Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 000-20699

DATATRAK International, Inc.
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (216) 921-6505

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Shares, without par value.

     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. [  ]

     As of February 28, 2002, the registrant had 5,263,836 Common Shares, without par value, issued and outstanding. As of that date, the aggregate market value of these shares, which together constitute all of the voting shares of the registrant, held by non-affiliates was $15,998,855 (based upon the closing price of $3.30 per Common Share on the Nasdag Stock Market, Inc. on February 28, 2002). For purposes of this calculation, the registrant deems the 415,698 Common Shares beneficially held by all of its Directors and executive officers to be the Common Shares held by affiliates.

     Except as otherwise stated, the information contained in this Form 10-K is as of December 31, 2001.

Table of Contents

Table of Contents

PART I

ITEM 1. BUSINESS

General

     We are a provider of software and other related services, commonly referred to as an application service provider, or ASP. Our customers use our software to collect and transmit clinical trial data electronically, commonly referred to as electronic data capture, or EDC. Our customers are companies in the clinical pharmaceutical, biotechnology, contract research organization, or CRO, and medical device research industries. Our services assist these companies in accelerating the completion of clinical trials by providing improved data quality.

     We were founded in 1991 as a site management organization, and through our Clinical Business, which we sold in April 1999, provided clinical research services to various clinical trial sponsors. We currently operate as an ASP providing EDC and other services to the clinical research industry.

     We began EDC operations in 1997. During that year, we participated in a joint venture with IBM Global Services to develop and market a data collection and management system for use in clinical trials. The joint venture was terminated, and in January 1998, we purchased the software now known as DATATRAK EDC™ from PadCom Clinical Research for $610,000. Since the purchase of DATATRAK EDC™, we have devoted the majority of our efforts to developing and improving the EDC technology employed by this software.

     In January 2002, we received approximately $4.0 million in connection with the consummation of a private placement of 1,922,514 of our common shares at a purchase price of $2.25 per share. The terms of this financing included the issuance of five-year warrants to purchase a total of 192,252 common shares, at $2.25 per share, to Stonegate Securities, Inc., our placement agent for the private placement. We expect to use the proceeds of the private placement to expand our worldwide marketing and sales efforts, continue investing in software development and for other general working capital purposes.

Overview of the Clinical Research Industry

     Our customers are companies in the clinical pharmaceutical, biotechnology, CRO and medical device research industry. This industry is driven by regulatory requirements which mandate that clinical trial sponsors adequately test new drugs and medical devices prior to marketing these drugs and devices. As a result of these regulatory requirements, we estimate that companies in this industry spend approximately $41.0 billion annually on clinical research, including approximately $12.0 billion for the collection, analysis and management of clinical trial data.

     Competitive and cost-containment pressures are forcing the pharmaceutical and biotechnology industries to become more efficient when developing new products. To improve returns on research and development investments, pharmaceutical and biotechnology companies are continuing to develop new products, while at the same time attempting to shorten product development timelines. These efforts have placed more drugs into the clinical development process and have increased the pressure for companies to develop products faster in order to maintain growth and continue to achieve acceptable returns on research and development expenditures. Clinical trial sponsors have attempted to create process efficiencies, control fixed costs and expand capacity by outsourcing clinical research activities.

DATATRAK Software and Services

     Under the traditional method of clinical research, research associates visit research sites to review clinical trial data, which is manually entered on the paper case report form, for accuracy and integrity. During these monitoring visits, the research associate must review each page of each case report form. These visits may last several days, and corrections to the case report forms are frequently required before the data can be

1

Table of Contents

delivered to the research sponsor. Several weeks, or even months, of data may be reviewed during each monitoring visit. At the completion of a monitoring visit, the case report form pages are physically transferred to a central location where the data is then entered into a database for statistical compilation. Using this method of data collection and quality control, the duration of the clinical trail process, from patient visit to delivery of clean data to the clinical trial sponsor, can range from six to nine months. Such delays are significant because errors or trends may not be detected until long after the interaction between the patient and clinical investigator.

     We believe that automating data entry and review procedures can save time in the drug development process. Our belief is supported by metrics presented by an international pharmaceutical manufacturer, in 1998. The use of DATATRAK EDC™ in a clinical trial was compared with the traditional, or paper, method of data collection and review in a clinical trial of similar size and complexity. The study showed that DATATRAK EDC™ reduced the overall length of the clinical trial by 30%. Further, the time required to achieve a final, locked database was reduced by 40%, through the use of DATATRAK EDC™. Finally, due to the improved quality of the clinical trial data obtained through the use of DATATRAK EDC™ the study showed an 86% reduction in questions concerning that clinical trial data. We can provide any customer with the DATATRAK® process as a competitive advantage by accelerating the review and processing of clinical trial data.

     DATATRAK EDC™ was developed to provide clinical research data to sponsors of clinical research trials faster and more efficiently than other forms of information-processing. The DATATRAK EDC™ software and its earlier versions have supported over 65 international clinical studies involving thousands of clinical research sites and tens of thousands of patients in 34 countries. Our product suite has been utilized in the clinical development of 13 separate drugs that have received regulatory approval from either the FDA or counterpart regulatory bodies in Europe.

     DATATRAK EDC™ is a technology platform that consists of Windows™ compatible software and hardware designed to assist clinical trial sponsors in starting and finishing their clinical trials on a more timely basis. Our combination of software and hardware expedites the data collection and reporting process during a clinical trial. In addition to providing technology, we are also a service business that offers EDC and clinical trial data management capabilities across numerous research sites. Our objective is to improve the traditional process of collecting clinical research and noninterventional health care data by providing cleaner data more quickly than what is available in a paper environment.

     The DATATRAK EDC™ system consists of five modules designed for flexible adaptation to the clinical research process. We initially provide a set of electronic data forms that can be modeled to suit the needs of each particular clinical trial. Each form is then made available through data entry capability to each research site participating in the clinical trail via the Internet or dial-up connection. Once clinical trial data has been collected and entered, the clinical trial sponsor, or other contracted vendor, can review the data remotely via the Internet or dial-up connection. After the data is reviewed and cleansed of all entry errors, DATATRAK EDC™’s report capability can generate customized reports. Finally, the software’s export feature allows completed data and reports to be transmitted directly to a clinical trial sponsor’s in-house database. Under this model, research data is collected more quickly and with greater accuracy than with physical review of paper reports.

     The DATATRAK EDC™ software can be deployed globally via a distributed platform using laptop computers, in a centralized environment with resident hardware, or in a wireless mode, all utilizing the Internet.

Customers and Marketing

     Our customers are largely comprised of clinical trial sponsors. We market our software and services through a sales and marketing staff located in the United States and Europe. Since the market for EDC in general, and for our services specifically, has been an emerging one, the effectiveness of our marketing efforts has been limited. However, we have selectively participated in scientific and medical meetings to promote

2

Table of Contents

our services and have occasionally used direct mail and journal advertisements to build awareness of our capabilities.

     The EDC market has been slow to develop. The growth of the Internet has drastically altered business strategies and pricing models in this specific sector. Most EDC vendors have insignificant revenues and are classified as start-ups. Nonetheless, we believe that some type of automation in the collection and review of clinical trial data is inevitable.

     It is our belief that DATATRAK EDC™ can be competitive in this emerging marketplace. Our product has been tested and verified to be in compliance with FDA and other regulations. Also, DATATRAK EDC™ can be used via the Internet and can be used in multiple languages. Furthermore, a clinical trial sponsor has published statistics indicating that DATATRAK EDC™ can reduce the length of time to complete a clinical trial, and can reduce the number of questions concerning the clinical trial data thereby improving the quality of the clinical trial data.

     During 2001 and 2000, Quintiles, Inc. accounted for 11% and 52% of our revenue, and Aventis Pharmaceuticals, Inc. accounted for 22% and 27% of our revenue. Furthermore, during 2001, Control Delivery Systems, Inc. and CV Therapeutics, Inc. accounted for 23% and 21% of our revenue.

Contracting and Backlog

     Our contracts with our customers provide a fixed price for each component or service to be delivered, and we recognize revenue as these components or services are delivered. Services provided by us that are in addition to those provided for in our contracts are billed on a fee-for-service basis as completed. Generally, these contracts range in duration from one to three years. The ultimate contract value is dependent upon the length of the customer’s use of DATATRAK EDC™ and the services we provide. As services are performed over the life of the contract, we recognize revenue per the specific terms of each contract. Costs associated with contract revenue are recognized as incurred. Our customers, with or without cause, can terminate a contract at any time. If one of our contracts is cancelled, we are entitled to payment for all work performed through the date of notice of termination and for recovery of some or all costs incurred to terminate a contract. The termination of a contract will not result in a material adjustment to the revenue or costs we have previously recognized.

     We are also a seller and licenser of software. Generally, we recognize revenue upon delivery of sold software. Licensing revenue is recognized ratably over the life of the license. To date we have not recognized any revenue from software sales.

     Our backlog consists of anticipated revenue from letters of intent and signed contracts yet to be completed. We do not include in our backlog potential contracts or letters of intent that have passed the verbal stage, but have not yet been signed. At December 31, 2001, our backlog was $11.9 million. Backlog includes a $2.4 million contract, which is currently on hold. Our backlog, at any point in time, is not an accurate predictor of future levels of revenue.

Competition

     We compete within the clinical research and the EDC markets. Both of these industries are highly competitive and fragmented. In addition, the EDC industry is currently emerging and is characterized by rapidly evolving technology. We compete in this market on the strength of DATATRAK EDC™’s functionality, design architecture and data entry and review tools, which we believe equal or exceed those available in the market. We believe that we may be able to enhance our competitive strength through the formation of strategic alliances with established industry organizations. We have received expressions of interest from various parties in establishing such relationships.

     Our major competitors include software vendors specializing in EDC, clinical trial data service companies, large pharmaceutical companies currently developing their own in-house technology and the traditional paper-based method of collecting clinical trial data. Also, many current and potential future competitors have or may have substantially greater financial and technical resources, greater name recognition

3

Table of Contents

and more extensive customer bases that could be leveraged, thereby gaining market share or product acceptance to our detriment. We may not be able to capture or establish the market presence necessary to effectively compete in this emerging sector of the clinical research industry. EDC may not effectively replace paper as the preferred method of collecting and managing clinical trial data to the extent that we believe it will.

     We are aware of other EDC systems that compete or, in the future, may compete directly with DATATRAK EDC™. We are also aware of other current or developing technologies that provide some of the functionality of the DATATRAK® process. There are other companies that have developed or are in the process of developing technologies that are, or, in the future, may be, the basis for competitive products in the clinical research EDC market. Some of those technologies may have an entirely different approach or means of accomplishing the desired effects of DATATRAK EDC™. Either existing or new competitors may also develop products that are superior to or that otherwise achieve greater market acceptance than DATATRAK EDC™. In addition, we believe that certain large companies in the information technology industry may be forming alliances and attempting to capitalize on the data delivery options offered by the Internet. To the extent that our approach to EDC may gain market acceptance, larger companies in the information technology industry may develop competing technology to our detriment.

Regulatory Matters

     The FDA has issued guidelines and rules on the use of computer systems in clinical trials relating to standard operating procedures, data entry, system design, security, system dependability and controls, personnel training, records inspection and certification of electronic signatures. Based on our review, we believe DATATRAK EDC™ complies with these guidelines and rules. Because the FDA’s guidance and rules are still developing, DATATRAK EDC™ may not remain consistent with the FDA’s requirements. Any release of additional FDA guidance that is significantly inconsistent with the design of DATATRAK EDC™ could cause us to incur significant costs in order to change our software. We intend to continue to monitor the FDA’s guidance to ensure compliance.

Potential Liability and Insurance

     Our services are supported by telecommunications equipment, software, operating protocols and proprietary applications for high-speed transmission of large quantities of data among multiple locations. In such operations, it is possible that data files may be lost, altered or distorted. DATATRAK EDC™ and future enhancements or adaptations may contain undetected design faults and software “bugs” that, despite our testing, are discovered only after the system has been installed and used by customers. Such faults or errors could cause delays or require design modifications on our part. In addition, clinical pharmaceutical and medical device research requires the review and handling of large amounts of patient data. Potential liability may arise from a breach of contract or a loss of or unauthorized release of clinical trial data. We obtain contractual agreements from our customers limiting our liability for damages resulting from errors in the transportation and handling of data. Nevertheless, we may still be subject to significant claims for data losses in the transportation and handling of data over our information technology network.

     If we were forced to undertake the defense of, or were found financially responsible for, claims based upon the foregoing or related risks we could incur significant costs relating to these claims. We maintain a $5.0 million errors and omissions professional liability insurance policy to cover claims that may be brought against us. This coverage may not be adequate, or continue to be available in the future.

Patents and Trademarks

     We hold registered service marks incorporating the DATATRAK® process, and trademarks, including the DATATRAK EDC™ software. The DATATRAK EDC™ software is the foundation of the DATATRAK® process. Intellectual property rights are significant to our continued operation and development.

4

Table of Contents

Employees

     As of February 28, 2002, we had approximately 80 full-time employees. None of our employees are represented by a union, and we consider relations with our employees to be satisfactory. We do not have employment agreements with all of our executive officers. Due to the early stage of development of our industry and business, the loss of the services of any of our executive officers could put us at a competitive disadvantage, since we would need to attract a qualified new executive to fill the vacancy. To address these risks, we must, among other things, continue to attract, retain and motivate qualified personnel.

ITEM 2. PROPERTIES

     We presently lease approximately 14,000 square feet of space in Shaker Heights, a suburb of Cleveland, Ohio, of which approximately 6,000 square feet is sublet to an unrelated third party. The remaining 8,000 square feet are used to house our executive offices and our U.S. operations. This lease and sublease will both expire in April 2002. As a result, we have entered into a new lease for approximately 10,000 square feet of office space in Mayfield Heights, a suburb of Cleveland, Ohio. During 2002, we will relocate our executive offices and our U.S. operations to this new space.

     We also lease, on a month-to-month basis, approximately 7,000 square feet of office space in Bonn, Germany for our European operations. We are currently exploring various options for the location of our European operations. These options include negotiating a long-term lease for the space we currently use or moving our European operations to a different location in or near Bonn, Germany.

ITEM 3. LEGAL PROCEEDINGS

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At a special meeting of shareholders held on November 29, 2001, our shareholders voted to approve our private placement and to amend our Third Amended and Restated Code of Regulations.

     The following is a summary of the voting:

5

Table of Contents

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON SHARES AND RELATED SHAREHOLDER MATTERS

     Our common shares are traded on The Nasdaq National Market (“Nasdaq”) under the symbol “DATA.” Our common shares were initially offered to the public on June 11, 1996 at a price of $13.50 per share and commenced trading on Nasdaq on that date. The following table sets forth, for the fiscal years ended December 31, 2001 and 2000, the high and low sale prices per share for our common shares, as reported by Nasdaq. These prices do not include retail markups, markdowns or commissions.

     On February 28, 2002, the last sale price of our common shares as reported by Nasdaq was $3.30 per share. As of February 28, 2002, we had 78 shareholders of record.

     We have never declared or paid cash dividends on our common shares. Any determination to pay cash dividends in the future will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, results of operations, current and anticipated cash needs and plans for expansion.

6

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented above includes the operating results of our Clinical Business for all periods presented prior to April 20, 1999. Prior to April 20, 1999, the date we sold our Clinical Business, substantially all of our revenue and operating results were derived from the Clinical Business.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
               OPERATIONS

General

     We are an ASP that provides EDC and other services to companies in the clinical pharmaceutical, biotechnology, CRO and medical device research industries. We assist our customers in accelerating the completion of clinical trials by streamlining the collection of data relating to clinical trials, and improving the overall quality of the clinical trial data collected. Through our Clinical Business, which we sold in 1999, we operated a multi-specialty site management organization that provided clinical research services to various clinical trial sponsors.

7

Table of Contents

     The discussion that follows highlights our business conditions and certain financial information. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

     Approximately 68% of our assets, or approximately $5.2 million, are held in cash, cash equivalents and short-term investments. We have recognized little EDC revenue to date and have experienced significant losses and negative cash flow from operations. We are continuing to develop and commercialize our business, and anticipate that our operating results will fluctuate significantly from period to period.

     We use a technology platform that consists of Windows™ compatible software and intranet hardware known as DATATRAK EDC™ to provide EDC and other services to clinical trial sponsors and CROs. Our future success is dependent on market acceptance of EDC in general, as an alternative to the traditional paper method of collecting clinical trial data, and acceptance of DATATRAK EDC™ specifically. We may be unsuccessful in achieving commercial acceptance of the DATATRAK® process.

     Our contracts with our customers provide a fixed price for each component or service to be delivered, and we recognize revenue as these components or services are delivered. Services provided by us that are in addition to those provided for in our contracts are billed on a fee-for-service basis as completed. Generally, these contracts range in duration from one to three years. The ultimate contract value is dependent upon the length of the customer’s use of DATATRAK EDC™ and the services we provide. As services are performed over the life of the contract, we recognize revenue per the specific terms of each contract. Costs associated with contract revenue are recognized as incurred. Our customers, with or without cause, can terminate a contract at any time. If one of our contracts is cancelled, we are entitled to payment for all work performed through the date of notice of termination and for recovery of some or all costs incurred to terminate a contract. The termination of a contract will not result in a material adjustment to the revenue or costs we have previously recognized.

     Since our purchase of the DATATRAK EDC™ software in January 1998, we have recorded revenue related to a small number of contracts. At December 31, 2001, our backlog was $11.9 million. Backlog includes a $2.4 million contract which is currently on hold. In the future, we may also record revenue related to the sales and licensing of software. Due to our early stage of development and low level of backlog, we may continue to recognize low levels of revenue.

Critical Accounting Policies

     In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have identified the most critical accounting principles upon which our financial status depends. Critical principles were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies were identified to be those related to revenue recognition and software development costs. Our revenue recognition and software development cost policies are stated in the notes to the consolidated financial statements and at relevant sections in this discussion and analysis.

Results of EDC Operations

     During 2001, 2000 and 1999 we have recorded net operating losses from our EDC operations of $7.7 million, $6.2 million and $4.9 million. During these years, our revenue has grown from $900,000 in 1999 to $2.0 million in 2000 to $2.2 million in 2001. Our low level and slow growth of revenue are due to our low level of backlog, the slow growth of the EDC market, and the slow conversion of our backlog into revenue. During these three years our operating expenses have continued to increase from $5.8 million in 1999, to $8.2 million in 2000 and to $9.9 million in 2001. Our personnel costs, which have represented approximately 40.0% to 50.0% of our operating expenses, have increased from $2.1 million in 1999, to $3.6 million in 2000 and to $5.2 million in 2001. This increase in personnel costs is a result of the growth in our sales, operations and software development staffs. We believe these increases in staff are necessary in order to continue to enhance our software offering, grow backlog and convert backlog into revenue. At December 31, 2001 we had approximately 75 employees.

8

Table of Contents

     At our current levels of revenue and conversion of backlog into revenue, we anticipate that our operating loss will be reduced during 2002. However, we anticipate that we will still record a net operating loss for the year ended December 31, 2002.

     The following table shows, for the periods indicated, selected items from our Consolidated Statements of Operations, expressed as a percentage of revenue. Results for 1999 include only the results of our EDC operations.

Year ended December 31, 2001 compared with year ended December 31, 2000

     Revenue for the year ended December 31, 2001 increased by 10.0% to $2.2 million, compared to $2.0 million for the year ended December 31, 2000. The low level of growth was due to the slower than expected development and conversion of our backlog into revenue during 2001. During the second half of 2001, we began reorganizing our sales force and are continuing to increase our sales and marketing staff in order to attract new business and grow backlog.

     Direct costs of revenue, mainly personnel costs, were $1.8 million and $1.6 million during the years ended December 31, 2001 and 2000. Our gross profit was $470,000 and $400,000 during 2001 and 2000. The 12.5% increase in direct costs was mainly the result of increased personnel costs of $260,000 from the addition of new employees. The increase in personnel costs was partially offset by an $80,000 decrease in other direct costs, mainly travel expenses and other costs, which are billed to our customers.

     Selling, general and administrative (“SG&A”) expenses include all administrative personnel costs, business and software development costs, and all other expenses not directly chargeable to a specific contract. These expenses increased by 26.3% to $7.2 million from $5.7 million for the years ended December 31, 2001 and 2000. The increase was primarily due to increased personnel costs of $1.3 million caused by an increase in sales and marketing and software development personnel.

     Depreciation and amortization expense increased to $950,000 during the year ended December 31, 2001, from $870,000 during the year ended December 31, 2000. The increase was the result of depreciating capital expenditures associated with the development of our information technology infrastructure.

     Other income for the year ended December 31, 2001 totaled $340,000, compared to $910,000 for the year ended December 31, 2000. Other income includes interest income, which decreased $510,000 for the year ended December 31, 2001 compared to December 31, 2000, due to our use of cash to fund operating losses and other working capital needs, and decreasing interest rates on our short-term investments. For the year ended December 31, 2001, there was a $50,000 decrease in foreign currency transaction adjustments compared to the year ended December 31, 2000.

9

Table of Contents

     Due to our loss for the year ended December 31, 2001, no income tax expense was recorded. At December 31, 2001 we had a net operating loss carryforward of approximately $17.2 million, for United States income tax purposes, which will expire through the year 2021. We also had a net operating loss carryforward of approximately $4.4 million, for German income tax purposes, with no expiration date. We have fully provided for our deferred tax assets through a valuation allowance.

Year ended December 31, 2000 compared with year ended December 31, 1999

     Revenue for the year ended December 31, 2000 increased by 122.2% to $2.0 million, compared to $900,000 for the year ended December 31, 1999. Of this increase, $900,000 is from customers with which we established relationships in 1999 and the remainder of the increase results from contracts with new customers.

     Direct costs of revenue, mainly personnel costs, were $1.6 million and $770,000 during the years ended December 31, 2000 and 1999. Our gross profit was $400,000 and $130,000 during 2000 and 1999. The 107.8% increase in direct costs was mainly the result of increased personnel costs of $640,000 from the addition of new employees. The remaining increase was due to additional contract costs related to the increased usage of the DATATRAK EDC™ software. During 2000, we completed an analysis of employee and other costs relating to research and development activities. Such research and development costs for 1999, totaling $260,000 were reclassified from direct costs to SG&A expenses to conform to the 2000 reporting presentation.

     SG&A expenses increased by 29.6% to $5.7 million from $4.4 million for the years ended December 31, 2000 and 1999. The increase was primarily due to increased personnel costs of $930,000. Included in the $930,000 increase in personnel costs is a one-time, non-cash charge of $110,000 for compensation expense on stock options. These stock options have exercise prices below the market value of our common shares on the date the stock option plan relating to these stock options was approved by our shareholders. Other SG&A costs associated with our development and marketing efforts increased by $350,000. A one-time expense of $350,000 associated with services to assess the market potential of the DATATRAK EDC™ software is in included in 1999 SG&A. The absence of this expense was offset by $370,000 of additional consulting costs in 2000.

     Depreciation and amortization expense increased to $870,000 during the year ended December 31, 2000 from $670,000 during the year ended December 31, 1999. The increase was the result of depreciating capital expenditures associated with the development of our information technology infrastructure.

     Other income for the year ended December 31, 2000 totaled $910,000, compared to $2.6 million for the year ended December 31, 1999. During 1999, $1.3 million was received as the result of a favorable outcome in a lawsuit. Other income also includes interest income which decreased $430,000 in 2000, compared to the year ended December 31, 1999, due to the our use of cash to fund our repurchase of common shares in August 1999, operating losses and other working capital needs.

     Due to our loss for the year ended December 31, 2000, no income tax expense was recorded.

Clinical Business Results of Operations

     From January 1, 1999 to April 20, 1999, we recorded operating results related to our Clinical Business. During this time period, the Clinical Business had revenue of $4.9 million. Direct costs, SG&A and depreciation expenses totaled $4.6 million resulting in income from operations of $290,000. Our April 20, 1999 sale of the Clinical Business resulted in a gain of $12.2 million. We incurred income tax expense of $380,000 for the year ended December 31, 1999 as a result of federal alternative minimum taxes and state income taxes incurred related to the gain associated with the sale of the Clinical Business.

10

Table of Contents

Liquidity and Capital Resources

     Our principal sources of cash have been cash flow from operations and proceeds from the sale of equity securities. The 1999 sale of our Clinical Business generated $15.6 million in cash and we also received $1.3 million in cash during 1999 from a favorable legal settlement. Our investing activities primarily reflect capital expenditures and net purchases of short-term investments. In 1999, we repurchased 3.3 million of our common shares at a cost of $20.2 million. On January 7, 2002, we raised approximately $4.0 million in cash with the completion of our private placement.

     Contracts with our customers usually require a portion of the contract amount to be paid at the time the contract is initiated. Additional payments are generally received upon completion of negotiated performance milestones throughout the life of the contract. We record all amounts received as a liability (deferred revenue) until work has been completed and revenue is recognized. Cash receipts do not necessarily correspond to costs incurred or revenue recognized. We typically receive a low volume of large-dollar receipts. Our accounts receivable will fluctuate due to the timing and size of cash receipts. Accounts receivable (net of allowance for doubtful accounts) was $430,000 at December 31, 2001 and $610,000 at December 31, 2000. Deferred revenue was $470,000 at December 31, 2001 and $340,000 at December 31, 2000.

     Cash and cash equivalents decreased $210,000 during the year ended December 31, 2001. This was the result of $6.2 million provided by investing activities, and $6.4 million used by operating and financing activities. Investing activities included net proceeds of $6.9 million from purchases and maturities of short-term investments offset by $690,000 used to purchase property and equipment. A capital lease obligation of $390,000, entered into during the year ended December 31, 2001, is excluded from financing and investing activities on our Condensed Consolidated Statement of Cash Flows. A total of $120,000, including interest, was paid under the capital lease obligation during 2001. Cash used for operating activities resulted from the funding of net operating losses and other working capital needs.

     At December 31, 2001, we had working capital of $4.3 million, and our cash, cash equivalents and short-term investments totaled $5.2 million. Our working capital has decreased by $7.4 million since December 31, 2000. The decrease was primarily the result of a $6.8 million decrease in our cash, cash equivalents and short-term investments and a $310,000 decrease in accounts and other receivables.

     We are responsible for funding the enhancement and testing of the DATATRAK EDC™ software. We will continue to invest in the development of the DATATRAK® process. Our operations and the EDC market are still in a developmental stage. We have experienced marginal revenue growth, however, we anticipate negative cash flow from operations during 2002 as we continue to build our operational and business development infrastructure. We anticipate capital and related expenditures of approximately $1.6 million for the twelve months ending December 31, 2002 for the continued commercialization and enhancement of DATATRAK EDC™, which we expect to fund from existing cash and cash equivalents, maturities of short-term investments and cash flow from operations. We believe that, with the cash raised in our January 2002 private placement, our cash and cash equivalents, maturities of short-term investments and cash flow from operations, will be sufficient to meet our working capital and capital expenditure requirements through December 31, 2002. However, we may need to raise additional funds to support expansion, respond to competitive pressures, acquire complementary businesses or technology or take advantage of unanticipated opportunities. We may need to raise additional funds by selling debt or equity securities, by entering into strategic relationships or through other arrangements. Additional capital may not be available on acceptable terms, if at all. To the extent that additional equity capital is raised, it could have a dilutive effect on our existing shareholders.

11

Table of Contents

Contractual Obligations

     The table below shows our contractual cash obligations, expressed in thousands, at December 31, 2001.

Inflation

     To date, we believe that the effects of inflation have not had a material adverse effect on our results of operations or financial condition.

Interest Rate Risk

     We have fixed income investments consisting of cash equivalents and short-term investments, which may be affected by changes in market interest rates. We do not use derivative financial instruments in our investment portfolio. We place our cash equivalents and short-term investments with high-quality financial institutions, limit the amount of credit exposure to any one institution and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. Investments are reported at amortized cost, which approximates fair value.

Foreign Currency Risk

     Our foreign sales and results of operations are subject to the impact of foreign currency fluctuations. Approximately 20% of our 2001 revenue was earned in Germany by our subsidiary, DATATRAK GmbH. We manage our risk to foreign currency exchange rates by maintaining foreign currency bank accounts in currencies in which we regularly transact business. We do not currently hedge against the risk of exchange rate fluctuations. On January 1, 2002, we began transacting business in Germany using Euros. The conversion to the Euro is not expected to have a material impact on our financial position, results of operations or cash flows.

Information About Forward-Looking Statements

     Certain statements made in this Annual Report on Form 10-K contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). All statements that address operating performance, events or developments that we anticipate will occur in the future, including statements related to future revenue, profits, expenses, income and earnings per share or statements expressing general optimism about future results, are forward-looking statements. In addition, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to the safe harbors created in the Exchange Act.

     Forward-looking statements are subject to numerous assumptions and risks and uncertainties that may cause our actual results or performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. We have identified the following important factors, which could cause our actual operational or financial results to differ materially from any projections, estimates, forecasts or other forward-looking statements made by or on our behalf. Under no

12

Table of Contents

circumstances should the factors listed below be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements. We undertake no obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Annual Report on Form 10-K. In addition, we do not undertake any responsibility to update publicly the occurrence of unanticipated events, which may cause actual results to differ from those expressed or implied by these forward-looking statements.

We have a limited operating history and we have not had profitable operations.

     We began providing EDC services in 1997 and have a limited operating history upon which investors may evaluate our performance. We have recognized operating losses in each year since 1997. Our cumulative operating loss since 1997 from EDC operations totaled $31.9 million at December 31, 2001, and we may not be profitable during future periods.

If we do not continue to enhance our software, we may not be able to meet the needs of our customers.

     Although the DATATRAK EDC™ software has been used in clinical trials, its continued enhancement is necessary to provide additional functionality and services to meet the ever-changing needs and expectations of our customers. Among the enhancements we have added to our software are features including electronic signatures, single user login for added security and multiple user access. To date we have had little EDC revenue from which to support the costs of this continued software enhancement. Our potential future revenue, may not be sufficient to absorb corporate overhead and other fixed operating costs that will be necessary for the success of the DATATRAK® process.

Our quarterly results fluctuate significantly.

     We are subject to significant fluctuations in quarterly results caused by many factors, including our success in obtaining new contracts, the size and duration of the clinical trials in which we participate, the timing of clinical trial sponsor decisions to conduct new clinical trials or cancel or delay ongoing trials and other factors, which could cause our revenue predictions to be incorrect. Our expense levels are based in part on our expectations as to future revenue and to a certain extent are fixed. We may be unable to adjust expenses in a timely manner to compensate for any unexpected revenue shortfall. As a result of our relatively small revenue base, any significant shortfall in revenue recognized during a particular period could have an immediate adverse effect on our income from operations and financial condition. Volatility in our quarterly results may adversely affect the market price of our common shares.

Our business strategies are unproven and we are in an early stage of development.

     Our efforts to establish a standardized EDC process for collection and management of clinical research data represent a significant departure from the traditional clinical research practices of clinical trial sponsors. The long-term viability of our business remains unproven. Our strategy may not gain acceptance among sponsors of clinical research, research sites or investigators. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets.

We may lose revenues if we experience delays in clinical trials or if we lose contracts.

     Although our contracts provide that we are entitled to receive revenue earned through the date of termination, our customers generally are free to delay or terminate a clinical trial or our contract related thereto at any time. The length of a typical clinical trial contract varies from several months to several years. Clinical trial sponsors may delay or terminate clinical trials for several reasons, including unexpected results or adverse patient reactions to a potential product, inadequate patient enrollment or investigator recruitment, manufacturing problems resulting in shortages of a potential product or decisions by the sponsor to de-emphasize or terminate a particular trial or drug. Because of our low level of backlog

13

Table of Contents

and revenue, we may lose revenues if a clinical trial sponsor decides to delay or terminate a trial in which we participate.

We may lose revenues if any of our customers decrease their research and development expenditures, or if we lose any of our major customers.

     Our primary customers are companies in the pharmaceutical industry. Our business depends on the research and development expenditures of companies in this industry. During 2001 and 2000, Quintiles, Inc. accounted for 11% and 52% of our revenue, and Aventis Pharmaceuticals, Inc. accounted for 22% and 27% of our revenue. Furthermore, during 2001, Control Delivery Systems, Inc. and CV Therapeutics, Inc. accounted for 23% and 21% of our revenue. The extent to which we rely on revenue from one customer varies from period to period, depending upon, among other things, our ability to generate new business, the timing and size of clinical trials and other factors. In light of our small revenue base, we are more dependent on major customers than many of the larger participants in the EDC industry. Our operations could be materially and adversely affected by, among other things, any economic downturn or consolidations in the pharmaceutical or biotechnology industries, any decrease in their research and development expenditures or a change in the regulatory environment in which these companies operate.

Changes in government regulations relating to the health care industry could have a material adverse effect on the demand for our services.

     Demand for our services is largely a function of the regulatory requirements associated with the approval of a New Drug Application by the FDA. These requirements are more stringent and thus more burdensome than those imposed by many other developed countries. In recent years, efforts have been made to streamline the drug approval process and coordinate U.S. standards with those of other developed countries. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures could have a material adverse effect on the demand for our services. Several competing proposals to reform the system of health care delivery in the United States have been considered by Congress from time to time. None of the proposals have been adopted.

     The FDA’s guidelines and rules related to the use of computerized systems in clinical trials are still in the early stages of development. We cannot assure you that the DATATRAK® process can be kept in compliance with these guidelines and rules as they develop. Any release of FDA guidance that is significantly inconsistent with the design of DATATRAK EDC™ may cause us to incur substantial costs to remain in compliance with FDA guidance and regulations.

We may not be able to capture or establish the market presence necessary to compete in the EDC market.

     The EDC market, which is still developing, and must compete with the traditional paper method of collecting clinical trial data, is highly fragmented. The major competitors, in the EDC market, include EDC software vendors, clinical trial data service companies and in-house development efforts within large pharmaceutical companies. Any current and potential future competitors have or may have substantially greater resources, greater name recognition and more extensive customer bases that could be leveraged, thereby gaining market share or product acceptance to our detriment.

We may subject to liability for potential breaches of contracts or losses relating to the unauthorized release of clinical trial data.

     Our services are supported by telecommunications equipment, software, operating protocols and proprietary applications for high-speed transmission of large quantities of data among multiple locations. In addition, clinical pharmaceutical and medical device research requires the review and handling of large amounts of patient data. Potential liability may arise from a breach of contract or a loss of or unauthorized release of clinical trial data. Our financial position could be materially adversely affected if we were forced to undertake the defense of, or were found financially responsible for, claims based upon the foregoing or related risks. We maintain a $5.0 million errors and omissions professional liability insurance policy to cover

14

Table of Contents

claims that may be brought against us. This coverage may not be adequate, or continue to be available to us, in the future.

We have provisions that may prevent a third-party acquisition and allow us to issue preferred shares.

     Our Articles of Incorporation and By-Laws contain provisions that may discourage a third party from acquiring, or attempting to acquire us. These provisions could limit the price that certain investors might be willing to pay for our common shares. In addition, our Board of Directors, without shareholder approval, can issue preferred shares whether under our shareholder rights plan or for other uses as determined by our Board. The issuance of preferred shares may adversely affect the rights of common shareholders, the market price of our common shares and may make it more difficult for a third party to acquire a majority of our outstanding common shares. At the present time, we do not plan to issue any preferred shares.