accountant's Report - an original copy of the accountant's financial due diligence report prepared by accountants acceptable to Lender in respect of the Guarantors and addressed to, among others, Lender; (vi) Membership of Board - confirmation of the approval by Lender of the membership of the Board of Directors of the Guarantors; (vii) Statutory Declaration and Report - a certified copy of the statutory declaration made in the prescribed form by all of the directors of each Guarantor as -36- required by Section 155(b) of the Companies Act 1985 and of the statutory report of each of the Guarantor's auditors required under Section 156(4) of the Companies Act 1985; (viii) Net Asset Confirmation - a letter from the auditors of each Guarantor, addressed to Lender and confirming that the provisions of Section 155(2) of the Companies Act 1985 are not being breached by any such Guarantor. (c) Lender shall have received an opinion letter or opinion letters from both United States and United Kingdom counsel to each UK Corporation in form and substance satisfactory to Lender. (d) Borrowers and Guarantors shall have executed and delivered to Lender such Credit Documents and amendments to Credit Documents as Lender may request. (e) Immediately upon making the Revolving Credit Loan or issuing the Letter of Credit, as the case may be, (i) the sum of (A) the aggregate outstanding principal balances of the Revolving Credit Loans plus (B) the aggregate of the face amounts of the outstanding Letters of Credit, if any, will not exceed the Revolving Credit Committed Amount, and (ii) the aggregate of the face amounts of the outstanding Letters of Credit, if any, will not exceed the Letter of Credit Maximum Amount. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Borrower hereby makes the following representations and warranties to Lender (a) on and as of the Effective Date, (b) at the time that each Loan is made, and (c) at the time that each Letter of Credit is issued. SECTION 3.01. CONDITIONS. All conditions precedent to the making of the applicable Loan or Letter of Credit as set forth in Article II have been satisfied in full. SECTION 3.02. EXISTENCE. Each Borrower: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate power, and has all material governmental licenses, authorizations, consents and approvals to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could (either individually or in the aggregate) have a Material Adverse Effect. -37- SECTION 3.03. ACTION. (a) Each Borrower has all necessary corporate power, authority and legal right to execute, deliver and perform Borrower's obligations under each of the Credit Documents; and (b) The execution, delivery and performance by each Borrower of each of the Credit Documents have been duly authorized by all necessary corporate or other action on Borrower's part (including any required shareholder or like approvals); and (c) This Agreement has been duly and validly executed and delivered by each Borrower and constitutes, and the Term Note and other Credit Documents, when executed and delivered by such Borrower, will constitute such Borrower's, legal, valid and binding obligation, enforceable against such Borrower, as the case may be, in accordance with its terms. SECTION 3.04. APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance of the Credit Documents by any Borrower or for the legality, validity or enforceability thereof, except for financing statement filings in respect of the security interests created in favor of Lender pursuant to this Agreement and the other Credit Documents. The borrowings hereunder, and the execution, delivery and performance of each of the Credit Documents will not (a) contravene any applicable provision of law, any applicable order of any court or other agency of government, or (b) contravene the Articles of Incorporation or By-laws or any indenture, agreement or other instrument binding upon any Borrower, or (c) be in conflict with, result in the breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument binding upon any Borrower, or (d) result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of any Borrower, except pursuant to this Agreement and the other Credit Documents. SECTION 3.05. OWNERSHIP. Schedule 3.05 contains a true, accurate, and complete description of the capital structure of each Borrower and identifies each Person who owns or holds any equity right, title or interest in each Borrower. SECTION 3.06. SUBSIDIARIES. US Corporation has no Subsidiaries other than TAS. EAGL has no Subsidiaries other than EAG, a private company limited by shares incorporated in England and Wales. EIL has no Subsidiaries other than Integrated Systems Assessment Limited, a private company limited by shares incorporated in England and Wales. US Corporation, EAGL, EIL, EAG, TAS and Integrated Systems Assessment Limited have and shall have no Affiliates other than each other. -38- SECTION 3.07. FINANCIAL STATEMENTS. (a) The financial statements of the US Corporation and the UK Corporation provided to Lender dated as of November 30, 1998, together with related consolidated statements of income, stockholders' equity and changes in financial position or cash flow are true, accurate, and complete in all material respects and fairly represent the financial condition of such Persons (and their Consolidated Subsidiaries, if any) as of such date; such financial statements were prepared in accordance with GAAP applied on a consistent basis (except as noted therein); and since the date of such financial statements there has been no material adverse change in the financial condition of the US Corporation and the UK Corporation (and their Consolidated Subsidiaries, if any). Since November 30, 1998 no dividends, distributions, loans or advancements of any kind have been made or given to any Person holding any equity right, title or interest in the US Corporation and the UK Corporation other than compensation in the ordinary course of business, that, if this Agreement had been in effect during the period from November 30, 1998 through the date of this Agreement, would not conflict with any provision of this Agreement. (b) The Opening Day Balance Sheets, which have been prepared and certified by the treasurer or other officer of each member of the Borrower Group, are true and correct. SECTION 3.08. SOLVENCY. Each Borrower is, and after giving effect to the consummation of this Agreement and the incurrence of any Obligations incurred hereunder, will be, Solvent. No Borrower is contemplating either the filing of a petition by such Borrower under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of such Borrower's Property, and such Borrower has no knowledge of any Person contemplating the filing of any such petition against such Borrower. No Borrower is currently the subject of any bankruptcy or similar proceeding under any state or federal law and none of such Borrower's Property is under the jurisdiction of any bankruptcy court or other court having similar jurisdiction. SECTION 3.09. INVESTMENTS. Schedule 3.09 contains a true, accurate, and complete listing of each Investment of each Borrower. No Borrower has any Investments other than Permitted Investments. SECTION 3.10. DEPOSIT ACCOUNTS. Schedule 3.10 contains a true, accurate, and complete listing of each deposit account of each Borrower. SECTION 3.11. INDEBTEDNESS. Schedule 3.11 contains a true, accurate, and complete listing of all Indebtedness of each Borrower. No Borrower has any Indebtedness other than Permitted Indebtedness. -39- SECTION 3.12. LIENS. Each Borrower has good and marketable title to its Property free of all Liens, except for Permitted Liens. Schedule 3.12 contains a true, accurate, and complete listing of each Lien on each Borrower's Property. SECTION 3.13. MATERIAL AGREEMENTS. Schedule 3.13 contains a true, accurate, and complete listing of each Material Agreement that burdens any Borrower or from which any Borrower derives direct or indirect benefits. To each Borrower's knowledge, no default or event of default by any Person under any Material Agreement has occurred and is continuing. No Borrower is a party to, or bound by, any contract or instrument, or subject to any charter or other corporate restriction, materially and adversely affecting the business, property, assets, operations or condition, financial or otherwise, of any Borrower. SECTION 3.14. LEGAL PROCEEDINGS. Except as set forth in Schedule 3.14, there is no pending Proceeding that has been commenced by or against any Obligor that relates to or may be reasonably expected to materially adversely affect on a consolidated basis the business of or the Property owned by or used by the Obligors and, to each Borrower's knowledge, no such Proceeding has been Threatened. SECTION 3.15. ACCOUNTS. All Accounts that may be listed on any accounts aging or listing furnished to Lender by or on behalf of Borrower at any time, and all Accounts included in Borrower's assets on any financial statement furnished to the Lender by or on behalf of Borrower at any time (including, without limitation, the Opening Day Balance Sheets), and unless otherwise expressly and clearly stated on such aging, listing or financial statement and thereby disclosed to the Lender: (a) shall have arisen from services performed by Borrower for, or goods sold by Borrower to, the appropriate Account Debtor in a commercial transaction; (b) the Account is based on an enforceable order or contract, written or oral, for services performed or goods sold, and the same were performed or sold in accordance with such order or contract; (c) Borrower's title to the Account is good and marketable and is not subject to any Lien other than Lender's security interest; (d) the amount shown on the books of Borrower and on any invoice or statement delivered to Lender regarding the Account is owing to Borrower. SECTION 3.16. INSURANCE. Schedule 3.16 contains a true, accurate, and complete listing of each insurance policy (including policies of worker's compensation insurance, liability insurance, casualty insurance and business interruption insurance) maintained in full force and effect by each Borrower. SECTION 3.17. INTELLECTUAL PROPERTY. Each Borrower holds, owns, or is licensed to use, all Intellectual Property necessary to conduct its businesses as now conducted or intended to be conducted, free of burdensome restrictions, and without known conflict with the rights of others. All of the Intellectual Property held, owned by, used by, or licensed to, each Borrower, or in which any Borrower has any right or interest, is listed on Schedule 3.17. Except as may be expressly stated on Schedule 3.17, each Borrower holds, owns, and has the exclusive right or license to use the Intellectual Property listed on Schedule 3.17, subject to no rights of any other Person. -40- SECTION 3.18. SPECIAL PROPERTY. No Borrower uses, owns or otherwise has rights to any Special Property, other than Special Property that is (a) Intellectual Property listed on Schedule 3.17 or (b) Property listed on Schedule 3.18. SECTION 3.19. MARGIN STOCK. No Borrower is engaged principally, or as one of its activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of any extension of credit hereunder will be used to buy or carry any Margin Stock. No Borrower owns Margin Stock except as disclosed on Schedule 3.19, and as of the date hereof the aggregate value of all Margin Stock owned by any Borrower does not exceed twenty-five percent (25%) of the assets of such Borrower. SECTION 3.20. TAX IDENTIFICATION NUMBERS. The tax identification number for each Borrower and Guarantor is correctly set forth opposite its name on Schedule 3.20. EHI does not have a tax identification number on the Effective Date, but EHI has applied for it as of the Effective Date. SECTION 3.21. BUSINESS. The business of each Borrower is as described on Schedule 3.21. SECTION 3.22. NAME, STRUCTURE. Except for the name change of the US Corporation contemporaneously with the execution of this Agreement to Environ International Corporation or as otherwise listed on Schedule 3.22, no Borrower has changed its name or organizational structure within the two (2) year period immediately preceding the Effective Date or purchased or acquired any Property from any Person other than Property which in the hands of such Person was such Person's inventory and was sold to Borrower in the ordinary course of such Person's business. SECTION 3.23. DESIGNATED LOCATIONS. The street address, and county and state, of each place of business of each Borrower and each place where such Borrower has, leases, maintains or stores Property, are listed on Schedule 3.23. The mailing address of Borrower's chief executive office is 4350 North Fairfax Drive, Suite 300, Arlington, Virginia 22203, which is in Arlington County, Virginia. As of the Effective Date, and except as disclosed on Schedule 3.23, Borrower does not own any interest, including any leasehold interest, in real estate. SECTION 3.24. LABOR STATUS. No Borrower has experienced a strike, labor dispute, slowdown or work stoppage due to labor disagreements which could have a Material Adverse Effect and there is no such strike, dispute, slowdown or work stoppage threatened against any Borrower. Except as disclosed on Schedule 3.24, no Borrower is a party to any labor, employment or management contracts between such Borrower and any of its employees or any person or group that represents any of its employees. -41- SECTION 3.25. ERISA STATUS. (a) Schedule 3.25 is a true, accurate, and complete listing of each Plan. Each Plan is in compliance in all material aspects with the applicable provisions of ERISA and the Code. Except as otherwise expressly indicated on Schedule 3.25, each Qualified Plan and each Multiemployer Plan has been determined by the Internal Revenue Service to qualify under Section 401 of the Code, and the trusts created thereunder have been determined to be exempt from tax under Section 501 of the Code, and nothing has occurred that would cause the loss of such qualification or tax-exempt status. There are no outstanding liabilities under Title IV of ERISA with respect to any Plan which could reasonably be expected to have a Material Adverse Effect. No Plan subject to Title IV of ERISA has any Unfunded Benefit Liability which could reasonably be expected to have a Material Adverse Effect. Neither Borrower nor any ERISA Affiliate has transferred any Unfunded Benefit Liability to a person other than an ERISA Affiliate or has otherwise engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA which could reasonably be expected to have a Material Adverse Effect. Neither any Borrower nor any ERISA Affiliate has incurred nor reasonably expects to incur (x) any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan, or (y) any liability under Title IV of ERISA (other than premiums due but not delinquent under Section 4007 of ERISA) with respect to a Plan, which could, in either event, reasonably be expected to have a Material Adverse Effect. No application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan (other than a Multiemployer Plan). No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan which could reasonably be expected to have a Material Adverse Effect. Each Borrower and each ERISA Affiliate has complied in all material respects with the notice and continuation coverage requirements of Section 4980B of the Code. Neither any Borrower nor any ERISA Affiliate has any contingent liability for post-retirement benefits under a welfare plan (as defined in Section 3(1) of ERISA), other than liability for continuation of coverage described in Section 4980B of the Code, except as disclosed on the financial statements of each Borrower prepared in accordance with GAAP applied on a consistent basis and delivered to Lender. (b) In respect of the UK Corporations, Schedule 3.25A contains a true, accurate and complete listing of all agreements or arrangements for the provision of pensions, allowances, lump sums or other similar benefits on retirement, death or long term ill health for the benefit of any current or former employee of either UK Corporation or their dependents, including ex gratia arrangements (each a "UK PLAN"). To the best knowledge of Obligors: (i) Full and accurate particulars of each UK Plan have been disclosed including, without limitation, copies of the current trust deed and rules plus any amending deeds or resolutions, members' booklets plus any subsequent announcements to members, membership details, details of contributions payable by and in respect of members, most recent actuarial report and valuation, most recent scheme accounts, evidence of Inland Revenue approval and contracting-out status and evidence of compliance with the Pensions Act 1995 and regulations. -42- (ii) Other than as disclosed there are no other Pension Schemes for current or past directors or employees of the Company. (iii) In relation to each UK Plan within the three years ending on the date of this agreement no power to augment benefits has been exercised, no discretion has been exercised to admit an employee to membership of the pension scheme who would not otherwise be eligible and no discretion has been exercised to provide a benefit which would not otherwise be provided; all benefits (other than a refund of contributions with interest where appropriate) payable under each UK Plan on the death of a member while in an employment to which the pension scheme relates are fully insured by a policy with an insurance company of good repute; there are no contributions to a UK Plan which are due but unpaid and have remained unpaid for more than one month and in any event contributions have been paid which are at least equal to and by the due date specified in any schedule of contributions or payments applicable under Section 58 or 87 of the Pensions Act 1995; no takeover protection provision will be triggered by Completion; each UK Plan is sufficiently funded on an ongoing basis using the assumptions used in the last actuarial valuation to secure at least the benefits accrued to Completion (other than those which are insured) and in addition is sufficiently funded to meet the minimum funding requirement as defined in Section 56 of the Pensions Act 1995, and all information provided to the Pension Scheme actuary for the purposes of the last actuarial valuation was true, accurate and complete in all respects and there have been no events since the date of that valuation which would show a deterioration of the funding position of a UK Plan were such a valuation to be undertaken at the date of Completion. (iv) Each UK Plan is either approved by the Board of Inland Revenue for the purposes of Chapter I Part XIV of the Income and Corporation Taxes Act 1988 or is a scheme under which the benefits provided or to be provided are consistent with the approval of the scheme by the Board of Inland Revenue for such purposes and is a scheme in respect of which an application for such approval has been made and has not been withdrawn or refused and the Board of Inland Revenue have not given notice to the applicant that they believe the application has been dropped; is established under irrevocable trusts; has been administered in accordance with all applicable laws (including Article 119 of the Treaty of Rome), regulations and requirements of any competent governmental body or regulatory authority and the trusts and rules of the UK Plan; has not been the subject of any report of wrongdoing or irregularities to the Occupational Pensions Regulatory Authority nor are there any circumstances which would justify such a report; is a scheme in respect of which all actuarial, consultancy, legal and other fees, charges or expenses have been paid and for which no services have been provided for which an account or invoice has not been rendered; and has no investment in employer-related assets as defined in Section 40 of the Pensions Act 1995. (v) No claim has been threatened or made or litigation commenced against the trustees or administrators of any UK Plan or against UK Corporations or any other person whom either UK Corporation is or may be liable to indemnify or compensate in respect of any matter arising out of or in connection with any UK Plan. There are no circumstances which -43- may give rise to any such claim or litigation. There are no unresolved disputes under any UK Plan's internal dispute resolution procedure. SECTION 3.26. ENVIRONMENTAL STATUS. Except as set forth in Schedule 3.26: (a) Each Borrower has obtained and maintained all Environmental Permits necessary to conduct its business, both as done currently and as proposed except insofar as collectively any non-compliance would not have a Material Adverse Effect.. (b) Each Borrower has complied with all Environmental Laws (including Environmental Permits) except insofar as collectively any non-compliance would not have a Material Adverse Effect. (c) To the knowledge of each Borrower, neither any Borrower nor any Environmental Affiliate known to it, whether actively or passively, has released, emitted, buried, leaked, or disposed of Regulated Substances on any Property ever owned, leased or operated by any of them. (d) To the best knowledge of each Borrower, no one else, whether actively or passively, has released, emitted, buried, leaked, or otherwise disposed of Regulated Substances on any Property while owned, operated or leased by any Borrower or any Environmental Affiliate known to it. (e) To Borrower's knowledge, there are no asbestos containing materials, polychlorinated biphenyls or radioactive substances located on Property now owned, operated or leased by any Borrower. (f) Neither any Borrower nor any Environmental Affiliate known to it has operated a treatment, storage or disposal facility requiring a permit or having interim status under the Resource Conservation and Recovery Act, as amended, or any comparable state laws, nor, to Borrower's knowledge, has any Property of any Borrower or any Environmental Affiliate known to it been used for such purposes. (g) To Borrower's knowledge, there have been no underground storage tanks, pipelines or surface impoundments at any Properties ever owned, leased or operated by Borrower or any Environmental Affiliate known to it which was violative of any Environmental Law during such period of ownership, use or operation. (h) Neither any Borrower nor any Environmental Affiliate known to it has received any Environmental Claim pursuant to any Environmental Law or relating to any potential environmental liability which is not resolved and which is likely to have a Material Adverse Effect. (i) To the best knowledge of each Borrower, no other party has received any Environmental Claim pursuant to any Environmental Law, including CERCLA or any -44- comparable state law or relating to any environmental liability relating to any Borrower or any Environmental Affiliate known to it, any of their Property or any property where wastes generated by any of them have been sent which is not resolved and which is likely to have a Material Adverse Effect. (j) To Borrower's knowledge, none of the Property ever owned, operated or leased by any Borrower or any known Environmental Affiliate is listed on any environmental regulatory list of contaminated properties, including the National Priorities List promulgated pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, the CERCLIS or any federal, state or local counterpart with respect to such period of Borrower's ownership, operation and lease which is not resolved and which is likely to have a Material Adverse Effect. (k) To Borrower's knowledge, there are no conditions on any adjacent or neighboring properties which threaten the Property of any Borrower. (l) To Borrower's knowledge, no Liens exist under or pursuant to any Environmental Laws on any Property owned, operated or leased by any Borrower, and to Borrower's knowledge no government action has been taken or is in process that could subject any such Property to such Liens and no Borrower would be required to place any notice or restriction relating to the presence of Regulated Substances at any Property owned or leased by it in any deed or lease to such Property. (m) Each Borrower has disclosed to Lender, prior to the date of this Agreement, its waste practices, its use of regulated substances and all potentially material environmental matters and has disclosed all reports, assessments, remedial action plans or other similar documents relating to any material environmental condition of Property or operations of any Borrower and any Environmental Affiliates known to it. SECTION 3.27. INVESTMENT COMPANY ACT. No Borrower is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.28. Omitted. SECTION 3.29. COMMERCIAL LOAN. The Loans made under this Agreement are made solely for a business or commercial purpose and not for any personal, family, or household purpose. The terms of this Agreement and Notes do not violate any Laws that regulate credit, including any applicable Laws regarding usury and the charging of interest, late charges, fees, or any costs and charges under this Agreement. SECTION 3.30. NO BROKER. No Borrower has made any agreement or taken any action that may cause anyone to become entitled to a commission or finder's fee or other compensation -45- of any kind attributable to any extensions of credit or other matters or transactions contemplated under this Agreement and the other Credit Documents. SECTION 3.31. OBLIGOR INFORMATION. There is no fact or circumstance or anticipated event known to any Responsible Officer that could have a Material Adverse Effect that has not been disclosed to Lender in this Agreement, the other Credit Documents, or in another writing furnished to Lender on or before the Effective Date for use in connection with the transactions contemplated by this Agreement and the other Credit Documents. The Obligor Information furnished to Lender on or before the Effective Date is true, accurate, and complete in all material respects, and does not omit any material fact or facts necessary to make the Obligor Information not misleading, and all Obligor Information furnished to Lender after the Effective Date shall be true, accurate and complete in all material respects. SECTION 3.32. INDEPENDENT ACCESS. Each Obligor has adequate means to obtain from each other Obligor, on a continuing basis, information concerning the condition, financial and otherwise, of all other Obligors, and the Obligors are not relying on Lender to furnish such information either now or in the future. Neither Lender, nor any Affiliate of Lender, nor any of its or their employees, attorneys, accountants, appraisers or other consultants or advisers have made any representations, warranties or agreements of any kind to or with the Principals, EHI, or the other Obligors, regarding the Stock Purchase Agreement or the matters and transactions contemplated thereby, or the businesses and assets that are directly or indirectly the subject matter thereof. SECTION 3.33. TAXES. Each Borrower has filed and will continue to file all United States income tax returns and all state income tax returns that are required to be filed, and has paid, or made adequate provisions for the payment of, all taxes which have or may become due pursuant to said returns or pursuant to any assessment received by Borrower except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. SECTION 3.34. APPLICABLE LAWS. Each Borrower is in compliance, in all material respects, with all Applicable Laws. SECTION 3.35. RISK MANAGEMENT AGREEMENTS. No Borrower is a party to any Risk Management Agreement, except as listed on Schedule 3.35. SECTION 3.36. YEAR 2000 ISSUES. Each Borrower and its subsidiaries have made a full and complete assessment of the Year 2000 Issues and have a realistic and achievable program for remediating any applicable Year 2000 Issues on a timely basis. Based on this assessment and program, each Borrower reasonably believes that Year 2000 Issues cannot be expected to have a Material Adverse Effect. SECTION 3.37. DIRECT OBLIGATION; FULL FAITH AND CREDIT. This Agreement, the Notes, and the other Credit Documents to which any Borrower is a party, and each of the Obligations of each Borrower hereunder or thereunder, are direct, unconditional and general obligations of each -46- Borrower jointly and severally for the payment of which the full faith and credit of each Borrower is pledged. SECTION 3.38. NO RECORDATION NECESSARY. This Agreement and each of the other Credit Documents are in proper form under Virginia law for the enforcement hereof or thereof against each Borrower under Virginia law, and to ensure the legality, validity, enforceability, priority or admissibility in evidence of this Agreement and the other Credit Documents, it is not necessary that this Agreement or any other Credit Document or any other document, except UCC financing statements, be filed, registered or recorded with, or executed or notarized before, any court or other authority in Virginia or that any registration charge or stamp or similar tax be paid on or in respect of this Agreement or any other Credit Document or any other document. SECTION 3.39. WAGES, SEVERANCE PAY, ETC. No Borrower has pension benefits, wages, severance pay or unemployment benefits unpaid and owing to any employees currently employed or severed or retired, except as described on Schedule 3.39. SECTION 3.40. STOCK PURCHASE AGREEMENT. The Stock Purchase Agreement is in full force and effect, complies with all Applicable Laws, has not been modified or amended, and no obligations, rights, or remedies thereunder have been waived. SECTION 3.41. Omitted. SECTION 3.42. Omitted. SECTION 3.43. PRINCIPALS. All of the Principals are identified in Schedule 3.43. ARTICLE IV AFFIRMATIVE COVENANTS Each Borrower covenants and agrees that from the date hereof and until the later of the Credit Termination Date or payment in full of all Obligations owed by any Borrower to Lender, unless Lender shall otherwise consent in writing: SECTION 4.01. INFORMATION. Each Borrower shall deliver to Lender, or cause to be delivered to Lender, the following: (a) Omitted. (b) as soon as available, but in any event within ninety (90) days after the close of each fiscal year of each Borrower (and Guarantors), audited financial statements reflecting their operations during such fiscal year, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules, all on a -47- consolidated and consolidating basis, and setting forth in comparative form consolidated figures for the preceding fiscal year, all in reasonable detail and audited by a certified public accountant of recognized national standing reasonably acceptable to Lender, whose opinion shall be unqualified and shall be to the effect that such consolidated financial statements have been prepared in accordance with GAAP applied on a consistent basis (excepting changes noted thereon with which such accountants concur); (c) as soon as available, but in no event more than forty-five (45) days after the end of each of the first three fiscal quarters, a balance sheet of each Borrower (and Guarantors) and statements of income and retained earnings and of cash flows for each Borrower (and the Guarantors) for such quarterly period and for the portion of the fiscal year ending with such period, all on a consolidated and consolidating basis, in each case setting forth in comparative form consolidated figures for the corresponding period of the preceding fiscal year (except that the balance sheet shall be compared to that at prior year end), all in reasonable form and detail acceptable to Lender, and accompanied by the certificate of the Director of Finance of the applicable Borrower (and the Guarantors) to the best of his or her knowledge, information and belief, as being true and correct in all material respects and as having been prepared in accordance with GAAP applied on a consistent basis, subject to changes resulting from normal year-end audit adjustments; (d) at the time of the delivery of the financial statements provided for in Sections 4.01 (a) and (b), a Responsible Officer's Certificate; (e) within the period for delivery of the annual financial statements provided in Section 4.01(a), a certificate of the accountants conducting the annual audit stating that they have reviewed this Agreement and stating further whether, in the course of their audit, they have become aware of any Default or Event of Default existing on the date of such statements arising as a result of a violation of any financial covenants of this Agreement, and if any such Default or Event of Default exists, specifying the nature and extent thereof; (f) promptly upon transmission thereof, copies of any filings and registrations with, and reports to, the Securities and Exchange Commission, or any successor agency, by any Borrower or Guarantor, and copies of all financial statements, proxy statements, notices and reports as such Borrower or Guarantor shall send to its shareholders or to the holders of any other Indebtedness of any Borrower or Guarantor in their capacity as holders; (g) within the period for quarterly and annual financial statements, summary agings of accounts receivable, and accounts payable listings, for each Borrower and the Guarantors each current as of the last day of the then most recently ended quarter, together with such other information as Lender may reasonably request regarding the accounts receivable and accounts payable; (h) within thirty (30) days after each filing by each Borrower and each Guarantor of any tax return or extension thereof pursuant to the taxing authority of any -48- Governmental Authority, a photocopy of each such tax return, with all related forms, schedules, and related information signed and certified by the applicable Borrower or Guarantor as true and complete; (i) with reasonable promptness upon any such request, such other information regarding the business, properties or financial or operating condition of any Borrower or Guarantor as Lender may reasonably request. SECTION 4.02. REPORTING NOTIFICATION EVENTS. Immediately upon any Responsible Officer obtaining knowledge thereof, but in any event within five (5) Business Days after any Responsible Officer obtains such knowledge, each Borrower shall give Lender written notice of each Notification Event, which written notice shall include (i) a description of the Notification Event (including an estimate of any anticipated liability or Material Adverse Effect that may arise from such Notification Event other than the occurrence of a Default or Event of Default), (ii) the date of the Notification Event and the date that the Responsible Officer first obtained knowledge of the Notification Event, and (iii) a description of the manner in which any Borrower has addressed or otherwise responded to the Notification Event or intends to address or otherwise respond to the Notification Event. SECTION 4.03. EXISTENCE. Each Borrower shall maintain its corporate or other legal existence, in each jurisdiction in which it is incorporated or otherwise formed, and in each jurisdiction where it is required to register or qualify to do business except for failures to register or qualify which, individually or in the aggregate, would not have a Material Adverse Effect. SECTION 4.04. PLACES OF BUSINESS. Borrower shall give Lender at least thirty (30) days' prior written notice of the intended opening of any new location in addition to the Designated Locations. Prior to such opening, such Borrower shall deliver to Lender a revised Schedule 3.26 adding such new location as a Designated Location and shall execute and deliver, or cause to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem necessary or desirable in Lender's discretion to protect Lender's interest in the Collateral at such new location, including UCC financing statements. Such Borrower shall provide to Lender such UCC financing statement search reports as Lender may reasonably request to confirm the absence of competing Lien Notices and to confirm the priority of Lender's UCC financing statements. If Borrower closes for business at any Designated Location, such Borrower shall give Lender at least thirty (30) days' prior written notice with a written explanation of the reason for closing such Designated Location. Upon and after the occurrence of an Event of Default which remains uncured, no Borrower shall open or close any place of business without Lender's prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned. SECTION 4.05. PROPERTY. Each Borrower shall maintain, preserve and protect all Property that is material to the business of such Borrower and keep such Property in good repair, working order and condition, normal wear and tear excepted, and from time to time as necessary make, or cause to be made, all repairs, renewals, additions, improvements, and replacements -49- thereto as necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses. SECTION 4.06. INSURANCE. Each Borrower shall maintain in full force and effect at all times insurance (including worker's compensation insurance, liability insurance, casualty insurance and business interruption insurance) in such amounts, covering such risks and liabilities, and with such deductibles as are in accordance with normal industry practice unless higher limits or other types of coverage are required by the terms of the other Credit Documents, provided that the insurance coverages maintained by each Borrower shall at all times be at least comparable in amount and in all other material respects, as the coverages described on Schedule 3.16. Each Borrower shall provide to Lender promptly upon Lender's request from time to time certificates, policies or endorsements as Lender shall require as proof of such insurance, and if any Borrower fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of the Obligors. All insurance policies shall provide for at least thirty (30) days' prior written notice to Lender of any cancellation or reduction in coverage and Lender may act as attorney-in-fact for any Borrower in obtaining, and at any time an Event of Default exists, adjusting, settling, amending and canceling such insurance. Each Borrower shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under all such insurance policies as to which such is obtainable at no or reasonable cost and shall cause each Borrower to obtain non-contributory Lender's loss payable endorsements to all such insurance policies in form and substance satisfactory to Lender. Such Lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by any Borrower or any other Person. To the extent Borrower defaults in regularly scheduled payments on the Notes or other Credit Documents, all proceeds of such casualty insurance and business interruption insurance not applied to repair and replacement of the Property shall be paid to Lender for application to the Obligations in accordance with the terms of this Agreement and the other Credit Documents or otherwise. Lender shall not be responsible for any failure to collect any insurance proceeds due under the terms of any policy regardless of the cause of such failure. SECTION 4.07. TAXES. Each Borrower shall pay and discharge, or cause to be paid and discharged, promptly all taxes, assessments, and governmental charges or levies imposed upon any Borrower or upon any Borrower's income and profits, or upon any of its Property or any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien upon such Property or any part thereof; PROVIDED, HOWEVER, THAT no Borrower shall be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings and such Borrower shall have set aside on its books adequate reserves with respect to any such tax, assessment, charge, levy or claim, so contested. -50- SECTION 4.08. COMPLIANCE WITH LAWS. Each Borrower shall comply, in all material respects, with all Applicable Laws. SECTION 4.09. MATERIAL AGREEMENTS. Each Borrower shall comply, in all material respects, with all Material Agreements, and shall diligently preserve, protect, and enforce such Borrower's rights and remedies under all Material Agreements. SECTION 4.10. PERMITTED INDEBTEDNESS. Each Borrower shall pay all of its Permitted Indebtedness promptly and in accordance with the contractual terms of such Permitted Indebtedness as set forth in the documentation for such Permitted Indebtedness. SECTION 4.11. MAINTENANCE OF PRIMARY ACCOUNT. Omitted. SECTION 4.12. CREDIT ADMINISTRATION COSTS; BROKERS. Each Borrower shall pay and cause all other Obligors to pay all out-of-pocket costs and expenses of Lender in connection with the Loans promptly upon Lender's demand from time to time. Each Borrower shall indemnify and hold harmless Lender from and against any claim by any Person not contracted with by Lender for a commission or finder's fee or other compensation of any kind attributable to any extensions of credit or other matters or transactions contemplated under this Agreement and the other Credit Documents, and shall pay Lender's attorney's fees, litigation expenses and court costs in defending any such claims. SECTION 4.13. REVIEW AND AUDIT. Each Borrower shall maintain its financial books and records in accordance with GAAP. Lender shall be permitted access to all Records at any location, including any Designated Location during normal business hours on reasonable notice and shall be permitted to take copies, at Borrower's expense, of such Records as Lender may request. Each Borrower shall permit and authorize Lender through any Person designated by Lender ("LENDER'S DESIGNEE"), at such times and as often as Lender may reasonably request, to visit, inspect, examine, audit and verify any of the properties and Records of each Borrower relevant to the subject matter of this Agreement or any other Credit Documents or any Obligor Information or the financial condition of each Borrower. The actions of Lender and Lender's Designee pursuant to this Section shall be scheduled and conducted so as not to be unreasonably disruptive to Borrower's operations. SECTION 4.14. RATE HEDGING. Upon the request of Lender, Borrower shall hedge the floating interest expense of the Term Loan for the full term of the Term Loan by maintaining one or more interest rate swap transactions with Lender or with another financial institution approved by Lender in writing in an aggregate notional amount equal to at least fifty percent (50%) of the initial amount funded under the Term Loan, with Borrower making fixed rate payments and receiving floating rate payments to offset changes in the variable interest expense of the Term Loan, all upon terms and subject to such conditions as shall be acceptable to Lender (or if such transaction is with another financial institution, all upon terms and subject to conditions as shall be approved by Lender in writing). -51- SECTION 4.15. USE OF LOAN PROCEEDS. The proceeds of the Loans shall be used solely for the purpose expressly permitted in Article II. SECTION 4.16. ERISA AND RELATED MATTERS. Each Borrower shall promptly furnish to Lender copies prepared or received by such Borrower or any ERISA Affiliate of: (i) at the request of Lender, each annual report (Internal Revenue Service Form 5500 series) and all accompanying schedules, actuarial reports, financial information concerning the financial status of each Plan, and schedules showing the amounts contributed to each Plan by or on behalf of Borrower or any ERISA Affiliates for the most recent three (3) plan years; (ii) all notices of intent to terminate or to have a trustee appointed to administer any Plan under Title IV of ERISA; (iii) all written demands by the PBGC under Subtitle D of Title IV of ERISA; (iv) all notices required to be sent to employees or to the PBGC under Section 302 of ERISA or Section 412 of the Code; (v) all written notices received with respect to a Multiemployer Plan concerning (x) the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA, (y) a termination described in Section 4041A of ERISA, or (z) a reorganization or insolvency described in Subtitle E of Title IV of ERISA; (vi) any new Plan that is subject to Title IV of ERISA or Section 412 of the Code adopted by Borrower or any ERISA Affiliate; (vii) any amendment to any Plan that is subject to Title IV of ERISA or Section 412 of the Code, if such amendment results in a material increase in benefits or Unfunded Benefit Liability; or (viii) at the request of Lender, information regarding any unfunded pension liabilities or similar liabilities, severance liabilities, unemployment liabilities, wage claims, or the like, if favor of any Person including without limitation, an tax authority or Governmental Authority; and, in respect of each UK Plan copies of (ix) any actuarial report and valuation of that UK Plan, and any other actuarial advice material to the funding of the UK Plan; (x) any amending deeds or documents; (xi) notification of any decision to terminate the UK Plan; (xii) and notification of any litigation commenced or threatened against the UK Plan, its trustees or the applicable UK Corporation in respect of the UK Plan including any complaint made to the Pensions Ombudsman. SECTION 4.17. ENVIRONMENTAL MATTERS. Each Borrower shall cause all Property owned or operated by Borrower to be kept free of contamination from Regulated Substance and any other harmful or physical conditions except as otherwise would be in compliance with applicable Environmental Laws. If any Obligor receives notice or becomes aware of any Environmental Claim or any violation of Environmental Laws or any contamination with Regulated Substances that relates to any of them or their respective Properties, then Obligor shall promptly provide written notice thereof to Lender and, upon written request of Lender, shall provide Lender with such reports, certificates, engineering studies or other written material or data as Lender may require so as to satisfy Lender that Obligor reasonably is in compliance with its obligations under this Agreement. In addition, if Lender shall at any time have reason to believe that any of the representations and warranties contained in Section 3.26 of this Agreement is not accurate in any respect, or that any Borrower is in breach of its obligations under the foregoing provisions of this Section, Lender shall have the right at any time and from time to time to employ, or to require any Obligors at the Obligors' expense to employ, a qualified environmental consultant acceptable to Lender to conduct a pertinent environmental review, -52- audit, assessment or report concerning the pertinent Borrower's operations and Property. Each Borrower shall cooperate fully with such consultant in any such audits, including by providing such access to any Borrower's books, records, Property, employees and agents and by furnishing such written and oral information as such consultant may reasonably request in connection with any such audits. Each Obligor (jointly and severally) shall indemnify and hold harmless Lender (and Lender's employees, agents, officers, directors, successors, and assigns) from all Environmental Claims directly or indirectly relating to or arising out of or based upon any presence or threatened presence of Regulated Substances at any Property owned or operated by any Borrower at any time or based upon any conduct or omission of any Borrower at any time or upon the breach by any Borrower of any covenant, agreement, representation, or warranty contained in this Agreement or any other Credit Documents or upon the violation of any Environmental Laws. This indemnity shall include (a) any Environmental Claim for personal injury (including sickness, disease, or death or the fear of any thereof), tangible property damage, nuisance, pollution, contamination, leak, spill, release, or other effect on the environment, and (b) the cost of any required, necessary, or appropriate response, investigation, repair, clean-up, treatment, removal, remediation, or detoxification of any Property or other properties affected by such release or threatened release, and the preparation and implementation of any other required, necessary or appropriate actions in connection with any Property or other properties affected by such release or threatened release. The covenants, agreements, representations, and warranties of Borrower contained in this Section shall survive the payment of the Obligations and the termination of this Agreement. SECTION 4.18. YEAR 2000 COMPATIBILITY. Each Borrower shall take all action necessary to assure that such Borrower's computer based systems are able to operate and effectively process data including dates on and after January 1, 2000. At the request of Lender, each Borrower shall provide Lender with assurance acceptable to Lender of such Borrower's Year 2000 compatibility. SECTION 4.19. CONSOLIDATED FUNDED DEBT TO EBITDA. The ratio of Consolidated Funded Debt to EBITDA for the Borrower Group shall not exceed the following: - ----------------------------------------------- --------------------------- APPLICABLE PERIOD RATIO - ----------------------------------------------- --------------------------- Effective Date through December 31, 1999 5.00:1 - ----------------------------------------------- --------------------------- January 1, 2000 to December 31, 2000 4.50:1 - ----------------------------------------------- --------------------------- January 1, 2001 to December 31, 2001 4.00:1 - ----------------------------------------------- --------------------------- January 1, 2002 and thereafter 3.50:1 - ----------------------------------------------- --------------------------- SECTION 4.20. SENIOR FUNDED DEBT TO EBITDA. The Borrower Group's ratio of Senior Funded Debt to EBITDA shall not exceed 2.50:1. SECTION 4.21. CONSOLIDATED TANGIBLE NET WORTH. Borrower Group's Consolidated Tangible Net Worth shall increase by $1,000,000 each year by December 31 of each year until -53- the Seller Note and all Obligations to Lender have been repaid in full. For the first year of the term of the Seller Note, the increase in Consolidated Tangible Net Worth shall be determined as of December 31, 1999 (and calculated by subtracting Borrower Group's Consolidated Net Worth as of December 31,1998). For each year thereafter until the Seller Note and all Obligations to Lender are paid in full, the increase in Borrower Group's Consolidated Tangible Net Worth shall be determined as December 31 of each such succeeding year by subtracting therefrom Borrower Group's Consolidated Tangible Net Worth as of December 31 of the immediately preceding year. SECTION 4.22. DEBT SERVICE COVERAGE. The Borrower Group's ratio of (a) consolidated EBITDA, net of incentive compensation, to (b) the sum of (i) consolidated portion of long term debt, (ii) consolidated current portion of long term capital leases, and (iii) consolidated interest expense shall be at least 1.30:1. SECTION 4.23. NEGATIVE NET INCOME. At no time shall any Borrower or Guarantor sustain losses (negative Net Income) in any two consecutive fiscal quarters or for any fiscal year. SECTION 4.24. PRINCIPALS. The Principals shall maintain in full force and effect employment agreements and such other agreements that contain economic disincentives to competition provisions covering at least one year after termination of employment with any Borrower or Guarantor. SECTION 4.25. Capital Contribution. As of the date of this Agreement, the shareholders of EHI, as a group, have contributed to the capital of EHI cash in an amount of not less than One Million Dollars ($1,000,000). ARTICLE IV-A ADDITIONAL SECURITY PROVISIONS SECTION 4A.01. SECURITY INTEREST. To further secure the Obligations, and without limiting the legal operation and effect of any other Credit Document, each Borrower hereby collaterally assigns to Lender, and grants Lender a security interest in, all of such Borrower's Property described below, now owned and hereafter acquired, created or arising, and all of such Borrower's Property listed on any Schedule to this Agreement, now owned and hereafter acquired, created or arising, and in each case regardless of where such Property may be located and whether such Property may be in the possession of any Borrower, Lender, or a third party, and, if any of such Property may be held or stored with any Person other than a Borrower, together with all of each Borrower's rights now owned and hereafter acquired, created or arising relating to the storage and retrieval thereof and access thereto (all of which Property described below or listed on any such Schedule and all such rights of storage, retrieval and access being referred to herein as "COLLATERAL"): -54- (a) All of each Borrower's "accounts" (as defined in Article 9), and including all obligations for the payment of money arising out of each Borrower's rendition of services, or sale, lease or other disposition of each Borrower's goods or other property, and including all rentals, lease payments, and other moneys earned and to be earned, due and to become due, under any lease, and all rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, and all guaranties or other contracts of suretyship with respect to any of the foregoing property, and all deposits, letters of credit, and other security for the obligation of any Account Debtor relating in any way to any of the foregoing property, and all credit and other insurance for any of the foregoing property and all contract rights ("ACCOUNTS"); and (b) All of each Borrower's right, title and interest in any and all depositary accounts, including any and all other demand, time, savings, passbook and like accounts, and including any Lock-Box, collateral accounts, cash management accounts, safe-keeping accounts, and safe-deposit boxes, and including any and all amounts and contents therein and thereof and all of each Borrower's rights under agreements relating thereto, and all of each Borrower's rights relating to the storage and retrieval thereof and access thereto ("LENDER ACCOUNTS"); and (c) All of each Borrower's "chattel paper" (as defined in Article 9) ("CHATTEL PAPER"); and (d) All of each Borrower's "documents" (as defined in Article 9) ("DOCUMENTS"); and (e) All of each Borrower's "equipment" (as defined in Article 9) and goods which are or are to become fixtures ("EQUIPMENT"); and (f) All of each Borrower's "general intangibles" (as defined in Article 9) of every kind and description, and including all (i) advertisements in any medium (and other marketing and promotional materials in any medium), brochures, signs, stationery, business forms, packaging and shipping materials, telephone numbers, post office addresses, mailing addresses, e-mail addresses, so-called "web" sites and addresses and all codes and rights relating thereto, programs and software, licenses, permits, consents, and approvals of any Governmental Authorities and other Persons, federal, state, and local tax refund claims, financing statements in which any Borrower's interest appears as a secured party or lessor, and things in action, (ii) Intellectual Property, (iii) to the extent not otherwise included as Intellectual Property, all goodwill associated with or related to any of the foregoing or each Borrower or each Borrower's business, (iv) all obligations and indebtedness owing to any Borrower (other than Accounts), and (v) all rights and claims in respect of refunds for taxes paid ("GENERAL INTANGIBLES"); and (g) All of each Borrower's moneys, securities and other property, now or hereafter held or received by, or in transit to, Lender, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and any balances, sums and credits of each Borrower held -55- by Lender at any time existing and all of each Borrower's Lender Accounts at Lender ("HELD ITEMS"); and (h) All of each Borrower's promissory notes or other instruments or agreements evidencing any Borrower's right to payment from any Person or Persons, and including, without limitation, all of each Borrower's "instruments" (as defined in Article 9), and letters of credit ("INSTRUMENTS"); and (i) All of each Borrower's "inventory" (as defined in Article 9), including all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in any Borrower's business, all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service or hire ("INVENTORY"); and (j) All of each Borrower's "securities" (whether certificated or uncertificated), "security entitlements," "securities accounts," "commodity contracts," "commodity accounts" and other "investment property" (as defined in Article 8A or Article 9, as the case may be) ("INVESTMENT PROPERTY"); and (k) All of each Borrower's right, title and interest in any tangible or intangible personal property that is not described within the other defined terms included within the definition of Collateral ("OTHER PERSONALTY"); and (l) All cash and non-cash "proceeds" (as the term is used in Article 9) and all other amounts received in respect of any sale, exchange, lease, license or other disposition of any Collateral, and including insurance proceeds ("PROCEEDS"); and (m) All products of Collateral ("PRODUCTS"); and (n) All of each Borrower's books, records, documents, ledger cards, invoices, bills of lading and other shipping evidence, credit files, computer programs, tapes, discs, diskettes, and other data and software storage medium and devices, customer lists, mailing lists, mailing labels, business forms and stationery, and other property and general intangibles evidencing or relating to each Borrower's Accounts, Inventory and/or other Collateral, or any Account Debtor, (including any rights of any Borrower with respect to the foregoing maintained with or by any other person) ("RECORDS"). SECTION 4A.02. CHATTEL PAPER AND INSTRUMENTS. Each Borrower shall mark or stamp the first page and the signature page of all Chattel Paper with a legend clearly and conspicuously stating that such Chattel Paper is subject to a continuing security interest in favor of Lender, and promptly upon Lender's request from time to time, and at each Borrower's sole cost and expense, and without limiting the effect of any other provision of this Agreement or any other Credit Document, each Borrower shall: (i) deliver to Lender such Chattel Paper, and execute and deliver to Lender such assignments of Chattel Paper and related endorsements of Chattel Paper, -56- as Lender may request, and shall cause the makers of the Chattel Paper to deliver to Lender such acknowledgments of the assignments of Chattel Paper as Lender may request; and (ii) deliver to Lender such Instruments, and execute and deliver to Lender such collateral assignments of Instruments and related endorsements of Instruments, as Lender may request, and shall cause the makers of the Instruments to deliver to Lender such acknowledgments of assignment of Instruments as Lender may request. SECTION 4A.03. BORROWER'S COLLECTION PRIVILEGES. To further secure the Obligations, and in addition to Lender's other rights, powers, and remedies under this Agreement, including those under Section 7.09, each Borrower agrees that Lender shall have the exclusive right to collect from Account Debtors, in the name of such Borrower or Lender, or in the name of Lender's designee, all Accounts, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property and similar Collateral; PROVIDED, HOWEVER, THAT prior to the revocation of the privilege by Lender in writing in Lender's discretion at any time after the occurrence of a Default, each Borrower shall be privileged to collect such Borrower's Accounts, Chattel Paper, Documents, General Intangibles, Instruments, Investment Property and similar Collateral in the ordinary course of such Borrower's business so long as such Borrower shall apply all proceeds of such Collateral and collections in accordance with the terms of this Agreement. Nothing in this Agreement shall be construed as obligating Lender to take any actions to collect any Collateral. SECTION 4A.04. COLLATERAL ACCOUNT. Following the occurrence of an Event of Default and requirement by Lender that any Borrower maintain a Lock-Box, each Borrower shall maintain a Collateral Account into which Items of Payment received and processed through the Lock-Box, and any other payments received by such Borrower from Account Debtors, shall be deposited on the date of such Borrower's receipt thereof. SECTION 4A.05. LOCK-BOX. Following the occurrence of an Event of Default and notice from Lender that a Lock-Box shall be required, each Borrower shall maintain a Lock-Box administered by Lender in accordance with Lender's standard Lock-Box service and shall direct each Account Debtor to make payments on Accounts to the Lock-Box address. SECTION 4A.06 ADDITIONAL COLLATERAL. If any Borrower proposes to acquire additional Property which would constitute Collateral, and if the security interest of Lender would not be a first priority perfected security interest upon acquisition of such Property, then except with respect to Permitted Liens, as to which this Section shall not apply, such Borrower shall, before acquiring such Property, take whatever actions Lender may require in order that, upon the acquisition of such Property, Lender will have a first priority perfected security interest therein. SECTION 4A.07 FURTHER ASSURANCES OF COLLATERAL. Each Borrower shall execute such further agreements, documents, financing statements and other instruments as may reasonably be requested by Lender in order to perfect the security interests granted herein. To the extent that possession of the Collateral may be necessary or advisable to perfect the collateral assignment and security interests granted hereby, each Borrower shall deliver such Collateral to Lender upon the request of Lender; PROVIDED THAT before the occurrence of an Event of Default, Lender shall -57- not require physical possession of Collateral if such possession would materially impair Borrowers' ability to transact business in a commercially reasonably manner. Without limiting the generality of the foregoing, each Borrower hereby covenants and agrees that all Liens granted to Lender under this Agreement and/or any other Credit Documents, are, and shall at all times be, first priority Liens, subject only to Permitted Liens, and that no Property of any Borrower shall be subject to any Lien (regardless of priority) except for Permitted Liens. ARTICLE V NEGATIVE COVENANTS Each Borrower covenants and agrees that from the date hereof and until the later of the Credit Termination Date or payment in full of all Obligations owed by any Borrower or Guarantor to Lender, unless Lender shall otherwise consent in writing: SECTION 5.01. RESTRICTED PAYMENTS. No Obligor shall make any payment of any incentive bonus or other incentive compensation (including the reasonable value of non-cash compensation) at any time that a monetary Default or non-monetary Event of Default exists under any of the Credit Documents or if such bonus or other incentive compensation would cause the Borrower Group to breach any of the Financial Covenants. SECTION 5.02. INVESTMENTS. No Obligor shall make, acquire or hold any Investments other than Permitted Investments. SECTION 5.03. INDEBTEDNESS. No Obligor shall incur, create, assume or suffer to exist any Indebtedness other than Permitted Indebtedness. SECTION 5.04. MAINTENANCE OF PERMITTED INDEBTEDNESS. No Obligor shall prepay any Permitted Indebtedness, excepting any prepayments of the Obligations. No Obligor shall modify any agreement relating to any Permitted Indebtedness. No Obligor shall make any payment on the Seller Subordinated Obligations except as expressly permitted in the Seller Subordination Agreement. SECTION 5.05. JUDGMENTS. No Obligor shall permit any judgment that is not covered by insurance entered against such Obligor to remain unsatisfied for a period of more than thirty (30) days after the judgment has become final. SECTION 5.06. TRANSACTIONS WITH AFFILIATES AND SELLING SHAREHOLDERS. Obligors may engage in transactions with Affiliates so long as such transactions (a) are on terms and conditions comparable to third-party arms length transactions; or (b) are employment or other compensation and benefit arrangements, including bonuses, incentive compensation, and stock option plans, which arrangements are entered into by such Obligor reasonably and in the ordinary course of such Obligor's business; or (c) are between such Obligor and an Obligor which is directly or indirectly wholly-owned by another Obligor. -58- SECTION 5.07. LINE OF BUSINESS; NAME; STRUCTURE. No Obligor shall engage in any business other than the business engaged in by such Obligor on the Effective Date and described on Schedule 3.22. No Obligor shall refuse, or divert or refer to any other Person any business or business opportunity that such Obligor could profit from in the ordinary course of such Obligor's business. No shareholder, officer, director or employee of any Obligor shall divert from such Obligor, or refer to any person other than a Obligor, any business or business opportunity that could be served by a Obligor in the ordinary course of such Obligor's business. Except for the name change of US Corporation to Environ International Corporation, no Obligor shall change its name or organizational structure without the prior written consent of Lender. SECTION 5.08. STOCK. Except for EHI which may issue additional shares of capital stock subject to the Shareholders' Agreement, no Obligor shall issue any additional shares of capital stock or other Equity Rights or Equity Interests except for securities (a) in respect of which it has no absolute and unqualified obligation to redeem or to pay cash distributions or dividends, and (b) the issuance of which does not result in an Event of Default. SECTION 5.09. DIVIDENDS; DISTRIBUTIONS; REPURCHASES. No Obligor shall declare or pay any dividend on, or make any other distribution of assets on account of, or redeem, purchase or otherwise acquire for value (other than redemptions in accordance with the Shareholders Agreement as in effect on the date hereof), any shares of any class of its capital stock, or any equity interest in it held by any Person (other than one Obligor to another Obligor), or any equity rights in it held by any Person if there is an existing Default or if any of the foregoing would result in a violation of any of the Financial Covenants or of any of the financial covenants set forth in the Seller Note or credit agreement executed by Borrower in connection with the Seller Note. SECTION 5.10. SUBSIDIARIES. Except as may be expressly permitted in Section 3.06 on the Effective Date, no Obligor shall (a) be or become a Subsidiary of any Person or (b) form or acquire or cause or permit any Person to be, a Subsidiary of any Obligor. Notwithstanding the foregoing, Borrowers may create new wholly owned Subsidiaries without the prior written consent of Lender so long as (a) such Subsidiaries are in the same business as Borrowers, (b) each such Subsidiary enters into a guaranty of the Loans on terms and conditions reasonably satisfactory to Bank, and (c) such Subsidiary secures its guaranty obligations by granting Lender a security interest in all of such Subsidiary's assets. SECTION 5.11. CONTROL. No Change of Control of any Obligor shall occur. SECTION 5.12. CONSOLIDATIONS; MERGERS; DISPOSITIONS; ACQUISITIONS. Except for Permitted Investments, no Obligor shall (i) enter into any transaction of merger or consolidation, or reorganization, or liquidate, wind up or dissolve itself, or suffer any liquidation or dissolution, or (ii) convey, sell, lease, license, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, Property or tangible or intangible assets, whether now owned or hereafter acquired, or (iii) sell, assign, convey, lease, license, abandon, transfer or otherwise dispose of, any of its Property or assets except in the ordinary course of business, or -59- (iv) acquire by purchase or otherwise any of the outstanding capital stock of, or all or substantially all of the business, Property or assets of, any Person. No Obligor shall sell, assign, convey, lease, license, abandon, transfer or otherwise dispose of, any Collateral, except that any Obligor may make (i) sales of Inventory in the ordinary course of such Obligor's business, (ii) sales for fair consideration of Equipment that is obsolete or no longer useful in such Obligor's business, and (iii) Permitted Licenses of Intellectual Property. SECTION 5.13. LIENS; BAILMENTS; CERTAIN SALES. No Obligor shall (a) create, incur, assume or suffer to exist any Lien or Lien Notice upon any Property of any Obligor other than Permitted Liens (including any Lien Notices that are Permitted Liens), or (b) license any Property of any Obligor to any other Person unless such license is a Permitted License, or (c) directly or indirectly, sell with or without recourse, or discount or factor, any Obligor's Accounts, Chattel Paper, Instruments, General Intangibles, or Documents. SECTION 5.14. RISK MANAGEMENT AGREEMENTS. No Obligor shall be a party to any Risk Management Agreement, other than with an entity approved by Lender except as listed on Schedule 3.35 or as may be expressly required by a provision of this Agreement. ARTICLE VI EVENTS OF DEFAULT; CERTAIN REMEDIES UPON DEFAULT SECTION 6.01. EVENTS OF DEFAULT. Subject to Section 6.01(s), each of the following events shall constitute an Event of Default attributable to all Obligors: (a) Any Obligor's failure to pay within ten (10) days after the Payment Date any amount of principal or interest of any Loan due on such Payment Date; or (b) Any Obligor's failure to pay any late charges, Loan related expenses or fees of Lender, or any other sums (other than principal and interest) due under any of the Credit Documents within ten (10) days after Lender's demand for such payments; or (c) If any representation or warranty made by any Obligor in any Credit Document is not true, accurate and complete in all material respects when made; or (d) If any Obligor shall fail to fulfill the requirements of any insurance provisions of the Credit Documents; or (e) Any Borrower's failure to notify Lender of any Notification Event as required in accordance with the requirements of Section 4.02; or (f) The Borrower Group's failure to satisfy any of the Financial Covenants; or -60- (g) The failure by Obligor to fulfill a covenant of this Agreement or any other Credit Documents. (h) If any statement, report, appraisal, certificate, opinion, or other information furnished to Lender by any Person in connection with the Borrowers' application for the Loans was not true, accurate and complete in all material respects when so furnished to Lender and on the Effective Date; or (i) If any statement, report, certificate, opinion, or other information furnished to Lender with or in accordance with the terms of this Agreement (including all annexes, schedules, and exhibits to the Credit Documents and all materials delivered to Lender to satisfy any condition of this Agreement) is not true, accurate and complete in all material respects when so furnished to Lender; or (j) The determination in good faith by Lender that a material adverse change has occurred on a consolidated basis in the financial or operating condition or business prospects of any Obligor from the condition set forth in the most recent financial statement of such Obligor furnished to Lender in connection with the Loans, or from the financial or operating condition or business prospects of such Obligor as heretofore most recently disclosed to Lender in writing by such Obligor, or the occurrence of any other fact, event or circumstance which Lender reasonably believes is likely to have a Material Adverse Effect on the Obligors on a consolidated basis; or (k) If one or more judgments or decrees shall be entered against any Obligor involving a liability of Two Hundred Fifty Thousand Dollars ($250,000) or more in the aggregate, or any judgment or decree entered against any Obligor shall not have been satisfied, vacated, discharged or stayed or bonded pending appeal within thirty (30) days from the entry thereof and which is not covered by insurance; or (l) The occurrence of a Change of Control of any Obligor; or (m) If any Obligor shall default in any payment of any Indebtedness to any Person, including any affiliate of Lender, (other than the Obligations), or shall breach any other terms, representations, warranties, covenants, conditions, or other provisions applicable to any such Indebtedness if the occurrence of any such default or breach would entitle the holder of such Indebtedness to accelerate such Indebtedness or exercise any other remedies (and the acceleration thereof would have a Material Adverse Effect on Borrower Group, and, if there is a cure period applicable to any such breach or default, such breach or default shall not have been cured within the cure period applicable thereto; or (n) If any Obligor shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or any of its property, (ii) admit in writing its inability to pay its debts as they mature, (iii) make a general assignment for the benefit of creditors, (iv) be adjudicated bankrupt or insolvent, (v) file a voluntary petition in Lenderruptcy or a petition or an -61- answer seeking reorganization or an arrangement with creditors or to take advantage of any Lenderruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law or if corporate or other action shall be taken by such Obligor for the purposes of effecting any of the foregoing, or (vi) consent to, approve of or acquiescence in any such proceeding or the appointment of any receiver of or trustee for any of its property, or suffer any such receivership, trusteeship or proceeding to continue undischarged for a period of sixty (60) days; or (o) Omitted. (p) the net loss through death, disability or voluntary or involuntary termination of employment within a fiscal year of Principals (after taking into account the hiring of new Principals and the promotion to Principal of existing employees) who are responsible for clients with average annual gross revenues over the most recent two complete fiscal years equal to or greater than twenty percent (20%) of the gross revenues of the US Corporation in the most recent complete fiscal year; or (q) Borrower shall default in any swap agreement (as defined in 11 U.S.C. ss.101) with Lender or any Affiliate of Lender; or (r) If (a) with respect to any Plan, there shall occur any of the following which could reasonably be expected to have a Material Adverse Effect: (i) the violation of any of the provisions of ERISA; (ii) the loss by a Plan intended to be a Qualified Plan of its qualification under Section 401(a) of the Code; (iii) the incurrence of liability under Title IV of ERISA; (iv) a failure to make full payment when due of all amounts which, under the provisions of any Plan or applicable law, any Borrower or any ERISA Affiliate is required to make; (v) the filing of a notice of intent to terminate a Plan under Sections 4041 or 4041A of ERISA; (vi) a complete or partial withdrawal of Borrower or an ERISA Affiliate from any Plan; (vii) the receipt of a notice by the plan administrator of a Plan that the PBGC has instituted proceedings to terminate such Plan or appoint a trustee to administer such Plan; (viii) a commencement or increase of contributions to, or the adoption of or the amendment of, a Plan; and (ix) the assessment against any Borrower or any ERISA Affiliate of a tax under Section 4980B of the Code; or (b) the Unfunded Benefit Liability of all of the Plans of Borrower, and each ERISA Affiliate shall, in the aggregate, exceed an amount that could reasonably be expected to have a Material Adverse Effect on Borrower Group. (s) The provisions described in Section 6.01(c), (d) and (f) through (j) shall not constitute Events of Default hereunder unless the events described in such actions are not cured within thirty (30) days after notice from Lender; provided that if Borrower commences a cure within the initial thirty (30) day cure period and diligently pursues to cure the Default thereafter, Borrower shall have up to sixty (60) days to cure such Default if it is not capable of cure within thirty (30) days. -62- SECTION 6.02. ACCELERATION. Upon the occurrence of an Event of Default, and at any time thereafter unless and until such Event of Default has been waived by Lender in writing or cured to the satisfaction of Lender as expressly acknowledged by Lender in writing, Lender may take any or all of the following actions against any or all Obligors: (a) declare the Credit Termination Date accelerated (without the necessity of any notice) on any Loan; and/or (b) declare the unpaid principal of, and all accrued and unpaid interest on, the Loan and any and all other outstanding and unpaid Obligations to be due, whereupon the same shall be immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower and each other Obligor; and/or (c) enforce any and all rights and interests created and existing under the Credit Documents and all rights of set-off; provided, however, without limiting the generality of the foregoing, upon the occurrence of an Event of Default described in Section 6.01(n) above, (i) the Credit Termination Date shall be immediately accelerated (without the necessity of any notice), and (ii) the unpaid principal of, and all accrued and unpaid interest on, the Loan and any and all other outstanding and unpaid Obligations shall be immediately due and payable to Lender without any action on the part of Lender, and without presentment, demand, protest, or other notice of any kind, all of which are hereby waived. SECTION 6.03. OTHER REMEDIES. In addition to the foregoing, upon the occurrence of an Event of Default, Lender may do any of the following: (a) Collect and enforce payment of all of each Borrower's Deposit Accounts, Accounts, General Intangibles, Chattel Paper, Instruments and Documents and rights and remedies with respect to such Property as would otherwise be exercised by any Borrower, including: the power to take possession of and endorse in the name of such Borrower, any Items of Payment of any kind and any other documents received; the power to extend the time of payment of, the time to sue for, and the time to give acquittances for, monies due; and the power to withdraw proceeds deposited in the name of the applicable Borrower in any Lender or savings institution. (b) Sell or otherwise dispose of the Collateral, or any part thereof, at public or private sale (or at any broker's board or on any securities exchange) or otherwise, for cash, upon credit or for future delivery as Lender shall deem appropriate. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of any Borrower, and each Borrower hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which any Borrower now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Lender shall give each Borrower at least ten (10) days' written notice (which each Borrower agrees is reasonable notice within the meaning of Section 9-504(3) of the UCC) of Lender's intention to make any sale of Collateral owned by any Borrower. Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange. Any such -63- public sale shall be held at such time or times within ordinary business hours and at such place or places as Lender may fix and state in the notice of such sale, and at any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as Lender may (in its discretion) determine, and Lender shall not be obligated to make any sale of any Collateral if Lender shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given, and Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, to any Borrower or anyone else, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by Lender until the sale price is paid by the purchaser or purchasers thereof, but Lender shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for Collateral so sold and, in case of any such failure, such of the Collateral may be sold again upon notice to Borrower as set forth in this Section. At any public sale made pursuant to this Section, Lender may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay or appraisal on the part of Borrower (all said rights being also hereby waived and released to the extent permitted by law), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to Lender from Borrower as a credit against the purchase price, and Lender may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to any Borrower therefor. For purposes hereof, a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof; Lender shall be free to carry out such sale pursuant to such agreement, and Borrower shall not be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after Lender shall have entered into such an agreement, all Events of Default shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon Lender, Lender may proceed by a suit or suits at law or in equity to foreclose this Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed Receiver. Upon any sale of Collateral by Lender (including a sale pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of Lender or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral being sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to Lender or such officer or be answerable in any way for the misapplication thereof. Borrower agrees that in selling or otherwise disposing of the Collateral and in exercising Lender's rights and remedies to the Collateral, Lender and/or any Receiver and/or any designee of Lender and/or any Receiver shall have the unrestricted and irrevocable right (so long as not violative of law) to advertise, sell, lease, license or otherwise dispose of the Collateral under and together with, and shall otherwise have the unrestricted and irrevocable right to use, without limitation, in connection therewith, any and all of Borrower's advertisements in any medium (and other marketing and promotional materials in any medium), brochures, signs, stationery, business forms, packaging and shipping materials, programs, software, licenses, permits, consents, approvals, and Intellectual Property relating to such Collateral and/or Borrower's business, and -64- all agreements with employees and former employees relating to any of the foregoing, and each Borrower shall indemnify and hold harmless Lender and any Receiver, and their designees, shareholders, directors, officers, employees, agents, attorneys, accountants, and other advisors, from and against any and all claims (including claims for royalties and/or money damages and/or claims for injunctive relief), liabilities, damages, royalties, and penalties of any Person, and Lender's and any Receiver's costs and expenses (including attorney's fees) and those of their designees, shareholders, directors, officers, employees, agents, attorneys, accountants, and other advisors, incurred to defend against any thereof. (c) With regard to all Collateral so collected, sold or otherwise disposed of, to the extent permitted by applicable law, Lender shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Agreement, first, to the settlement of all Liens on the Collateral prior to Lender's Lien; second, to the payment of all Collection Costs; and third, to the payment of all Obligations, and, in case of any deficiency, Lender may collect such deficiency from any Borrower (provided however, nothing in this provision shall be construed in derogation or limitation of any guaranty of payment or used to construe any guaranty of payment as being merely a guaranty of collection). (d) Notwithstanding anything in this Agreement or any other Credit Document to the contrary, Lender's declaration of default and exercise of remedies with respect to any swap agreement (as defined in 11 U.S.C. ss.101) between an Obligor and Lender shall not be governed by this Agreement or any other Credit Documents, but rather by the applicable swap agreement (as defined in 11 U.S.C. ss.101). SECTION 6.04. RECEIVER. If an Event of Default shall occur and be continuing, Lender shall be entitled as a matter of right and to the extent permitted by law, without notice to any Obligor, and without regard to the adequacy of security, to the immediate ex parte appointment of a Receiver by a court having jurisdiction in order to carry out all rights and remedies available to Lender upon such Event of Default, and to manage, protect and preserve the Collateral, and any other Property of any Borrower and continue to operate or liquidate any Borrower's business and to collect all revenues and profits thereof and apply the same to the payment of all expenses and other charges of such receivership, custodianship or similar appointment, including compensation of the Receiver and to the payment of the Obligations, and to the payment of such other claims and expenses as may appear appropriate. If Lender shall apply for the appointment of, or the taking of possession by, a Receiver, to hold, operate or liquidate all or any substantial part of the properties or assets of any Borrower, such Borrower hereby consents to any such appointment and taking of possession. Each Borrower shall deliver to any Receiver so appointed upon Lender's request all original Records, and any other records, books, and other information regarding the Collateral, and any other Property of such Borrower and the operations of the business of such Borrower. SECTION 6.05. WAIVERS. Each Borrower waives presentment, demand, notice of dishonor, and protest, and all demands and notices of any action taken by Lender under this Agreement, except as otherwise provided herein, are hereby waived, and any indulgence of -65- Lender, substitution for, exchange of or release of collateral, or addition or release of any person liable on the collateral is hereby assented and consented to and shall not operate or be claimed to operate to release or exonerate any other collateral or person or any claim of Lender. SECTION 6.06. ARBITRATION. (a) Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy arising out of, or relating to this letter or the Credit Documents between the parties hereto (a "DISPUTE") shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "ARBITRATION RULES") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, disputes as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to swap agreements. (b) Special Rules. All arbitration hearings shall be conducted in the city in which the office of Lender first stated above is located. A hearing shall begin within 90 days of demand for arbitration and all hearings shall be concluded within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 ET SEQ. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. (c) Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; and (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary Lenderruptcy proceeding. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. Each party agrees that it shall not have a remedy of punitive or exemplary damages against the other in any Dispute and hereby waive any right or claim to punitive or exemplary damages they have now or which may arise in the future in connection with any Dispute, whether the Dispute is resolved by arbitration or judicially. The parties acknowledge that by agreeing to binding arbitration they have irrevocably waived any right they may have to a jury trial with regard to a Dispute. -66- ARTICLE VII MISCELLANEOUS SECTION 7.01. FURTHER ASSURANCES. Each Borrower shall execute and deliver to Lender such further assurances of this Agreement and the matters contemplated by this Agreement and the other Credit Documents, including any Lien Notices in favor of Lender, promptly from time to time upon Lender's written request. SECTION 7.02. SUCCESSORS AND ASSIGNS. This Agreement and the other Credit Documents shall be binding upon and inure to the benefit of Lender and its successors and assigns and any holders of the Notes. No Borrower shall, without Lender's prior written consent, which consent may be withheld in Lender's discretion, assign any of such Borrower's rights under this Agreement or any of the other Credit Documents to any Person, and any attempt of such an assignment by any Borrower without Lender's prior written consent shall be void. Lender may sell or assign to any financial institution or institutions, and such financial institution or institutions may further sell or assign a participation interest (undivided or divided) in, Lender's rights and benefits under this Agreement and the other Credit Documents, and to the extent of that assignment such assignee or assignees shall have the same rights and benefits against each Borrower under this Agreement and the other Credit Documents as it or they would have had if such assignee or assignees were Lender making the Loans. Each Borrower shall promptly upon Lender's request furnish confirmation in writing to any such assignees such information as Lender or any such assignee may request regarding any matters, or the status thereof, relating to the Loans, the Notes, this Agreement, the other Credit Documents, or any Obligor Information. Lender may from time to time in its discretion appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of Lender provided under this Agreement and under the other Credit Documents or otherwise. In furtherance of such agency, Lender may from time to time direct that each Borrower and any other Obligor provide notices, certificates, reports, and other Obligor Information contemplated by this Agreement (or duplicates thereof) to such agent. Each Obligor consents to the appointment of any such agent and agrees to provide all such notices, certificates, reports, and other Obligor Information to such agent and to otherwise deal with such agent acting on behalf of Lender in the same manner as would be required if dealing with Lender itself and Lender agrees to give each Borrower notice of the appointment of any such agent. SECTION 7.03. SEVERABILITY. Any provision of this Agreement prohibited by the laws of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, or modified to conform with such laws, without invalidating the remaining provisions of this Agreement, and any such prohibition in any jurisdiction shall not invalidate such provisions in any other jurisdiction. -67- SECTION 7.04. GOVERNING LAW. This Agreement and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Virginia (excluding Virginia conflict of laws rules), including all matters of construction, validity and performance, regardless of the location of the parties or any Property, excepting, however, that the UCC (or decisional law) of a jurisdiction other than Virginia may provide the method of perfection of liens and security interests created under this Agreement and the other Credit Documents. SECTION 7.05. JURISDICTION; VENUE; SERVICE. Each Borrower irrevocably consents to the non-exclusive personal jurisdiction of the courts of the Commonwealth of Virginia and, if a basis for federal jurisdiction exists, the non-exclusive jurisdiction of the United States District Court for the District of Virginia. Each Borrower agrees that venue shall be proper in any circuit court of the Commonwealth of Virginia selected by Lender or, if a basis for federal jurisdiction exists, in any Division of the United States District Court for the District of Virginia. Each Borrower waives any right to object to the maintenance of any suit or claim in any of the state or federal courts of the Commonwealth of Virginia on the basis of improper venue or of inconvenience of forum. Any suit or claim brought by any Borrower against Lender that is based, in whole or in part, directly or indirectly, on this Agreement or any matters relating to this Agreement or the other Credit Documents, shall be brought in a court only in the Commonwealth of Virginia. No Borrower shall file any counterclaim against Lender in any suit or claim brought by Lender against such Borrower in a jurisdiction outside of the Commonwealth of Virginia unless under the rules of the court in which Lender brought such suit or claim the counterclaim is mandatory, and not permissive, and would be considered waived unless filed as a counterclaim in the claim or suit instituted by Lender against such Borrower. Each Borrower agrees that any forum outside the Commonwealth of Virginia is an inconvenient forum and that a suit brought by such Borrower against Lender in any court outside the Commonwealth of Virginia should be dismissed or transferred to a court located in the Commonwealth of Virginia. Each of the parties hereto further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at the address set out for notices in this Agreement, such service to become effective thirty (30) days after such mailing. Nothing herein shall affect the right of Lender to serve process in any other manner permitted by law or to commence legal proceedings or to otherwise proceed against any Borrower or any other Person in any other jurisdiction. SECTION 7.06. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. SECTION 7.07. SURVIVAL. All representations and warranties and indemnities made by any Borrower herein shall survive delivery of the Notes and the making of the Loan. -68- SECTION 7.08. NOTICES. Any notice required or permitted by or in connection with this Agreement shall be in writing and shall be made by telecopy, or by hand delivery, or by overnight delivery service, or by certified mail, return receipt requested, postage prepaid, addressed to the parties at the appropriate address set forth below or to such other address as may be hereafter specified by written notice by the parties to each other. Notice shall be considered given as of the earlier of the date of actual receipt, or the date of the telecopy or hand delivery, one (1) calendar day after delivery to an overnight delivery service, or three (3) calendar days after the date of mailing, independent of the date of actual delivery or whether delivery is ever in fact made, as the case may be, provided the giver of notice can establish that notice was given as provided herein. Notwithstanding the aforesaid procedures, any notice or demand upon any Obligor, in fact received by such Obligor, shall be sufficient notice or demand. Each undersigned Obligor (other than Borrower) hereby appoints Borrower as his, her or its agent for purposes of receiving notices under this Agreement and the other Credit Documents, so that notices given to Borrower shall be fully effective notice to Borrower and to each such other undersigned Obligor (other than Borrower). If to Lender: APPLIED BIOSCIENCE INTERNATIONAL INC. 3151 Seventeenth Street Extension Wilmington, North Carolina 28412 Telecopy: (910) 772-6951 If to Obligors: Environ Holdings, Inc. 4350 North Fairfax Drive Suite 300 Arlington, Virginia 22203 Attn: Mitchell B. Smith Telecopy No. (703) 516-2462 SECTION 7.09. LENDER APPOINTED ATTORNEY-IN-FACT. Each Borrower hereby appoints Lender as such Borrower's attorney-in-fact, with power of substitution, which appointment is coupled with an interest and irrevocable but which appointment shall not be exercised except during the continuance of any Event of Default hereunder, to do each of the following in the name of such Borrower or in the name of Lender or otherwise, for the use and benefit of Lender, but at the cost and expense of such Borrower, and with or without notice to such Borrower: (a) notify the Account Debtors to make payments directly to Lender, and to take control of the cash and non-cash proceeds of any Collateral; (b) compromise, extend, or renew any of the Collateral or deal with the same as it may deem advisable; (c) release, make exchanges, substitutions, or surrender of all or any part of the Collateral; (d) remove from such Borrower's place of business all Records relating to or evidencing any of the Collateral or without cost or expense to Lender, make such use of such Borrower's places of business as may be reasonably necessary to administer, control and collect the Collateral; (e) repair, alter or supply goods, if any, necessary to fulfill in whole or in part the purchase order or similar order of any Account Debtor; (f) demand, collect, receipt for and give renewals, extensions, discharges and releases of any of the -69- Collateral; (g) institute and prosecute legal and equitable proceedings to enforce collection of, or realize upon, any of the Collateral; (h) settle, renew, extend compromise, compound, exchange or adjust claims with respect to any of the Collateral or any legal proceedings brought with respect thereto; (i) endorse the name of such Borrower upon any Items of Payment relating to the Collateral or upon any proof of claim in Lenderruptcy against an Account Debtor; (j) institute and prosecute legal and equitable proceedings to reclaim any of the goods sold to any Account Debtor obligated on an Account at a time when such Account Debtor was insolvent; and (k) receive and open all mail addressed to such Borrower and notify the postal authorities to change the address for the delivery of mail to such Borrower to such address as Lender may designate. SECTION 7.10. REMEDIES CUMULATIVE. No failure or delay on the part of Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Obligor and Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies provided herein are cumulative and not exclusive of any rights or remedies which Lender would otherwise have. No notice to or demand on any Borrower in any case shall entitle such Borrower or any Obligor to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand. SECTION 7.11. AMENDMENTS, WAIVERS AND CONSENTS. Neither this Agreement nor any other Credit Document nor any of the terms hereof or thereof may be amended, changed, waived, discharged or terminated unless such amendment, change, waiver, discharge or termination is in writing signed by Lender. SECTION 7.12. WAIVERS OF CLAIMS; CONSEQUENTIAL AND PUNITIVE DAMAGES. Each Borrower and Lender hereby waive to the fullest extent permitted by law all claims to consequential and punitive damages in any lawsuit or other legal action brought by either of them against the other of them in respect of any claim between them arising under this Agreement, the other Credit Documents, or any other agreement or agreements between them at any time, including any such agreements, whether written or oral, made or alleged to have been made at any time prior to the date hereof, and all agreements made hereafter or otherwise, and any and all claims arising under common law or under any statute of any state or the United States of America, whether any such claims be now existing or hereafter arising, now known or unknown. In making this waiver Lender and each Borrower acknowledge and agree that there shall be no claims for consequential or punitive damages made by Lender against any Borrower and there shall be no claims for consequential or punitive damages made against Lender by any Borrower. Lender and each Borrower acknowledge and agree that this waiver of claims for consequential damages and punitive damages is a material element of the consideration for this Agreement. SECTION 7.13. NO THIRD PARTY BENEFICIARIES. There shall be no third party beneficiaries of this Agreement. -70- SECTION 7.14. ENTIRE AGREEMENT. Each Borrower agrees that the Credit Documents are a complete and exclusive expression of all the terms of the Loans and agrees that all prior agreements, statements, and representations, whether written or oral, which relate in any way to the Loans are hereby superseded and shall be given no force and effect, and that no promise, inducement, or representation has been made to any Obligor which relates in any way to the Loans, other than what is expressly stated in the Credit Documents. Each Borrower has executed the Credit Documents in full, understands the terms therein, and is executing this Agreement after the opportunity to have full consultation with counsel of such Borrower's choice. SECTION 7.16. WAIVER OF JURY TRIAL. EACH BORROWER AND LENDER HEREBY WAIVE ALL RIGHT TO TRIAL BY JURY OF ANY AND ALL CLAIMS BETWEEN THEM OF ANY TYPE, INCLUDING CLAIMS ARISING UNDER AND/OR RELATING IN ANY WAY TO THIS AGREEMENT AND/OR THE OTHER CREDIT DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED BY THE CREDIT DOCUMENTS. EACH BORROWER AND LENDER ACKNOWLEDGES THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT THIS WAIVER IS MADE KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION WITH COUNSEL OF ITS CHOICE. ALL CLAIMS ARISING UNDER THIS AGREEMENT AND/OR THE OTHER CREDIT DOCUMENTS AND/OR THE TRANSACTIONS CONTEMPLATED BY THE CREDIT DOCUMENTS SHALL BE TRIED BEFORE A JUDGE OF A COURT HAVING JURISDICTION, WITHOUT A JURY. SECTION 7.17. JUDGMENT CURRENCY. (a) If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or under the Notes or any other Credit Document from a currency ("ORIGINAL CURRENCY") to another currency ("OTHER CURRENCY"), the parties hereto agree to the fullest extent they may effectively do so, that the rate of exchange used shall be that at which Lender could in accordance with normal banking procedures purchase the Original Currency with the Other Currency on the second Business Day preceding that on which such final judgment is given. (b) The obligation of any Borrower in respect of any sum due in the Original Currency from any Borrower to Lender hereunder or under the Notes shall, notwithstanding any judgment in any Other Currency, be discharged only if and to the extent that on the Business Day following receipt by Lender of any sum adjudged to be so due in such Other Currency, Lender may in accordance with normal Banking procedures purchase such amount of the Original Currency with such Other Currency which it could have purchased on the second Business Day preceding that on which the final judgment referred to in clause (a) above is given. If the amount of the Original Currency so purchased is less than the amount of the Original Currency that Lender could have purchased on the second Business Day preceding that on which such final judgment is given, each Borrower agrees, as a new and separate obligation and notwithstanding any such judgment, to indemnify Lender against, and pay Lender on demand, such difference, and if the amount of the Original Currency so purchased exceeds the amount of the Original Currency which Lender could have purchased on the second Business Day -71- preceding that on which such final judgment is given, Lender agrees to remit to such Borrower such excess. SECTION 7.18. WAIVER OF IMMUNITY. Each Borrower hereby represents, warrants and agrees that to the extent that any Borrower or any of such Borrower's property and assets may have or hereafter acquire any right of sovereign or other immunity from suit, court jurisdiction, attachment in aid of execution of judgment, set-off, execution or other legal process, such Borrower hereby irrevocably waives, to the fullest extent permitted by law, such right of immunity with respect to such Borrower's obligations hereunder and with respect to legal proceedings to enforce the same and to enforce any judgment rendered in such proceedings. SECTION 7.19. PUBLICITY. Lender may, in Lender's discretion and at Lender's expense, publicize or otherwise advertise by so-called "tombstone" advertising or otherwise Lender's financing transactions with Borrowers and Guarantors. Lender may include references to Borrowers and Guarantors (and may use any logo or other distinctive symbol associated with Borrowers or Guarantors), and the transactions contemplated by this Agreement, in connection with any advertising, promotion, or marketing undertaken by Lender. -72- IN WITNESS WHEREOF, Lender and each Borrower, intending to be legally bound hereby, have caused this Agreement to be duly executed and delivered under seal as of the date first above written. WITNESS: LENDER: APPLIED BIOSCIENCE INTERNATIONAL INC. /s/ Elisa E. Tractman By: /s/ Fred B. Davenport, Jr.(SEAL) Name: Fred B. Davenport, Jr. Title: Vice President BORROWERS: ENVIRON HOLDINGS, INC. a Delaware corporation /s/ Elisa E. Tractman By: /s/ Mitchell B. Smith(SEAL) Name: Mitchell B. Smith Title: President APBI ENVIRONMENTAL SCIENCES GROUP, INC. a Virginia corporation /s/ Elisa E. Tractman By: /s/ Jospeh Highland(SEAL) Name: Joseph Highland Title: Chairman EX-21 13 EXHIBIT 21 EXHIBIT 21 PHARMACEUTICAL PRODUCT DEVELOPMENT, INC., AND SUBSIDIARIES SUBSIDIARIES The subsidiaries of Pharmaceutical Product Development, Inc., as of February 16, 1999, are as follows:
Jurisdiction of Incorporation or Name of Subsidiary Organized in ------------------ ------------ 1. Applied Bioscience International Inc. Delaware 2. PPD Pharmaco, Inc. Texas 3. Pharmaco International Holdings, Inc. Delaware 4. Pharmaco Investments Inc. Delaware 5. PPD Pharmaco SNC France 6. Pharma Contracts Scandinavia AB Sweden 7. PPD Pharmaco Canada, Ltd. Canada 8. PPD Do Brazil-Suporte Brazil 9. Q & Q Brazil 10. Pharmaco International Holdings GmbH Germany 11. PPD Pharmaco GmbH Germany 12. PPD Pharmaco Sp. zo.o Poland 13. PI Praha, s.r.o. Czech Republic 14. PPD Pharmaco GmbH & Co. KG Germany 15. Pharmaceutical Product Development (Pty) Ltd. South Africa 16. PPD Pharmaco Hungary Research & Development Ltd. Hungary 17. PPD UK Holdings Ltd. United Kingdom 18. Pharmaco International Ltd. United Kingdom 19. Leicester Clinical Research Centre, Ltd. United Kingdom 20. Chelmsford Clinical Trials Unit Ltd. United Kingdom 21. Gabbay Ltd. United Kingdom 22. Data Analysis & Research (DAR) Ltd. United Kingdom 23. APBI Investor Relations Inc. New Jersey 24. Clinix International Inc. Delaware 25. APBI Finance Corporation Delaware 26. PPD Pharmaco Mexico S.A. de C.V. Mexico 27. PPD Pharmaco Pty Limited Australia 28. PPD Pharmaco SRL Italy 29. PPD Spain, S.L. Spain 30. PPD Pharmaco (Thailand) Co., Ltd. Thailand 31. Cambridge Applied Nutrition Toxicology and Bioscience Limited United Kingdom 32. Clinical Technology Centre (International) Limited United Kingdom 33. Genupro, Inc. North Carolina 34. Belmont Research, Inc. Massachusetts 35. PPD Discovery, Inc. North Carolina 36. Target Discovery, Inc. North Carolina 37. SARCO, Inc. Delaware
Subsidiaries 1, 30, 33, 34 and 35 are wholly owned subsidiaries of Pharmaceutical Product Development, Inc. Subsidiaries 2, 17, 23, 24 and 25 are wholly owned subsidiaries of Subsidiary 1. Subsidiaries 3 and 4 are wholly owned subsidiaries of Subsidiary 2. Subsidiary 5 is owned 99% by Subsidiary 3 and 1% by Subsidiary 23. Subsidiaries 6, 7, 8, 10, 15, 27, 28 and 29 are wholly owned subsidiaries of Subsidiary 3. Subsidiary 9 is a wholly owned subsidiary of Subsidiary 8. Subsidiaries 11, 12, 13 and 16 are wholly owned subsidiaries of Subsidiary 10. Subsidiary 14 is owned 72% by Subsidiary 10 and 28% by Subsidiary 11. Subsidiaries 18, 19, 20, 21 and 22 are wholly owned subsidiaries of Subsidiary 17. Subsidiaries 31, and 32 are wholly owned subsidiaries of Subsidiary 18. Subsidiaries 36 and 37 are wholly owned subsidiaries of Subsidiary 35. Subsidiary 26 is owned 99% by Subsidiary 3 and 1% by Subsidiary 2. EX-23 14 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Pharmaceutical Product Development, Inc. and its subsidiaries on Form S-8 (File No. 333-20925) of our report dated February 2, 1999, on our audits of the consolidated financial statements of Pharmaceutical Product Development, Inc. and its subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this annual report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Raleigh, North Carolina March 3, 1999 EX-27 15 FDS -- PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
5 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 34,083 0 128,857 2,042 0 172,966 102,126 59,617 236,582 79,049 0 0 0 2,343 153,067 236,582 0 285,609 0 156,810 100,132 0 414 32,229 12,461 15,155 4,614 0 0 19,769 0.85 0.85
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