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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ X ] For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
[ ] For the transition period from ---------------- to ------------------
Commission file number 000-20699
COLLABORATIVE CLINICAL RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1685364
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
20600 Chagrin Boulevard, Cleveland, Ohio 44122
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 491-9930
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, 1997, the registrant had 6,342,914 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 $36,115,588 (based upon the closing price
of $8.25 per Common Share on the NASDAQ Stock Market, Inc. on February 28, 1997)
For purposes of this calculation, the registrant deems the 1,965,267 Common
Shares beneficially held by all of its Directors and executive officers to be
the Common Shares held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used
in connection with its Annual Meeting of Shareholders to be held on May 20, 1997
are incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form
10-K is as of December 31, 1996.
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TABLE OF CONTENTS
Part I
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 4A. Executive Officers of the Company 11
Part II
Item 5. Market for Registrant's Common Shares and Related Shareholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition 14
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 23
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
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PART I
ITEM 1. BUSINESS
GENERAL
Collaborative Clinical Research, Inc. ("Collaborative" or the
"Company") manages a network comprised of over 500 affiliated clinical research
sites, including four owned research facilities ("Affiliated Sites"), providing
access to over 3,700 principal investigators. The Company provides sponsors
(primarily pharmaceutical and biotechnology companies and, in selected cases,
contract research organizations ("CROs")--collectively, "Sponsors") with an
innovative, time-efficient method of site selection and clinical trial
management and also provides a full range of clinical trial services. During
1996, the Company was involved in 229 clinical trials providing services to 88
sponsors.
The Company, founded in 1991 to provide an alternative method for
sponsors to access patients and investigators, has grown through internal
expansion supplemented by strategic acquisitions.
In 1995, as a means of expanding its services beyond clinical research,
the Company entered into a joint venture with Pharmaceutical Marketing Services,
Inc. ("PMSI") to develop and market health-economic data collection and
analytical services. In order to increase the speed, efficiency and accuracy of
clinical data collection within the Affiliated Site network, the Company has
entered into an exclusive ten-year technology alliance agreement (beginning in
1996) with Integrated Systems Solutions Corporation ("ISSC"), a unit of IBM
Global Services, to develop and market an electronic data collection and project
management system for use in clinical trials.
During 1996, Collaborative completed two acquisitions of clinical
research entities. GFI Pharmaceutical Services Inc. ("GFI"), acquired in January
of 1996, provides the Company with the ability to conduct Phase I through Phase
IV clinical research and to provide clinical reference laboratory and
Institutional Review Board ("IRB") services. Walker Clinical Evaluations ("WCE")
was acquired in October of 1996. WCE is a provider of contract research services
on pharmaceuticals, medical devices, foods and other products.
In 1996, the Company issued 3,400,000 Common Shares, without par value,
at $13.50 per share in connection with its initial public offering. A portion of
the net proceeds were used to repay approximately $3.25 million of outstanding
indebtedness, and approximately $3.0 million was used for the acquisition of
WCE. The remaining proceeds will be used to provide working capital to support
the continuing expansion of the Company's business and to fund potential
acquisitions.
CLINICAL RESEARCH INDUSTRY OVERVIEW
The pharmaceutical and health care provider industries are undergoing
significant changes, including cost containment efforts that are exerting
pressure on both the price and utilization of drugs and other medical products
and services. These cost containment pressures have led pharmaceutical companies
to place increased importance on developing innovative drugs and bringing them
to market faster. At the same time, these pressures have led hospitals,
physicians and other health care providers to seek alternative sources of
revenue.
Drug Development Industry Trends
Although new drug development has always been a lengthy and expensive
process, in the past, pharmaceutical manufacturers generally were able to
realize an attractive return on investment after a new drug received marketing
approval from the Food and Drug Administration ("FDA"). In recent years,
participants in the pharmaceutical industry have become increasingly cost
conscious because of margin
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pressures stemming from patent expirations, acceptance of generic drugs, and
pressure from regulatory agencies as well as managed care companies to reduce
drug prices. As a result, participants in the pharmaceutical and biotechnology
industries have increasingly focused product development expenditures on
innovative drugs to treat chronic ailments or complex disease states.
The complex development and approval process for new drugs and the
pharmaceutical industry's emphasis on the development of innovative drugs to
treat chronic conditions or complex disease states have significantly increased
drug development costs. Thus, industry participants are confronted with the need
to make higher expenditures in the drug development process with the potential
for longer development time frames in bringing innovative drugs to market.
In order to reduce development costs and enhance revenue by extending
the period during which the cost of proprietary new products can be recovered,
industry participants have increasingly sought to reduce the fixed costs
associated with drug development programs and enhance the efficiency of the drug
development process. Outsourcing of many aspects of the drug development process
in order to reduce the fixed component of these costs is a direct result of this
effort. Another component is the streamlining of the clinical research process
in order to reduce not only the cost of product development but also the length
of time required to complete clinical trials and to receive FDA approval.
The desire to contain health care costs has resulted in demand for
health care information (pharmacoeconomic, outcomes assessment and disease
management data) by many participants in the market. Pharmacoeconomic data are
used to assess the cost effectiveness of various alternatives in treating a
specific disease. Outcomes and disease management data are intended to enable
better measurement of the health care system's approach to a given disease by
assessing the costs incurred and the overall efficiency with which the disease
is managed in relation to the treatment options available. Such data can provide
important information concerning the potential market for a new compound, and,
in light of the increasing attention by payors to the cost of new products, may
assume increasing importance in the product development process.
Health Care Provider Trends
Health care providers also have seen significant changes in the market
for their services in recent years. The growth of managed care, as well as
efforts by the government and insurers to contain increases in reimbursement
rates, have imposed significant cost containment pressures on institutions and
providers. This has led to a desire on the part of institutions and providers to
seek new sources of revenue. As clinical research opportunities have expanded
beyond academic settings into non-traditional research sites such as private
practice groups, managed care organizations and for-profit research
corporations, clinical research has become an increasingly important alternative
revenue source to these institutions and providers.
While clinical research offers considerable benefits to health care
providers, they often face significant obstacles in initiating or expanding a
clinical research program. Many non-traditional sites do not have established
research programs and need to make investments in administrative staffing and
marketing in order to perform clinical research. An institution which can offer
only a single research site confronts difficulty in marketing its services to
Sponsors. In most situations, Sponsors will require multiple sites for a
clinical trial, and it is inefficient for Sponsors to spend significant amounts
of time learning about the capabilities of a single site. The cost of necessary
investments and the difficulty in effectively marketing their services to
Sponsors reduces the ability of many individual research sites to realize the
full potential of clinical research as an additional source of revenue.
BUSINESS STRATEGY
The Company's strategy is to capitalize on opportunities created by the
needs of pharmaceutical companies and health care providers to respond
effectively to cost containment trends. In implementing its strategy, the
Company has identified the following areas of emphasis:
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Utilization of the Affiliated Site Network
The primary objective of the Company's Affiliated Site network is to
improve the time-efficiency of the clinical research process. By reducing the
time required for research site and investigator selection, the Company provides
Sponsors with the opportunity to begin clinical research sooner and thereby
reduce the length of the new drug approval process. The Affiliated Site network
also increases the attractiveness of clinical research as an alternative source
of revenue to health care providers. The Company markets the capabilities of all
Affiliated Sites, thus reducing the inefficiencies associated with single-site
marketing efforts. Affiliated Sites are provided with the opportunity to
participate in a number of clinical research trials involving a wide variety of
therapeutic areas.
Targeted Expansion of the Affiliated Site Network
Expanding the Affiliated Site network is a central component of the
Company's strategy. In targeting potential additions to the Affiliated Site
network, the Company focuses on those research sites that have areas of
therapeutic expertise corresponding with Sponsors' drug development programs.
The Company seeks out both experienced research sites and health care providers
that historically have not participated in clinical research. Such providers
include managed care companies and companies providing alternate site medical
services, such as home and long-term care.
Development of On-Site, Electronic Data Collection and Management System
Through a technology development alliance with ISSC, the Company is
developing a network-wide on-site, electronic data collection and management
system ("DataTRAK"SM) to enable it to improve the process of collecting clinical
research and health care data. Currently, most clinical research data is
gathered through physical monitoring visits to each individual research site.
During these visits, each case report form ("CRF") is reviewed by the Sponsor or
its representative. Monitoring visits may last several days, and numerous
corrections to CRFs are frequently required before they are acceptable to the
Sponsor.
In a recently completed pilot test, Collaborative and ISSC used
historical data running across the DataTRAK system to simulate the development
and entry of data by clinical investigators, the collection of such data by
monitors and the verification and preparation of that data for delivery to the
simulated clinical trial investigation's sponsor. The test was completed on
schedule, and its results indicate that the hardware, software and
communications network allowed the DataTRAK system to function as expected in
this test. Significant additional development and testing of the DataTRAK system
will be required prior to its implementation, and there can be no assurance as
to the success of further development efforts nor as to the success of the
DataTRAK initiative.
Expansion of Clinical Research Services
Becoming a fully integrated provider of clinical research services is
one component of the Company's business strategy. The Company has expanded its
range of clinical research services to include the performance of clinical
research, protocol design, clinical reference laboratory services, IRB services
and regulatory affairs services.
Development of Quality Assurance Division
At the end of 1996, Collaborative began the formation of a quality
assurance division. The goal of this division is to develop and implement ISO
9000 standardization for the Company, and all Company-owned sites and Affiliated
Sites. ISO is an internationally recognized description of a comprehensive
quality system for businesses and service organizations to assure the design,
development, production,
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installation and service of a product. The Company believes that this is the
first attempt to apply ISO certification to the clinical research industry.
Acquisition Initiative
Selective acquisitions of research organizations should continue to
play an important role in the Company's efforts to become an integrated provider
of research services. The Company intends to seek potential future acquisition
candidates that enhance its ability to perform clinical research or provide
additional services. The Company's acquisition strategy is based on acquiring
controlling interests in research entities that have an established reputation
and on-going business in the performance and management of clinical trials.
Collaborative Partners
The Company intends to expand on its Affiliated Site concept, through
the Collaborative Partners initiative. The goal of this initiative is for the
Company to be a majority owner in joint ventures with academic medical centers,
managed care organizations, physician practice groups and other hospital
networks. These joint ventures would then form their own miniature clinical
research networks. These networks would be based either on therapeutic areas or
geographic regions. The goal of Collaborative Partners is to provide additional
patient access to Sponsors.
Development of Health Care Information Services Capabilities
In order to capitalize on the demand for health care information, the
Company has formed Health Research Innovations L.L.C. ("HRI"), an entity that it
owns equally with PMSI. Through HRI, the Company and PMSI market their health
care data collection and analysis capabilities to the health care industry. The
Company is HRI's exclusive subcontractor for the collection of this data and
PMSI is its non-exclusive subcontractor for data analysis and study design.
Each of the various strategic initiatives undertaken by the Company
summarized above involves significant risks. In particular, the success of each
initiative depends in large part on certain assumptions made by the Company's
management concerning trends in the clinical research market and the
pharmaceutical industry. There can be no assurance that any of these strategic
initiatives will be successful or even that the Company's efforts to pursue
these initiatives will not have a material adverse effect on its results of
operations or financial condition. Moreover, there can be no assurance that the
Company will be successful in its expansion and development initiatives.
THE AFFILIATED SITE NETWORK
Since commencing operations in 1991, the Company has developed a
network of more than 500 Affiliated Sites and today provides Sponsors with
access to over 3,700 principal investigators in a wide variety of therapeutic
areas. Affiliated Sites range from group practices with individual investigators
to integrated health care delivery systems with hundreds of investigators, and
include academic medical centers, community hospitals, outpatient treatment
centers, research centers, managed care organizations and physician practice
groups. Regardless of its size, each member of the network is considered a
single "Affiliated Site." The network's principal investigator population
includes investigators experienced in infectious disease and HIV/AIDS,
orthopedics, cardiology, hematology/oncology, pulmonary, endocrinology,
gastroenterology/metabolism, neurology and many other medical specialties. Each
Affiliated Site is a party to an Affiliation Agreement with the Company, under
the terms of which each Affiliated Site agrees not to pursue any opportunities
for clinical research initially presented by the Company directly with the
Sponsor of such clinical research program, and also agrees not to affiliate with
another research network during the period of its affiliation with the Company
and for a specified period thereafter. Members of the Affiliated Site network
remain free to solicit and accept clinical research opportunities presented to
them from sources other than the Company. At the request of Sponsors, the
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Company will also use research sites outside of its Affiliated Site network.
Sponsors may request that the Company use research sites outside the Affiliated
Site network in the case of large, multi-site trials or in order to include in
the trial investigators of national standing in a particular therapeutic area or
those with whom the Sponsor has worked in the past.
The Company regularly updates its demographic database on each
Affiliated Site including information concerning areas of therapeutic
specialization, research capabilities, prices for various medical services and
demographic information concerning patient disease profiles. Information
generated during this process is kept on-line at the Company's headquarters for
use by the Company's operations and sales and marketing personnel in discussing
clinical research opportunities with potential Sponsors.
SERVICES
The Company's core business is the provision of site selection and
management services for clinical trial programs. The Company also performs
clinical research and provides clinical reference laboratory and IRB services.
It has performed services in many therapeutic areas. The Company assists
Sponsors in the identification and recruitment of investigators, initiation of
clinical trials at sites, collection and interpretation of data and trial
results and report preparation. Trials for which the Company has provided site
selection and trial management services range in size from single site trials
involving fewer than ten patients to a 300 site trial involving 3,000 patients.
Site Selection Services
The Company's site selection services consist of the identification and
recruitment of research sites and investigators to participate in a clinical
trial on behalf of a Sponsor. Certain site selection services, such as the
preparation of a survey abstract to determine the potential interest of research
sites in a particular trial, may be utilized by Sponsors prior to their
determination to initiate a clinical trial.
Company-Owned Clinical Research Facilities
The Company performs research directly and provides certain other
clinical research services to its customers. The Company operates four research
facilities for conducting Phase II through Phase IV research (one facility also
includes a 100-bed Phase I clinical research unit), a clinical reference
laboratory and owns an independently managed IRB. Phase I clinical research is
substantially more specialized and limited than other phases of the research
process because hospital or clinic beds must be available for extended stays in
a sequestered environment.
Clinical Trial Management Services
The Company provides a variety of clinical trial management services,
whether clinical trials are performed at Affiliated Sites or owned research
facilities. These services include pre-study and research site activation
services, patient tracking services, data management services and project
management. These include investigator meetings, coordination of the IRB
approval process and other procedures that must be performed prior to enrollment
of patients in a study, assistance in patient enrollment, on-going data
collection services and adverse events reporting services. Each of the Company's
Affiliated Sites provides it with timely information concerning patient
enrollment, the status of each individual patient and the progression of the
study. This information is assimilated by the Company and provided to Sponsors.
CUSTOMERS AND MARKETING
The Company has provided its services to many of the leading
pharmaceutical companies, biotechnology companies and CROs. The Company's
business development strategy focuses on marketing the capabilities of its core
Affiliated Site network, including its owned research facilities, combined with
efforts to develop and market additional services often required by Sponsors.
The Company believes that
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its key strength and major differentiating factor is its ability to provide
rapid access to highly qualified clinical investigators across various
therapeutic-disease areas in multiple health care delivery settings.
During each of the three years in the period ended December 31, 1996,
sales to companies in the pharmaceutical industry accounted for more than 78% of
the Company's revenue. During 1994, 1995 and 1996, sales to Merck & Co., Inc.
accounted for approximately 23%, 76% and 22%, respectively, of the Company's
revenue. Also during 1996, sales to Dey Laboratories accounted for 31% of the
Company's total revenue. Other customers in the pharmaceutical industry have
from time to time accounted for more than 10% of the Company's annual revenue,
with sales to two additional pharmaceutical industry customers each accounting
for more than 10% of revenue during 1994. The extent to which the Company relies
on sales to one customer varies from period to period, depending upon, among
other things, its ability to generate new business from new and existing
customers, the timing and size of clinical trials and other factors. As a result
of increasing consolidation in the pharmaceutical industry and the relatively
small number of major participants in the biotechnology industry, it is not
unusual for CROs and others involved in the placement and administration of
clinical trials to derive more than 10% of their revenue from a single customer,
and it is likely that the Company will experience such concentration in future
years. However, in light of the Company's small revenue base, it is more
dependent on major customers than many of the larger participants in the
clinical research industry, and the loss of business from a significant customer
could materially and adversely effect the Company's revenue.
The Company's marketing activities are conducted by its business
development staff located primarily in the Philadelphia metropolitan area. Most
of the Company's business development staff have scientific or medical
backgrounds. The Company employs a variety of promotional activities including
journal advertisements, direct mail and participation at scientific and medical
meetings to promote its services to the pharmaceutical industry.
CONTRACTING AND BACKLOG
The Company's contracts provide a fixed price for each component, or
service, which depends on such things as the number of research sites selected,
patients enrolled and other services required by the Sponsor. Generally, the
Company's contracts range in duration from several months to several years.
Revenue is earned over the life of the contract as various services are
performed under the percentage of completion method utilizing units of delivery.
All costs associated with contract revenue are recognized as incurred. Contracts
generally require a portion of the fee to be paid at the time the trial is
initiated, with the balance payable over the life of the contract when
pre-determined payment milestones are satisfied. The Company does not bear the
risk of cost overruns.
The Company's contracts generally may be terminated by the Sponsor with
or without cause. In the event of termination, the Company is entitled to
payment for all sums owed for work performed through the date of notice of
termination and all costs associated with termination of the study. Clinical
trials may be terminated for several reasons, including unexpected results or
adverse patient reactions to the drug, inadequate patient enrollment or
investigator recruitment, manufacturing problems resulting in shortages of the
drug or decisions by the Sponsor to de-emphasize or terminate a particular trial
or development efforts on a particular drug. Depending on the size of the trial
in question, a Sponsor's decision to terminate a trial in which the Company
participates could have a materially adverse effect on the Company's backlog,
future revenue and profitability.
Backlog consists of anticipated revenue from letters of intent and
signed contracts that have not been completed. Once work under a letter of
intent or contract commences, revenue is recognized over the life of the
contract. In certain cases, the Company will work on a project prior to
finalizing a letter of intent or contract. Backlog excludes anticipated revenue
for projects for which the Company has commenced work but for which a definitive
letter of intent or contract has not been executed.
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The Company believes that its backlog as of any date is not necessarily
a meaningful predictor of future results. Contracts included in backlog are
subject to termination or delay at any time, as a result of a number of factors.
There can be no assurance that the Company will be able to realize revenue
included in backlog or as to the amount of backlog orders that may be filled
within the current fiscal year. Delayed contracts remain in the Company's
backlog pending determination of whether to continue, modify or cancel the
contract. As of December 31, 1995 and 1996, the Company's backlog was $21.8
million and $22.5 million, respectively.
COMPETITION
The clinical research industry is highly fragmented and comprised of
several large, full-service CROs and many small, limited service providers. The
major competitors in the industry include the research departments of
pharmaceutical companies, CROs and other research sites. The Company competes in
this market on the basis of its ability to provide rapid access to high-quality
clinical investigators within its network of Affiliated Sites in a
time-efficient manner and to provide its customers with a high level of service
throughout the trial process. Many of the Company's competitors have
substantially greater financial and other resources than the Company, and there
can be no assurance of the Company's ability to continue to compete effectively
with these larger competitors. To the extent the Company's approach to the
selection and conduct of clinical trials continues to gain acceptance in the
market, there can be no assurance that these larger competitors will not develop
their own networks of research sites, nor as to the effect of such competing
networks on the Company's operations. The Company may also face competition from
other networks of research sites in the recruitment of potential Affiliated
Sites.
As the Company continues to expand the range of its clinical research
services, it will compete more directly with the core services provided by CROs.
Many of these CROs are substantially larger and have more resources than the
Company. There can be no assurance that the Company will be able to compete
effectively with these larger companies in providing clinical research services.
REGULATORY MATTERS
Government Regulation
The clinical investigation of new pharmaceutical and biotechnology
products is highly regulated. The purpose of these regulations is to assure that
only those products proven to be safe and effective are made available to the
public. The FDA has promulgated regulations and guidelines pertaining to
applications to initiate trials of new compounds, approval and conduct of
studies, report and record retention, informed consent, applications for
approval of new compounds and post-marketing requirements. Under FDA
regulations, companies providing clinical research services that assume the
obligations of a drug Sponsor are required to comply with applicable FDA
regulations and are subject to regulatory action for failure to comply with such
regulations. The historical trend has been toward increased regulation by the
FDA; however, recent initiatives have been undertaken by the FDA to streamline
the agency's internal review processes.
The services provided by the Company are ultimately subject to FDA
regulation and, to the extent that the Company expands its services outside the
United States, appropriate regulatory authorities in other countries. The level
of regulation in other countries is generally less comprehensive than that
present in the United States. Depending on the nature of services that it
provides with respect to a particular research trial, the Company may be
required to comply with FDA regulations governing such activities as selecting
investigators, obtaining documentation from investigators, verifying that
patient informed consent is obtained, monitoring the validity and accuracy of
data, verifying drug accountability and instructing investigators to maintain
records and reports. The Company must also maintain records for each study for
specified periods for inspection by the study Sponsor and the FDA. If FDA audits
indicate that the Company has failed to adequately comply with federal
regulations and guidelines, it could have a material
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adverse effect on the Company. In addition, the failure of the Company to comply
with applicable regulations could result in termination of on-going research or
the disqualification of data, either of which could also have a material adverse
effect on the Company's results of operations, financial condition and
reputation.
The Drug Development and Approval Process
All drugs proposed to be marketed in the United States must undergo an
extensive development and approval process. Pre-clinical testing is the first
stage in this process. During the pre-clinical stage, a new compound is tested
in vitro and in animals over a one to three year period in order to obtain
information concerning the basic biological activity and safety of the drug. If
the results of pre-clinical studies are satisfactory, the Sponsor files an
Investigational New Drug Application ("IND") with the FDA before beginning human
testing. In order to receive IND status, the Sponsor must provide the FDA with
manufacturing data, preclinical test results, information concerning the uses of
the drug in other countries or in the United States for other purposes and a
plan for conducting clinical trials. The design of each clinical trial, or its
"protocol," is an essential component of the drug development effort. Each
protocol must correctly anticipate the nature of the data and results that the
FDA will require before approving the drug.
In the absence of any comments from the FDA on the IND, a Sponsor may
begin clinical trials on human subjects 30 days after the IND is filed. Clinical
trials often represent the most expensive and time consuming part of the drug
development process. The trial process usually starts on a small scale with
trials intended to assess safety, and then expands to larger trials in order to
test a compound's efficacy. There are four phases of clinical testing, with
multiple trials generally conducted within each phase.
Phase I testing typically consists of specialized studies designed to
acquire safety and dosing information on a new compound. In these
studies, the drug is tested on approximately 20 to 80 individuals and
data is gathered concerning toxicity, absorption, metabolism and other
pharmacological actions. Each individual study lasts from a period of
days to several weeks, and the phase itself typically lasts from six
months to one year.
Phase II testing typically consists of studies in approximately 100 to
200 patients who suffer from the targeted disease or condition. Phase
II trials focus on obtaining information on the drug's effectiveness
and dose-response relationship. Because these trials gather early
evidence of a compound's efficacy, their results are often pivotal to
a Sponsor's decision concerning whether to proceed to larger trials.
These trials typically last one to two years.
Phase III testing typically consists of large, multi-center trials
involving hundreds to thousands of patients. Phase III trials are
intended to collect efficacy and safety information on a large scale.
The collection of such data is most critical in Phase III, because the
data developed during these trials will have a significant influence
on the labeling aspects of the new drug. At least one Phase III trial
performed within the United States is required of any compound before
it will be approved by the FDA. These trials typically last two to
three years.
Phase IV studies are frequently required by the FDA as a condition to
granting marketing approval. The FDA will often require Sponsors,
after a drug is approved for marketing, to conduct additional clinical
trials to monitor long-term risks and benefits, alternative dosage
levels or evaluate safety and efficacy in targeted patient
populations. These studies are usually less data intensive than those
conducted in other phases of clinical research, but may involve
hundreds to thousands of patients and can last for several years.
After a new compound has successfully completed the first three phases
of the clinical trial process, a new drug application ("NDA") is submitted to
the FDA. The NDA is a comprehensive filing that includes the results of all
pre-clinical and clinical studies, with the majority of its clinical data
derived
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from Phase II and Phase III trials. In addition, the NDA contains information
about the drug's composition and the Sponsor's plans for producing, packaging
and labeling the product. The FDA's review process for an NDA can take anywhere
from a few months, for drugs related to life threatening conditions, to many
years, with the average review lasting more than two and one-half years. Drugs
that successfully complete this review may be marketed in the United States,
subject to such conditions as the FDA may specify. As a result of increasing
public pressure to allow new drugs to reach the market more quickly, the FDA has
increased its reliance on Phase IV studies. In some instances, the FDA has
granted conditional approval to potentially lifesaving drugs or those for
previously untreatable conditions in order to permit marketing while Phase IV
studies are conducted.
The pre-clinical and clinical testing and approval processes for
biotechnology products are substantially similar to those applicable to drugs,
except that the results of clinical trials are submitted in the form of a
Product License Application rather than an NDA. In many cases, medical device
products are also subject to extensive pre-clinical and clinical testing
requirements.
POTENTIAL LIABILITY AND INSURANCE
Clinical trials involve the testing of approved and non-approved drugs
on human beings. This testing carries with it a significant risk of liability
for personal injury or death to participants resulting from an adverse reaction
to, or improper administration of, the trial drug. Many of these participants
are seriously ill and are at great risk of further illness or death as a result
of factors other than their participation in the trial. The Company participates
with Sponsors in the site selection process, and contracts on behalf of its
customers with physicians who render professional services, including
administering the drugs being tested, to participants in these trials. Company
personnel and subcontractors also render professional services to participants
in trials, and are materially involved in the patient treatment process.
Consequently, the Company may be subject to claims in the event of personal
injury or death of persons participating in clinical trials and arising from
professional malpractice of physicians with whom it has contracted and its own
employees. To date, the Company has not received any claims resulting from
either the testing of new drugs or professional malpractice.
The Company believes that risk of liability associated with clinical
trials is mitigated by various regulatory requirements, including the role of
institutional review boards and the need to obtain informed consent. The FDA
requires each human clinical trial to be reviewed and approved by the IRB at
each research site. An IRB is an independent committee that includes medical and
non-medical personnel and is obligated to protect the interests of patients
enrolled in the trial. After the trial begins, the IRB monitors the protocol and
the measures designed to protect patients, such as the requirement to obtain
informed consent. In addition, regulations governing the conduct of clinical
trials and the protection of human subjects place responsibility for proper
study conduct and subject protection directly on the principal investigator at
each location where a study is performed. At its owned research facilities, the
Company has assumed the duties and liabilities of a principal investigator. All
principal investigators employed by the Company are required to carry their own
malpractice insurance.
In order to reduce its exposure to liability, the Company generally
obtains indemnification from its clients and, in some cases, from investigators
and Affiliated Sites contracted by the Company on behalf of its clients. The
Company's agreements with its Affiliated Sites obligate it to pursue contracts
solely with Sponsors that provide indemnification for adverse outcomes which may
occur in an enrolled subject and that allow such indemnification rights to pass
through to the Affiliated Sites and investigators. These indemnity rights do not
protect the Company against certain of its own actions, such as those involving
negligence or misconduct. Furthermore, these indemnities are contractual
arrangements that are subject to negotiation with individual Sponsors, and the
terms and scope of such indemnities vary from Sponsor to Sponsor and from trial
to trial. In order for such indemnification to be valid, the Company and its
employees and agents must act within the bounds of specific procedural
requirements governing the conduct of the clinical trial. Since the value of the
Company's indemnification depends on the financial viability of the indemnifying
party, there can be no assurance that the Company will be able to rely on such
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indemnification in each instance of potential liability. The financial position
of the Company could be materially adversely affected if the Company was forced
to undertake the defense of, or found financially responsible for, claims based
upon the foregoing or related risks.
The Company currently maintains an errors and omissions professional
liability insurance policy in amounts it believes to be sufficient. However,
there can be no assurance that this coverage will be adequate, or that insurance
coverage will continue to be available to the Company.
PATENTS AND TRADEMARKS
The Company has registered service marks incorporating the
Collaborative Clinical Research logo and the DataTRAK trademark. Through its
acquisitions of GFI and WCE, the Company has acquired eight registered service
marks. The Company does not own any patents. The Company believes that its
ability to attract and retain highly-skilled employees and manage the growth of
its business are more important to its performance than any intellectual
property rights that it has developed to date. However, it is possible that
software and other intellectual property developed during the course of the
Company's joint venture with PMSI and its technology development alliance with
ISSC may become important to its business in the future.
EMPLOYEES
As of January 31, 1997, the Company had 198 full-time employees, of
whom seven had executive or managerial responsibilities. None of the Company's
employees are represented by a union. The Company considers relations with its
employees to be good.
The Company's growth continues to place significant demands on its
management resources. The success of the Company's business is substantially
dependent on the services of its senior management team, and the services of Dr.
Jeffrey A. Green in particular. The Company has employment agreements with Dr.
Green and all of its executive officers; however, the loss of Dr. Green's
services or the services of its other executive officers could have a material
adverse effect on the Company. To address these risks, the Company must, among
other things, continue to attract, retain and motivate qualified personnel.
While the Company has not experienced significant problems in attracting or
retaining qualified personnel, there can be no assurance that the Company will
be successful in addressing such risks.
ITEM 2. PROPERTIES
The Company presently maintains its executive offices in approximately
14,000 square feet of space in Cleveland, Ohio pursuant to two leases with
unaffiliated third parties. The Company leases approximately 32,000 square feet
of office and medical space in Evansville, Indiana. This facility houses, among
other things, a 100-bed in-patient Phase I research facility. The Company also
leases property in three additional states, most of which is used to conduct
clinical research. Collaborative believes that its facilities are adequate for
its operations and suitable additional space will be available when needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to various lawsuits arising
in the ordinary course of business. The Company does not believe that the
outcome of such litigation will have a material adverse effect on its results of
operations or financial condition.
On December 5, 1995, a former employee of the Company filed a charge
against the Company with the Ohio Civil Rights Commission (the "OCRC") alleging
that the employee's employment was terminated due to age. On March 13, 1996, the
Company filed a statement of position denying the allegations in the charge. On
October 17,1996 the OCRC issued a determination that it was not probable that
the Company had engaged in unlawful employment practices, and dismissed the
charge. The applicant
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may seek judicial review of this determination in the Court of Common Pleas, or
institute a separate lawsuit alleging discrimination. To date, no such action
has been filed. The Company believes that the charge is without merit and does
not believe that this matter will have a material adverse effect on the
Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
ITEM 4A EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers
are as follows:
Name Age Position
---- --- --------
Dr. Jeffrey A. Green 41 President, Chief Executive Officer and Director
Debra S. Adamson 44 Vice President of Collaborative Partners
Terry C. Black 39 Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
Dr. Richard J. Kasmer 39 Vice President of Site Operations, General Counsel and
Assistant Secretary
Nathan F. Messinger 41 Vice President of Business Development
Dr. William H. Stigelman, Jr. 51 Vice President of Affiliated Site Relations
Dr. Mary L. Westrick 40 Vice President of Corporate Operations
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Jeffrey A. Green, Pharm.D., FCP, is the Company's founder and has
served as its President and Chief Executive Officer since March 1992. From 1984
to 1992, Dr. Green served as an Assistant Professor of Medicine and Radiology at
Case Western Reserve University, Cleveland, Ohio. During his tenure at Case
Western Reserve University, Dr. Green established and directed the
Cardiovascular Clinical Pharmacology Research Program at University Hospitals of
Cleveland. In addition, Dr. Green was an established investigator in clinical
cardiology and PET scanning, and was responsible for directing over 90
individual investigations during his tenure. Dr. Green has authored over 90
publications and has been an invited speaker at more than 125 national meetings.
He was the recipient of the McKeen Cattell Distinguished Achievement Award from
the American College of Clinical Pharmacology in 1988.
Debra S. Adamson, M.S., has been Vice President of Collaborative
Partners since January 1996. Ms. Adamson is responsible for directing all
operations, including marketing, for the Company's owned research facilities.
Ms. Adamson is actively involved in operational systems development, budgetary
issues and the integration of acquired sites into the Company's operations. Ms.
Adamson was a co-founder of GFI and served as GFI's Executive Director, Clinical
Services from 1987 to 1996. Ms. Adamson was also a co-founder of the Ohio Valley
IRB. Previously, Ms. Adamson served as Senior Scientist of United States
Pharmaceutical Group Clinical Studies at Bristol-Myers Squibb where she was
responsible for overall trial design and implementation for central nervous
system compounds.
Terry C. Black has served as the Company's Vice President of Finance
and Chief Financial Officer since June 1994 and has served as the Treasurer and
Assistant Secretary since January 1996. Prior to joining the Company, Mr. Black
served as Acting Chief Financial Officer and Analyst for Action Auto Rental,
Inc., a Cleveland, Ohio based insurance replacement automobile rental company,
from March 1992 to October 1992 and as its Chief Financial Officer from October
1992 to January 1994. Before joining Action Auto Rental, Mr. Black served in a
variety of financial and accounting positions with the insurance replacement
rental car industry, including Treasurer and co-founder of Network Car Rental,
Inc. and Treasurer and Controller of
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Agency Rent-A-Car. In 1993, Action Auto Rental filed for protection from its
creditors under Chapter 11 of the United States Bankruptcy Code and was
subsequently liquidated.
Richard J. Kasmer, Pharm.D., JD, has served as the Company's Vice
President of Site Operations, General Counsel and Assistant Secretary since
January 1996. From 1992 to 1996, Dr. Kasmer served as the Company's Vice
President of Clinical Operations and Secretary. Dr. Kasmer is involved in the
management of ongoing trials within the Company's Affiliated Site network, trial
budgetary issues, contractual management and negotiations with the Company's
acquisition candidates. Prior to joining the Company, Dr. Kasmer was employed by
the VA Medical Center in Cleveland, Ohio for eight years and is an established
investigator with over 15 years of experience in Phase I through Phase IV trials
and has participated in over 80 individual investigations.
Nathan F. Messinger has served as the Company's Vice President of
Business Development since August 1993. Mr. Messinger is responsible for
strategic and business development as well as marketing and sales programs. In
addition, Mr. Messinger is responsible for the ongoing development of strategic
alliances and joint ventures within the pharmaceutical, biotechnology and
health-economics industries. From 1992 to 1993, Mr. Messinger served as
Director, Business Development for the Caremark Division of Baxter Healthcare
Corporation and has held senior marketing, strategic planning and general
management positions with companies such as New Brunswick Scientific Company,
The Langer Biomechanics Group and Dynatech Laboratories, Inc.
William H. Stigelman, Jr., M.S., Pharm.D., has served as the Company's
Vice President of Affiliated Site Relations since December 1992. Dr. Stigelman
is responsible for worldwide Affiliated Site development, and the development
and implementation of standard operating procedures and quality control
procedures for the Affiliated Site network. Prior to joining the Company, Dr.
Stigelman served in a variety of positions during his 23-year career in the
United States Air Force. Dr. Stigelman served as director of pharmacy at three
Air Force medical centers and as a director of a clinical research facility. As
Chief of Clinical Investigations at the Air Force Surgeon General's Office, Dr.
Stigelman directed an Air Force wide research program involving more than 1,000
protocols and annual budgets exceeding $8.0 million.
Mary L. Westrick, Ph.D., has been Vice President of Corporate
Operations since January 1996. Dr. Westrick is responsible for the management of
all aspects of interventional and noninterventional clinical trials. In
addition, Dr. Westrick is responsible for administrative operations and quality
assurance. Dr. Westrick was a co-founder of GFI and served as GFI's Executive
Director, Administrative Services from 1987 to 1996. Dr. Westrick was also a
co-founder of the Ohio Valley IRB. Previously, Dr. Westrick held the position of
Research Scientist in the Department of Metabolism and Pharmacokinetics at
Bristol-Myers Squibb. In that capacity, she was responsible for pre-clinical
research and trial design and implementation of Phase I studies and Phase II and
Phase III clinical support for central nervous system compounds.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Company's Common Shares are traded on the Nasdaq National Market
under the symbol "CCLR". The Common Shares were initially offered to the public
on June 11, 1996 at a price of $13.50 per share and commenced trading on the
Nasdaq Stock Market, Inc. ("Nasdaq") on that date. The following table sets
forth, for the fiscal year ended December 31, 1996, the high and low sale
prices per share for the Common Shares, as reported by Nasdaq. These prices do
not include retail markups, markdowns or commission.
High Low
---- ---
Second Quarter (from June 11, 1996) $15.00 $ 11.25
Third Quarter $15.25 $ 8.00
Fourth Quarter $15.50 $ 9.75
On February 28, 1997, the last sale price of the Common Shares as
reported by Nasdaq was $8.25 per share. As of February 28, 1997, there were
approximately 114 holders of record and approximately 1,000 beneficial holders
of the Common Shares.
The Company has never declared or paid cash dividends on its Common
Shares. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
----------- ----------- ----------- ------------ -----------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 549 $ 1,423 $ 4,047 $ 10,453 $ 25,715
Direct costs 279 975 2,908 8,491 17,976
-------- -------- -------- -------- --------
Gross profit 270 448 1,139 1,962 7,739
Selling, general and administrative expenses 439 686 1,386 2,770 6,141
Depreciation and amortization 81 118 59 62 606
-------- -------- -------- -------- --------
Income (loss) from operations (250) (356) (306) (870) 992
Other income (expense) 5 5 92 117 1,038
-------- -------- -------- -------- --------
Income (loss) before income taxes (245) (351) (214) (753) 2,030
Income tax expense -- -- -- -- 383
-------- -------- -------- -------- --------
Net income (loss) $ (245) $ (351) $ (214) $ (753) $ 1,647
======== ======== ======== ======== ========
Net income (loss) per share $ (0.23) $ (0.25) $ (0.10) $ (0.24) $ 0.33
======== ======== ======== ======== ========
Shares used in the computation 1,058 1,407 2,182 3,102 5,052
======== ======== ======== ======== ========
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December 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments $ 446 $ 207 $ 4,105 $ 3,011 $34,683
Working capital (deficit) 197 (82) 3,879 2,961 39,626
Total assets 787 651 5,523 7,025 53,687
Long-term liabilities 23 -- -- -- --
Retained earnings (accumulated deficit) (293) (644) (858) (1,611) 36
Total shareholders' equity 354 30 4,004 3,323 49,548
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company provides clinical research services to Sponsors of clinical
research through its network of Affiliated Sites and its owned research
facilities. Revenue is derived principally from the identification, placement,
monitoring and management of clinical trial programs and health-economic data
evaluations within the Company's network of Affiliated Sites and owned research
facilities.
The Company commenced operations in July 1991 and has achieved its
growth through internal development and acquisitions. Effective January 31,
1996, the Company acquired GFI, which conducts Phase I through Phase IV clinical
research and provides clinical reference laboratory services and IRB services.
Effective October 25, 1996, the Company purchased WCE (or Walker), a provider of
contract research services for pharmaceuticals, medical devices, foods and other
products. Both acquisitions have been accounted for under the purchase method of
accounting, and the consolidated results of operations include the results of
operations of both businesses from their respective acquisition dates. After
allocating purchase price to the fair value of the net assets acquired, the
Company recorded approximately $5.9 million of goodwill in connection with the
GFI acquisition and approximately $2.5 million of goodwill in connection with
the WCE acquisition. The Company amortizes goodwill using the straight-line
method over a period of 20 years.
The Company's backlog at December 31, 1996 was $22.5 million, as
compared to backlog of $21.8 million at December 31, 1995. This backlog is lower
than the Company originally anticipated. While backlog as of any particular date
is not necessarily a meaningful predictor of future results, the lower than
anticipated backlog level at December 31, 1996 is expected to have a material
adverse effect on the Company's results of operations for the first quarter of
1997. The Company is continuing its efforts to attract new business, and has
focused on the backlog for its network of Affiliated Sites, where the lead time
to realize revenues is longer than for its GFI and WCE subsidiaries. The
Company's financial performance for 1997 will depend in large part upon its
success in attracting new business and in converting new backlog into revenue.
There can be no assurance as to the results of the Company's efforts to attract
new business, nor as to the timing of revenues associated with new or existing
backlog.
The Company's quarterly results can fluctuate as a result of a number
of factors, including the Company's success in attracting new business, the size
and duration of the clinical trials in which the Company and members of its
network of Affiliated Sites participate, the timing of Sponsor decisions to
conduct new clinical trials or cancellation or delays of ongoing trials,
acquisitions and other factors, many of which are beyond the Company's control.
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The Company's clinical research service contracts generally have terms
ranging from several months to several years. A portion of the contract fee is
generally payable upon execution of the contract, with the balance payable in
installments over the life of the contract. Revenue and related direct costs are
recognized as specific contract terms are fulfilled under the percentage of
completion method utilizing units of delivery. The Company's contracts are
broken down into discrete units of deliverable services for which a fixed fee
for each unit is established. Pass-through costs that are paid directly by the
Company's Sponsors, and for which the Company does not bear the risk of economic
loss, are excluded from revenue. These costs can include investigator meeting
fees, IRB fees and travel costs. The termination of a contract results in no
material adjustments to revenue or direct costs previously recognized, and the
Company is entitled to payment for all work performed through the date of notice
of termination and all costs associated with termination of a study.
The Company's contracts generally may be terminated by the Sponsor with
or without cause. Clinical trials may be terminated or delayed for several
reasons, including unexpected results or adverse patient reactions to the drug,
inadequate patient enrollment or investigator recruitment, manufacturing
problems resulting in shortages of the drug or decisions by the Sponsor to
de-emphasize or terminate a particular trial or development efforts on a
particular drug. Depending on the size of the trial in question, a Sponsor's
decision to terminate or delay a trial in which the Company participates could
have a material adverse effect on the Company's backlog, future revenue and
profitability.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's Statements of Operations, expressed as a percentage of
revenue:
Year ended December 31,
--------- ---------- ---------
1994 1995 1996
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Direct costs 71.9 81.2 69.9
Gross profit 28.1 18.8 30.1
Selling, general and administrative expenses 34.3 26.5 23.9
Depreciation and amortization 1.4 0.6 2.3
Income (loss) from operations (7.6) (8.3) 3.9
Other income 2.3 1.1 4.0
Income (loss) before income taxes (5.3) (7.2) 7.9
Income tax expense --- --- 1.5
Net income (loss) (5.3) (7.2) 6.4
- --------------
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenue increased by $15.3 million, or 147.1%, from $10.4 million in
1995 to $25.7 million in 1996. Approximately $6.7 million of the increase was a
result of the GFI and WCE acquisitions. The remaining $8.6 million of the
increase was due to the number and size of the Company's new and ongoing
clinical trials primarily conducted at its Affiliated Sites. Approximately $7.6
million of the $8.6 million related to a full service clinical trial which began
in the fourth quarter of 1995 and is scheduled to be completed in 1997. On a pro
forma basis, giving effect to the GFI and WCE acquisitions as if they had
occurred on January 1, 1995, pro forma revenue for 1996 of $28.8 million would
have increased by 45% compared to 1995 pro forma revenue of $19.9 million.
Direct costs include compensation and related fringe benefits for
non-administrative employees (including employees at Company-owned research
facilities) and other expenses directly related to contracts, which can be
subcontracted to the Affiliated Sites and other vendors. These costs increased
by
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$9.5 million, or 111.8%, from $8.5 million in 1995 to $18.0 million in 1996.
Direct costs decreased as a percentage of revenue from 81.2% in 1995 to 69.9% in
1996. Of the $9.5 million increase, $4.0 million was due to the acquisitions of
GFI and WCE, and $5.5 million was due to the number and size of Collaborative's
new and ongoing clinical trials. Direct costs for Collaborative's ongoing and
new clinical trials, primarily conducted at the Company's Affiliated Sites,
decreased from 81.2% to 73.5% as a percentage of revenue for 1995 and 1996,
respectively. This reflects the effects of pricing changes implemented by the
Company during the second half of 1995 intended to increase prices for certain
services and include charges for certain administrative contract costs that had
previously been absorbed. As a percentage of revenue, Collaborative's higher
direct costs at its Affiliated Sites were offset by the GFI and WCE
subsidiaries' lower direct costs.
Selling, general and administrative expenses include all administrative
personnel costs, business and Affiliated Site development costs, and all other
expenses not directly chargeable to a specific contract. Selling, general and
administrative expenses increased by $3.3 million, or 117.9%, from $2.8 million
in 1995 to $6.1 million in 1996. Of the $3.3 million increase, $1.9 million
reflects expenses associated with GFI and WCE's operations and the remainder was
due to the Company's internal growth. As a percentage of revenue, selling,
general and administrative expenses decreased from 26.5% in 1995 to 23.9% in
1996. The decrease in selling, general and administrative expenses as a
percentage of revenue reflects improved absorption of fixed costs resulting from
the increase in the Company's revenue.
Depreciation and amortization expense increased by $544,000 from
$62,000 in 1995 to $606,000 in 1996. Of the $544,000 increase, $199,000 resulted
from the depreciation of assets acquired with the acquisitions of GFI and WCE,
$288,000 resulted from the amortization of goodwill resulting from the
acquisitions and $57,000 resulted from increased capital expenditures.
Other income increased from $117,000 in 1995 to $1.0 million in 1996.
This was the result of a $924,000 increase in interest income on invested cash
(primarily the proceeds of the Company's initial public offering), offset by a
$93,000 increase in interest expense due to the issuance of notes payable to the
former shareholders of GFI, and borrowings against the Company's line of credit.
Also, there was a $90,000 decrease in the Company's share of HRI's net loss for
the twelve months ended December 31, 1996. For financial reporting purposes, the
Company records its share of the net income or loss from HRI using the equity
method.
As a result of the Company's net operating loss carryforwards of $1.4
million for federal income tax purposes, the Company's effective tax rate for
1996 was 19% of pre-tax income. This effective tax rate is reflected in the
Company's Consolidated Statement of Operations for the year ended December 31,
1996. The Company fully utilized its net operating loss carryforwards for
federal income tax purposes during 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Revenue increased by $6.4 million, or 160.0%, from $4.0 million in
1994. Approximately $5.6 million of the increase resulted from revenue derived
from a 300-site multi-year clinical research project which began in December
1994. The balance of the increase reflects revenue derived from other new
projects obtained through the Company's increased business development efforts.
Direct costs increased by $5.6 million, or 193.1%, from $2.9 million in
1994 to $8.5 million in 1995. Direct costs increased as a percentage of revenue
from 71.9% in 1994 to 81.2% in 1995. The increase in direct costs as a
percentage of revenue reflects the continuing effects of the Company's decision
during the first half of 1994 to reduce fees for certain services and to absorb
certain administrative contract costs as a means of capturing additional market
share. Because the Company's contracts range from several months to several
years, the effects of the pricing decision in 1994 continued to have an impact
on the results of operations for 1995. During the second half of 1995, the
Company began to implement
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changes in its pricing practices intended to increase prices for certain
services and include charges for certain administrative contract costs that had
previously been absorbed.
Selling, general and administrative expenses increased by $1.4 million,
or 100.0%, to $2.8 million in 1995, but decreased as a percentage of revenue
from 34.3% in 1994 to 26.5% in 1995. The majority of the increase in these
expenses resulted from additions to personnel and increases in costs associated
with business and Affiliated Site development. In 1995, legal expenses increased
by $250,000 due to costs incurred in defense and settlement of certain
employment litigation. The decrease in selling, general and administrative
expenses as a percentage of revenue reflects improved absorption of fixed costs
resulting from the increase in the Company's revenue.
Depreciation and amortization expense increased by 5.1% from $59,000 in
1994 to $62,000 in 1995 as a result of purchases of additional computer
equipment and leasehold improvements during the year.
Other income increased from $92,000 in 1994 to $117,000 in 1995. This
increase was caused by a higher level of interest income, offset by the
Company's share of losses incurred by HRI for the six months ended December 31,
1995. The Company's share of HRI's loss during 1995 was $105,000.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's principal sources of cash have been
cash flow from operations and proceeds from the sale of equity securities. The
Company's investing activities primarily reflect capital expenditures,
acquisitions and net purchases of short-term investments.
The Company's contracts usually require a portion of the contract
amount to be paid at the time the contract is initiated. Additional payments are
generally made upon completion of negotiated performance requirements throughout
the life of the contract. Cash receipts do not necessarily correspond to costs
incurred and revenue recognized (revenue recognition is based on the
units-of-delivery method of percentage of completion accounting). The Company
typically receives a low volume of large-dollar receipts. As a result, the
number of days outstanding in accounts receivable will fluctuate due to the
timing and size of cash receipts. Accounts receivable (net of allowance for
doubtful accounts) was $8.4 million at December 31, 1996 and $2.9 million at
December 31, 1995. On a pro forma basis, after giving effect to the GFI and WCE
acquisitions, accounts receivable (net of allowance for doubtful accounts) would
have been $4.8 million at December 31, 1995. Deferred revenue was $932,000 at
December 31, 1996 and $559,000 at December 31, 1995. On a pro forma basis, after
giving effect to the GFI and WCE acquisitions, deferred revenue would have been
$875,000 at December 31, 1995. The number of days outstanding in accounts
receivable (net of unearned revenue) was 70 days at December 31, 1996 (69 days
on a pro forma basis) and 52 days at December 31, 1995 (44 days on a pro forma
basis).
Cash and cash equivalents increased $4.4 million during the year ended
December 31, 1996. This was the result of $41.4 million being provided by
financing activities, offset by $2.4 million and $34.6 million being used in
operating and investing activities, respectively. Cash provided by financing
activities consisted of proceeds of $42.5 million from the Company's initial
public offering, the exercise of certain common share options and warrants, and
borrowings of $1.3 million under the Company's and GFI's lines of credit, offset
by repayments of $2.4 million against such lines of credit. Cash used for
operating activities resulted primarily from cash used to fund working capital
needs and the increase in accounts receivable. Investing activities included
$52.1 million used to purchase short-term investments, $7.3 million used to
purchase GFI and WCE, $933,000 used to purchase property and equipment, and
$25.7 million provided by the maturity of short-term investments.
On June 28, 1996, the Company and ISSC signed an exclusive ten-year
technology alliance agreement to develop and market an electronic data
collection and project management system for use in clinical trials. As part of
the technology alliance agreement, ISSC will fund the development of the
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electronic data collection and project management system. During 1997, the
Company anticipates investing approximately $1.0 million in the DataTRAK
technology alliance.
The Company's principal cash needs on both a short-term and long-term
basis are for the funding of its operations and capital expenditure
requirements. The Company expects to continue expanding its operations through
internal growth, strategic acquisitions, joint ventures and alliances. The
Company expects such activities will be funded from existing cash and cash
equivalents, maturities of short-term investments, cash flow from operations and
borrowings under its line of credit.
The Company has a line of credit with a commercial bank providing a
maximum credit facility of $5.0 million. Borrowings under the line of credit
bear interest at rates up to prime. Amounts outstanding under the line of credit
are collateralized by substantially all of the Company's tangible assets and are
payable on demand. There were no borrowings under the line at December 31, 1996.
The line of credit is subject to renewal at July 31, 1997.
The Company believes that cash generated from operations, amounts
available under its line of credit and maturities of short-term investments will
be sufficient to fund its working capital and capital expenditure requirements
for the foreseeable future. However, selective acquisitions of research
organizations are anticipated to play an important role in the Company's growth
strategy. The Company has engaged in preliminary discussions with several
potential acquisition candidates. To the extent that the Company is successful
in its efforts to acquire additional research organizations, it may require
additional capital. There can be no assurance as to the Company's ability to
obtain additional financing.
INFLATION
To date the Company believes the effects of inflation have not had a
material adverse effect on its results of operations or financial condition.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K, other SEC
filings or written materials or orally by the Company or its representatives may
constitute forward looking statements. The Company wishes to take advantage of
the safe harbor for forward looking statements provided by the Securities
Litigation Reform Act of 1995 (the "Act"), and is including this information in
its Annual Report on Form 10-K in order to do so. In the absence of any
published interpretations of the Act, the Company has identified the following
important factors which could cause the Company's actual operational or
financial results to differ materially from any projections, estimates,
forecasts or other forward looking statements made by or on behalf of the
Company. Under no circumstances should the factors listed below be construed as
an exhaustive list of all factors which could cause actual results to differ
materially from those expressed in forward-looking statements made by the
Company.
LIMITED OPERATING HISTORY; LACK OF PROFITABLE OPERATIONS
The Company commenced operations in 1991 and has a limited operating
history upon which investors may evaluate its performance. With the exception of
1996, the Company recognized losses in each year since its inception. There can
be no assurance that the Company will be profitable during future periods.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company is subject to significant fluctuations in quarterly results
caused by many factors, including the Company's success in obtaining new
contracts, the size and duration of the clinical trials in which the Company and
members of its network of Affiliated Sites participate, the timing of Sponsor
decisions to conduct new clinical trials or cancel or delay ongoing trials and
other factors. As a result of
18
21
the Company's limited operating history, the Company does not have historical
financial data for a significant number of periods on which to base planned
operating expenses. Therefore, the Company's expense levels are based in part on
its expectations as to future revenue and to a certain extent are fixed. There
can be no assurance as to the Company's revenue in any given period, and it may
be unable to adjust expenses in a timely manner to compensate for any unexpected
revenue shortfall. As a result of the Company's relatively small revenue base,
any significant shortfall in revenue recognized during a particular period could
have an immediate adverse effect on its results of operations and financial
condition. There can be no assurance that the Company will be able to accurately
anticipate quarterly results. Volatility in the Company's quarterly results may
adversely affect the market price of the Company's Common Shares.
RISKS ASSOCIATED WITH UNPROVEN BUSINESS STRATEGIES AND EARLY STAGE OF COMPANY'S
DEVELOPMENT
The Company's efforts to establish a network of Affiliated Sites and
market the network as a method of streamlining the process of selecting
investigators and conducting clinical trials represent a significant departure
from the traditional clinical research practices of Sponsors. The long-term
viability of the Company's strategy remains unproven. There can be no assurance
that the Company's strategy will continue to gain acceptance among Sponsors,
research sites or investigators. The Company has expanded its Affiliate Site
network to include 62 Canadian and 2l United Kingdom sites, but to date has not
recognized any revenue from operations outside the United States. In addition,
the Company's efforts to expand into the health care information services market
are at an early stage, and there can be no assurance as to the Company's ability
to expand into this area in a profitable manner. In that regard, the Company has
undertaken a number of strategic initiatives intended to expand the scope of its
services. These initiatives are identified in this Form 10-K and in the
Company's other SEC filings. All of these initiatives are based upon assumptions
made by the Company concerning trends in the clinical research market and the
health care industry. Any of these assumptions could prove to be incorrect,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, and there can be no assurance that the Company
will be successful in these efforts.
POTENTIAL LOSS OF CONTRACTS
Although the Company's contracts with Sponsors provide that it is
entitled to receive revenue earned through the date of termination, Sponsors
generally are free to terminate a clinical trial or the Company's contract
related thereto at any time. The length of a typical clinical trial contract
varies from several months to several years. Sponsors may terminate clinical
trials for several reasons, including unexpected results or adverse patient
reactions to a potential product, inadequate patient enrollment or investigator
recruitment, manufacturing problems resulting in shortages of a potential
product or decisions by the Sponsor to de-emphasize or terminate a particular
trial or development efforts with respect to a particular potential product. A
Sponsor's decision to terminate a trial in which the Company participates could
have a material adverse effect on the Company's business, results of operations
and financial condition.
DEPENDENCE ON MAJOR CUSTOMERS
The Company's primary customers are companies in the pharmaceutical
industry. The Company's business is substantially dependent on the research and
development expenditures of companies in this industry. During each of the three
years in the period ended December 31, 1996, sales to companies in the
pharmaceutical industry accounted for more than 78% of the Company's revenue.
During 1994, 1995 and 1996 sales to Merck & Co., Inc. accounted for
approximately 23%, 76% and 22%, respectively, of the Company's revenue. Also
during 1996, sales to Dey Laboratories accounted for 31% of the Company's
revenue. Other customers in the pharmaceutical industry have from time to time
accounted for more than 10% of the Company's annual revenue. The extent to which
the Company relies on sales to one customer varies from period to period,
depending upon, among other things, its ability to generate new business from
19
22
new and existing customers, the timing and size of clinical trials and other
factors. In light of the Company's small revenue base, it is more dependent on
major customers than many of the larger participants in the clinical research
industry. The Company's operations could be materially and adversely affected
by, among other things, any economic downturn in the pharmaceutical or
biotechnology industries, any decrease in their research and development
expenditures or a change in the regulatory environment in which these companies
operate.
RISKS ASSOCIATED WITH ACQUISITIONS BY THE COMPANY
Selective acquisitions are anticipated to play an important role in the
Company's efforts to become an integrated provider of research services. GFI was
the Company's first acquisition, and subsequent to that transaction, the Company
acquired WCE. There can be no assurance that the Company will be able to
successfully integrate and profitably manage the businesses that it has acquired
to date or that it will be able to identify, acquire, successfully integrate or
profitably manage additional acquisitions without substantial costs, delays or
other problems. In addition, there can be no assurance that companies acquired
in the future will be profitable at the time of their acquisition or that the
GFI or WCE acquisitions or other possible future acquisitions will achieve
and/or maintain revenue and profitability that justify the investment therein.
Acquisitions also may involve a number of special risks, including adverse
short-term effects on the Company's reported operating results, potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, diversion of management's attention, dependence on retention,
hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities and amortization of goodwill and acquired company
intangible assets, some or all of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
EFFECT OF EXPANSION STRATEGY ON THE COMPANY'S CORE BUSINESS
The Company's efforts to expand the range of its services expose it to
significant risks. As the Company expands its ability to conduct clinical
research through acquisitions and otherwise, circumstances will arise in which
it will compete for research projects with its Affiliated Sites. There can be no
assurance as to the impact of this competition on the Company's relationship
with its current Affiliated Sites or on its ability to continue to expand the
Affiliated Site network. The Company's inability to continue to expand its
network of Affiliated Sites, or the withdrawal of a significant number of
Affiliated Sites or those with expertise in certain therapeutic areas, could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, because of the rapid access to clinical
investigators provided by the Company's Affiliated Site network, CROs have from
time to time engaged the Company to assist them in the site selection process.
During fiscal 1994, 1995 and 1996, services provided to CROs represented
approximately 10%, 6% and 7%, respectively, of the Company's total revenue.
There is no assurance that CROs will continue to do business with the Company.
MANAGEMENT OF GROWTH; NEED FOR IMPROVED SYSTEMS
The Company believes that the expansion of its business will continue
to place a strain on its operational, human and financial resources. In order to
manage such expansion, the Company must continue to improve its operating,
administrative and information systems and accurately predict its future
personnel and resource needs. In addition, expansion of foreign operations also
may involve the additional risks of assimilating differences in foreign business
practices, hiring and retaining qualified personnel and overcoming language
barriers. Failure by the Company to meet the demands of and to manage expansion
of its business and operations could have a material adverse effect on the
Company's business, results of operations and financial condition.
LIMITED OBLIGATIONS OF AFFILIATED SITES
The Company's network of Affiliated Sites is essential to its business.
The Company enters into agreements with each Affiliated Site ("Affiliation
Agreements"). The obligations of Affiliated Sites under
20
23
the Affiliation Agreements are limited. Affiliated Sites have full discretion as
to whether to participate in clinical research opportunities presented by the
Company, are free to pursue research opportunities presented to them from
sources other than the Company and may withdraw from the network at any time.
DEPENDENCE ON KEY PERSONNEL
As of January 31, 1997, the Company had a total of 198 full-time
employees, of whom seven had executive or managerial responsibilities. The
Company's growth continues to place significant demands on its management
resources. The success of the Company's business is substantially dependent on
the services of its senior management team and the services of Dr. Jeffrey A.
Green in particular. The Company has employment agreements with Dr. Green and
all of its executive officers; however, the loss of Dr. Green's services or the
services of other executive officers could have a material adverse effect on the
Company.
GOVERNMENT REGULATION; POTENTIAL IMPACT OF HEALTH CARE REFORM
Demand for the Company's services is largely a function of the
regulatory requirements associated with the approval of a new drug application
imposed by the FDA. These requirements are more stringent and thus more
burdensome than those imposed by many other developed countries. In recent
years, efforts have been made to streamline the drug approval process and
coordinate U.S. standards with those of other developed countries. Changes in
the level of regulation, including a relaxation in regulatory requirements or
the introduction of simplified drug approval procedures could have a material
adverse effect on the demand for the Company's services. Several competing
proposals to reform the system of health care delivery in the United States have
been considered by Congress from time to time. None of the proposals have been
adopted. The process by which the government will pursue additional or modified
proposals for national health care reform and the precise nature of any such
proposals is unclear at this time. Some of the proposals put forth to date
incorporate price controls on drugs and limits on overall medical spending which
may adversely affect expenditures by the pharmaceutical and biotechnology
industries for research and development, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
At present, it is impossible to predict the effect of any new legislation or
changes in regulatory environment on the Company.
The failure of the Company to comply with applicable regulations could
result in the termination of on-going research or the disqualification of data
for submission to regulatory authorities. Further, the issuance of a notice or
finding by the FDA to either the Company or its clients based upon a material
violation by the Company of either Good Clinical Practices or Good Laboratory
Practices could have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION
The clinical research industry is highly fragmented and is comprised of
several large, full-service CROs and many small, limited service providers. The
major competitors in the industry include the research departments of
pharmaceutical companies, CROs and other research sites. Many of the Company's
competitors have substantially greater financial and other resources than the
Company, and there can be no assurance of the Company's ability to continue to
compete effectively with these larger competitors. There can be no assurance
that these larger competitors will not develop their own networks of Affiliated
Sites, nor as to the effect of such competing networks on the Company's
operations. The Company may also face competition from other networks of
research sites in the recruitment of potential Affiliated Sites. As the Company
continues to expand the range of its clinical research services, it will compete
more directly with the core services provided by CROs. Many of these CROs are
substantially larger and have more resources than the Company. There can be no
assurance that the Company will be able to compete effectively with these larger
companies in providing clinical research services.
21
24
POTENTIAL LIABILITY FROM OPERATIONS
Clinical trials involve the testing of approved and experimental drugs
on human beings. This testing carries with it a significant risk of liability
for personal injury or death to participants resulting from an adverse reaction
to, or improper administration of, the potential product. The Company
participates with Sponsors in the selection process. The Company also contracts
on behalf of its customers with physicians who render, and itself renders,
professional services including administering the drugs being tested to
participants in these trials. Consequently, the Company may be subject to claims
in the event of personal injury or death of persons participating in clinical
trials and arising from professional malpractice of physicians with whom it has
contracted and its own employees. Although the Company is generally indemnified
by its clients for such liability, in order for such indemnification to be
valid, the Company and its employees and agents must act within the bounds of
specific procedural requirements governing the conduct of the clinical trial.
Since the value of the Company's indemnification depends on the financial
viability of the indemnifying party, there can be no assurance that the Company
will be able to rely on such indemnification in each instance of potential
liability. In addition, the acquisitions of GFI and WCE have significantly
increased the Company's involvement in the clinical research process. Although
the Company's employees have been directly involved from time to time in
rendering services to patients in clinical trials, the Company's role in the
clinical trial process prior to these acquisitions primarily consisted of
contracting with physicians who rendered professional services to trial
participants. With the GFI and WCE acquisition, the Company's involvement in the
patient treatment process is much more significant than in the past.
Accordingly, the Company's risk of liability for malpractice has increased. If
the Company was forced to undertake the defense of, or found financially
responsible for, claims based upon the foregoing or related risks, there could
be a material adverse effect on the Company's business, results of operations
and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
Quarterly results of operations for the year ended December 31, 1996
are included in Note 13 of the Consolidated Financial Statements.
22
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors appearing under the caption
"Election of Directors" in the Company's definitive Proxy Statement to be used
in connection with the Annual Meeting of Shareholders to be held on May 20, 1997
(the "1997 Proxy Statement") is incorporated herein by reference. Information
required by this Item as to the executive officers of the Company is included as
Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction
3 to Item 401(b) of Regulation S-K. Information required by Item 405 of
Regulation S-K is set forth in the 1997 Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to "Executive Compensation" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by
reference to "Security Ownership of Principal Holders and Management" in the
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, the information required by this Item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 1997 Proxy Statement.
23
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
See Item 8 of Part II of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules for the Company and its subsidiaries
have been included in the consolidated financial statements or the related
footnotes, or they are either inapplicable or not required.
(a)(3) Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the period
covered by this Annual Report on Form 10-K other than the following:
Current Report on Form 8-K, dated October 17, 1996, reporting under
Item 5 the Company's execution of an agreement to acquire the assets of Walker
Clinical Evaluations.
Current Report on Form 8-K, dated October 17, 1996, reporting under
Item 2 the Company's acquisition of substantially all of the assets of Walker
Clinical Evaluations.
24
27
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.
COLLABORATIVE CLINICAL RESEARCH, INC.
/s/ Jeffrey A. Green
-------------------------------------
Jeffrey A. Green
President and Chief Executive Officer
Date: March 28, 1997
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.
Signature Title
--------- -----
/s/ Jeffrey A. Green President and Chief Executive Officer and
- ------------------------------------- Director
Jeffrey A. Green (Principal Executive Officer)
/s/ Terry C. Black Vice President of Finance, Chief Financial
- ------------------------------------- Officer and Treasurer
Terry C. Black (Principal Financial and Accounting Officer)
/s/ Timothy G. Biro Director
- ---------------------------------------
Timothy G. Biro
/s/ Seth B. Harris Director
- ---------------------------------------
Seth B. Harris
/s/ Alan C. Mendelson Director
- ---------------------------------------
Alan C. Mendelson
/s/ Robert M. Stote Director
- ---------------------------------------
Robert M. Stote
/s James A. Terwoord Director
- ---------------------------------------
James A. Terwoord
/s/ Alan G. Walton Director
- ---------------------------------------
Alan G. Walton
Date: March 28, 1997
25
28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Collaborative Clinical Research, Inc.
We have audited the accompanying consolidated balance sheets of
Collaborative Clinical Research, Inc. and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Collaborative Clinical Research, Inc. and subsidiaries at December 31, 1995 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
February 13, 1997
F-2
30
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===================================================================================================================================
DECEMBER 31,
---------------------------------
1995 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,156,925 $ 5,509,460
Short-term investments 1,854,396 29,173,736
Accounts receivable (less allowance for doubtful accounts
of $89,000 and $263,500 as of December 31, 1995
and 1996, respectively) 2,936,119 8,420,539
Prepaid expenses 715,101 661,292
----------- -----------
Total current assets 6,662,541 43,765,027
Property, plant and equipment
Equipment 403,258 1,839,614
Leasehold improvements 35,586 239,373
----------- -----------
438,844 2,078,987
Less accumulated depreciation 140,030 458,206
----------- -----------
298,814 1,620,781
Goodwill, less accumulated amortization of $288,000
as of December 31, 1996 - 8,131,875
Other assets 25,818 118,790
Investment in HRI 37,937 50,120
----------- -----------
63,755 8,300,785
----------- -----------
Total assets $ 7,025,110 $53,686,593
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,696,746 $ 1,900,060
Accrued expenses 445,859 1,306,285
Deferred revenue 559,213 932,460
----------- -----------
Total current liabilities 3,701,818 4,138,805
Shareholders' equity:
Serial Preferred Shares, without par value; authorized
1,000,000 shares; none issued - -
Series A, B and C Convertible Preferred Shares: $.001
par value, authorized 2,860,000 shares; issued and
outstanding 2,182,353 and 0 shares as of December 31,
1995 and 1996, respectively 2,182 -
Additional paid-in capital 4,847,885 -
Common Shares, without par value, authorized 15,000,000
shares; issued and outstanding 402,500 and 6,310,414
shares as of December 31, 1995 and 1996, respectively 84,011 49,511,964
Retained earnings (accumulated deficit) (1,610,786) 35,824
----------- -----------
Total shareholders' equity 3,323,292 49,547,788
----------- -----------
Total liabilities and shareholders' equity $ 7,025,110 $53,686,593
=========== ===========
See accompanying notes.
F-3
31
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
============================================================================================
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
---- ---- ----
Revenue $ 4,046,884 $ 10,452,920 $ 25,715,004
Direct costs 2,907,895 8,490,465 17,976,472
------------ ------------ ------------
Gross profit 1,138,989 1,962,455 7,738,532
Selling, general and administrative expenses 1,386,519 2,770,590 6,140,400
Depreciation and amortization 58,631 61,500 606,061
------------ ------------ ------------
Income (loss) from operations (306,161) (869,635) 992,071
Other income (expense):
Interest income 92,063 222,054 1,146,111
Interest expense - - (93,330)
Loss from joint venture - (105,144) (15,042)
------------ ------------ ------------
Income (loss) before income taxes (214,098) (752,725) 2,029,810
Income tax expense - - 383,200
------------ ------------ ------------
Net income (loss) $(214,098) $(752,725) $1,646,610
============ ============ ============
Net income (loss) per share $(0.10) $(0.24) $0.33
============ ============ ============
Weighted average common shares outstanding 2,182,277 3,102,272 5,052,027
============ ============ ============
See accompanying notes
F-4
32
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===================================================================================================================================
PREFERRED SHARES
-----------------------------------------------------------------------------
SERIES A SERIES B SERIES C
------------------------ ------------------------- ----------------------
NUMBER NUMBER NUMBER
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE
----------- ----------- ----------- ------------ ---------- ----------
BALANCE AT JANUARY 1, 1994 500,000 $ 500 66,667 $ 67 - $ -
Issuance of Series C Preferred Shares 1,412,367 1,412
Series A and Series C Preferred Share dividends 30,604 31 53,291 53
Stock compensation
Net loss
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994 530,604 531 66,667 67 1,465,658 1,465
Exercise of Common Share Options
Series A and Series C Preferred Share dividends 9,396 9 110,028 110
Stock compensation
Net loss
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 540,000 540 66,667 67 1,575,686 1,575
Exercise of Common Share Options
Exercise of Common Share Warrants
Issuance of Common Shares in business acquisition
Series C Preferred Share dividends 18,780 19
Initial Public Offering of Common Shares, net
Conversion of Series A, B and C Preferred Shares (540,000) (540) (66,667) (67) (1,594,466) (1,594)
Stock compensation
Net income
--------- ---------- --------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1996 - $ - - $ - - $ -
========== ========== ========== ========== ========== ==========
---------- COMMON SHARES RETAINED
ADDITIONAL ----------------------- EARNINGS
PAID-IN NUMBER STATED (ACCUMULATED
CAPITAL OF SHARES AMOUNT DEFICIT) TOTAL
----------- ----------- ----------- -------------- ----------
BALANCE AT JANUARY 1, 1994 $ 667,798 400,000 $ 5,281 ($ 643,963) $ 29,683
Issuance of Series C Preferred Shares 4,180,290 4,181,702
Series A and Series C Preferred Share dividends (84) -
Stock compensation 6,625 6,625
Net loss (214,098) (214,098)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 4,848,004 400,000 11,906 (858,061) 4,003,912
Exercise of Common Share Options 2,500 375 375
Series A and Series C Preferred Share dividends (119) -
Stock compensation 71,730 71,730
Net loss (752,725) (752,725)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 4,847,885 402,500 84,011 (1,610,786) 3,323,292
Exercise of Common Share Options 22,633 8,352 8,352
Exercise of Common Share Warrants 136,000 884,000 884,000
Issuance of Common Shares in business acquisition 148,148 2,000,000 2,000,000
Series C Preferred Share dividends (19) -
Initial Public Offering of Common Shares, net 3,400,000 41,656,465 41,656,465
Conversion of Series A, B and C Preferred Shares (4,847,866) 2,201,133 4,850,067 -
Stock compensation 29,069 29,069
Net income 1,646,610 1,646,610
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 $ - 6,310,414 $49,511,964 $ 35,824 $49,547,788
=========== =========== =========== =========== ===========
See accompanying notes.
F-5
33
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
============================================================================================================
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ($ 214,098) ($ 752,725) $ 1,646,610
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Equity loss in HRI - 105,144 15,042
Depreciation and amortization 58,631 61,500 606,061
Provision for doubtful accounts 25,000 24,000 93,643
Accretion of discount on investments (60,584) (143,526) (919,723)
Stock compensation expense 6,625 71,730 29,069
Changes in operating assets and liabilities:
Accounts receivable (934,059) (1,758,815) (2,628,285)
Prepaid expenses (45,832) (623,770) 78,629
Other assets (5,815) (19,653) (91,972)
Accounts payable and accrued expenses 502,628 2,245,428 (1,056,152)
Deferred revenue 489,069 (62,403) (199,964)
------------ ------------ ------------
Net cash used in operating activities (178,435) (853,090) (2,427,042)
INVESTING ACTIVITIES
Purchases of property and equipment (65,036) (241,722) (932,953)
Purchases of businesses (net of cash acquired) - - (7,278,038)
Maturities of short-term investments - 3,075,700 25,749,178
Purchases of short-term investments (2,927,914) (1,798,072) (52,148,794)
Investment in HRI - (143,081) (27,225)
------------ ------------ ------------
Net cash provided by (used in) investing activities (2,992,950) 892,825 (34,637,832)
FINANCING ACTIVITIES
Borrowings on line of credit 100,000 - 1,271,111
Payments on line of credit (200,710) - (2,402,520)
Proceeds from issuance of shares 4,181,702 375 42,548,818
------------ ------------ ------------
Net cash provided by financing activities 4,080,992 375 41,417,409
Increase in cash and cash equivalents 909,607 40,110 4,352,535
Cash and cash equivalents at beginning of year 207,208 1,116,815 1,156,925
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,116,815 $ 1,156,925 $ 5,509,460
============ ============ ============
Cash paid during the year for interest $ - $ - $ 93,330
============ ============ ============
See accompanying notes
F-6
34
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Collaborative Clinical Research, Inc. (the "Company") manages a network of
affiliated and owned clinical research sites. The Company provides sponsors of
clinical research (primarily pharmaceutical and biotechnology companies and, in
selected cases, contract research organizations) with an innovative,
time-efficient method of site selection and clinical trial management.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its two wholly-owned subsidiaries, Collaborative Holdings, Inc. and GFI
Pharmaceutical Services, Inc. ("GFI"). Walker Clinical Evaluations ("WCE") is a
division of Collaborative Holdings Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The results of operations of the businesses acquired (GFI and WCE) have been
included in the consolidated financial statements of the Company from the date
of acquisition (See Note 11).
REVENUE RECOGNITION
Revenue and related direct costs of revenue are recognized as specific contract
terms are fulfilled under the percentage-of-completion method (the
units-of-delivery method). Fees for individual contract services are fixed upon
execution of the contract and provide for payment for all work performed.
Pass-through costs that are paid directly by the Company's clients, and for
which the Company does not bear the risk of performance, are excluded from
revenue. The termination of a contract results in no material adjustments to the
revenue or costs previously recognized.
The following sets forth the revenue generated by customers who accounted for
more than 10% of the Company's revenue during each of the periods presented (in
thousands):
YEARS ENDED DECEMBER 31,
---------------- ----------------- ----------------
CUSTOMER 1994 1995 1996
-------- ---- ---- ----
A $522 $* $*
B 950 7,935 5,754
C 654 * *
D --- * 7,925
* Less than 10% of revenue.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments in cash
equivalents are carried at cost which approximates market value.
F-7
35
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
PREPAID EXPENSES
Included in prepaid expenses is $670,600 and $108,300 at December 31, 1995 and
1996, respectively, advanced to vendors for services to be provided under
current contracts.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of U.S. Treasury securities and obligations
of U.S. government agencies, obligations of states and U.S. corporate securities
with maturities of one year or less. These securities are stated at amortized
cost, which approximates fair value. The Company has the positive intent and
ability to hold the securities to maturity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciable assets consist of
medical, office and computer equipment. Depreciation on equipment is computed
using the straight-line method over estimated useful lives of 5 to 7 years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the assets' estimated useful life or the lease term.
DEFERRED REVENUE
Deferred revenue represents cash advances received in excess of revenue earned
on on-going contracts. Payment terms vary with each contract but may include an
initial payment at the time the contract is executed, with future payments
dependent upon the completion of certain contract phases or targeted milestones.
In the event of contract cancellation, the Company is entitled to payment for
all work performed through the point of cancellation.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined by dividing net income (loss)
applicable to Common Shares by the weighted average number of Common Shares and
Common Share equivalents outstanding during the year. Common Share equivalents
consist of Convertible Preferred Shares (all of which converted, according to
their terms, upon completion of the Company's initial public offering in June,
1996-- see Note 7) and Common Shares which are issuable upon exercise of
outstanding options and warrants to purchase Common Shares.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
Common Share options, Preferred Share dividends and Common Share warrants
granted by the Company during the twelve months preceding the Company's initial
public offering date have been included in the calculation of Common Shares and
Common Share equivalents outstanding as if they were outstanding for all periods
presented prior to the Company's initial public offering, using the treasury
stock method (at the initial public offering price of $13.50 per share).
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25").
F-8
36
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
GOODWILL
The Company has classified as goodwill the cost in excess of fair value of the
net assets acquired in purchase transactions. Goodwill is amortized over a
20-year period using the straight-line method. The carrying value of goodwill is
evaluated if circumstances indicate a possible impairment in value. If
undiscounted cash flows over the remaining amortization period indicate that
goodwill may not be recoverable, the carrying value of goodwill will be reduced
by the estimated shortfall of cash flows on a discounted basis.
INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". This accounting standard requires that the
liability method be used in accounting for income taxes. Under this accounting
method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting basis and the tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that apply
in the periods in which the deferred tax asset or liability is expected to be
realized or settled. A valuation allowance is provided for deferred tax assets
for which realization currently is not certain.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
might affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Advertising expenses were $189,000, $309,000
and $173,000 for 1994, 1995 and 1996, respectively.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31,
---------------------------------
1995 1996
---- ----
Billed $ 2,729,189 $ 6,731,028
Unbilled 295,930 1,953,011
Allowance for doubtful accounts (89,000) (263,500)
----------- -----------
$ 2,936,119 $ 8,420,539
=========== ===========
3. FINANCING ARRANGEMENTS
The Company has a line of credit agreement with a bank which provides for
borrowings up to $5.0 million that bears interest at rates not to exceed prime
(no amounts are outstanding at December 31, 1995 and 1996). Substantially all of
the Company's tangible assets are pledged as collateral on the line of credit.
F-9
37
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
4. SHORT-TERM INVESTMENTS
The following is a summary of held-to-maturity securities:
DECEMBER 31,
-----------------------------------------------------------------------
1995 1996
--------------------------------- ----------------------------------
AMORTIZED AMORTIZED
COST COST COST COST
---- ---- ---- ----
U.S. Treasury securities
and obligations of
U.S. government agencies $ 1,777,829 $ 1,854,396 $17,419,974 $17,640,993
Obligations of states and
political subdivisions ----- ----- 2,500,000 2,506,783
U.S. corporate securities ----- ----- 8,893,180 9,025,960
--------------------------------- ----------------------------------
Total $ 1,777,829 $ 1,854,396 $28,813,154 $ 29,173,736
================================= ==================================
5. INCOME TAXES
Income tax expense consists of the following at December 31, 1996:
Current Deferred Total
------- -------- -----
Federal $ 209,200 $ (10,000) $ 199,200
State and local 185,700 (1,700) 184,000
------------ -------------- ------------
$ 394,900 $ (11,700) $ 383,200
========== =========== ==========
A reconciliation of income taxes at the United States Federal statutory rate to
the effective income tax rate for the year ended December 31, 1996 is as
follows:
Income taxes at the United States statutory rate $ 706,800
State and local income taxes 162,500
Net operating loss carryforwards (476,500)
Other - net (9,600)
---------
$ 383,200
==========
The significant components of the Company's deferred tax assets (liabilities)
are as follows:
DECEMBER 31,
-------------------------------------
1994 1995 1996
---- ---- ----
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 238,000 $ 568,000 $ --
Allowances and accruals 32,000 79,000 106,000
Depreciation and amortization (2,000) (9,000) (53,000)
--------- --------- ---------
268,000 638,000 53,000
Valuation allowance (268,000) (638,000) (53,000)
--------- --------- ---------
Net deferred tax assets recorded $ 0 $ 0 $ 0
========= ========= =========
F-10
38
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
6. OPERATING LEASES
The Company leases certain office equipment and space. Rent expense relating to
these operating leases was approximately $46,000, $123,000 and $580,000 in 1994,
1995 and 1996, respectively. Future minimum lease payments for the Company under
noncancelable operating leases as of December 31, 1996 are as follows:
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- --------
1997 $ 847,000
1998 866,300
1999 842,400
2000 715,600
2001 263,300
----------
$3,534,600
==========
7. SHAREHOLDERS' EQUITY
On June 5, 1996, a total of 136,000 Common Share warrants were exercised. On
June 11, 1996, the Company issued 3,000,000 Common Shares at $13.50 per share in
connection with an initial public offering. A portion of the proceeds from the
stock issuance were used to repay $3,250,000 of outstanding indebtedness. Upon
the closing of the initial public offering, the Company issued 148,148 Common
Shares to the former shareholders of GFI and all of the Company's outstanding
series A, B and C Convertible Preferred Shares were automatically converted into
a total of 2,201,133 Common Shares. On July 11, 1996, an additional 400,000
Common Shares were sold at $13.50 per share to cover underwriting
over-allotments from the initial public offering.
Convertible Preferred Shares
The Series A, B and C Convertible Preferred Shares ("Preferred Shares") are
convertible to Common Shares on a one-for-one basis, have voting rights and have
liquidation preferences over Common Shares. Effective upon the closing of the
Company's initial public offering, all outstanding Preferred Shares
automatically converted into Common Shares.
The Series A Preferred Shares had a cumulative dividend rate of $0.10. Dividends
accrued between the second and third anniversary of the original issue date were
paid in the form of Series A Preferred Shares. From and after the third
anniversary of the original issue date, dividends were paid in the form of
Series C Preferred Shares. Dividends on Series B Preferred Shares were
discretionary and accrued only to the extent dividends were declared on Common
Shares. The Series C Preferred Shares had a dividend rate of $0.24 and were
cumulative. Dividends on the Series C Preferred Shares were paid in Series C
Preferred Shares.
Serial Preferred Shares
At December 31, 1996 the company had 1,000,000 Serial Preferred Shares, without
par value, authorized, with none outstanding.
F-11
39
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
8. SHARE OPTION PLANS
The Company has four share option plans. At December 31, 1996, the Company had
reserved 700,000 Common Shares for the exercise of Common Share options. The
weighted average contractual life of all options outstanding was 6.8 years as of
December 31, 1996.
The Amended and Restated 1994 Directors' Share Option Plan ("Director Plan") was
established by the Company in July 1994. The Director Plan provides for the
granting of a maximum of 11,000 options to purchase Common Shares to directors
of the Company for their participation in Board of Directors' meetings. The
option price per share is equal to the fair market value of a Common Share on
the date of grant. Options fully vest after six months and one day from the date
of grant, and all options granted under the Director Plan expire ten years after
the grant date.
The Amended and Restated 1992 Share Incentive Plan ("1992 Plan") was approved by
the Company's shareholders on September 23, 1992. The 1992 Plan provides for the
granting of a maximum of 481,333 options to purchase Common Shares to key
employees and consultants of the Company and its affiliates. Prior to May 1995,
options to purchase 316,499 Common Shares were granted at exercise prices of
less than fair market value of a Common Share on the date of grant. The Company
has recognized compensation expense related to these Common Share options of
$6,625 in 1994, $71,730 in 1995 and $29,069 in 1996. Options awarded under the
plan vest in equal increments over a three to five year period commencing on the
first anniversary date of the grant. If all options vest, additional
compensation expense of $33,000 will be recognized through 1998.
Subsequent to April 1995, all options to purchase Common Shares awarded under
the 1992 Plan were granted at exercise prices that represented the fair market
value of a Common Share on the date of grant. All options granted under the 1992
Plan expire ten years after the grant date.
The Amended and Restated 1996 Outside Directors' Stock Option Plan ("1996
Director Plan") was established by the Company in February 1996. The 1996
Director Plan provides for the granting of a maximum of 25,000 options to
purchase Common Shares to outside directors of the Company. The option price per
share is equal to the fair market value of a Common Share on the date of grant.
Options fully vest after one year and one day from the date of grant, and all
options granted under the 1996 Director Plan expire ten years after the grant
date.
The Amended and Restated 1996 Key Employees and Consultants Stock Option Plan
("1996 Plan") was established by the Company in February 1996. The 1996 Plan
provides for the granting of a maximum of 182,667 options to purchase Common
Shares to key employees and consultants of the Company and its affiliates.
Vesting of options awarded under the plan is determined by the Company's
Compensation Committee, as appointed by the Board of Directors, and all options
granted under the 1996 Plan expire ten years after the grant date.
F-12
40
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
==========================================================================
Information regarding the Company's share option plans is summarized below:
1996
1992 DIRECTOR 1996 DIRECTOR
PLAN PLAN PLAN PLAN
---- ---- ---- ----
Outstanding at January 1, 1994 132,500 -- -- --
Granted 176,999 2,666 -- --
Exercised -- -- -- --
Canceled (7,500) -- -- --
-------- -------- ------ --------
Outstanding at December 31, 1994 301,999 2,666 -- --
Granted 190,000 6,000 -- --
Exercised (2,500) -- -- --
Canceled (10,666) -- -- --
-------- -------- ------ --------
Outstanding at December 31, 1995 478,833 8,666 -- --
Granted -- 1,334 93,800 9,000
Exercised (22,633) -- -- --
Canceled (46,000) -- -- --
-------- -------- ------ --------
Outstanding at December 31, 1996 410,200 10,000 93,800 9,000
======== ======== ====== ========
Options available to grant at:
December 31, 1996 -- 1,000 88,867 16,000
======== ======== ====== ========
Average option price per share:
At December 31, 1994 $ 0.19 $ 0.80 $--- $---
At December 31, 1995 1.85 3.45 -- --
At December 31, 1996 1.75 4.27 11.36 9.60
Options exercisable:
At December 31, 1994 41,250 -- -- --
At December 31, 1995 118,183 5,666 -- --
At December 31, 1996 200,450 10,000 -- --
Average price of options exercised:
At December 31, 1994 $--- $--- $--- $---
At December 31, 1995 0.15 -- -- --
At December 31, 1996 0.37 -- -- --
Average price of options canceled:
At December 31, 1994 0.15 $--- $--- $---
At December 31, 1995 0.18 -- -- --
At December 31, 1996 3.39 -- -- --
9. STOCK BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. As discussed below, the alternative
fair value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models that were not
developed for
F-13
41
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
use in valuing employee stock options. Under APB 25 compensation expense has
been recognized for all options granted at less than the fair market value of
the Company's Common Shares on the date of grant (see footnote 8).
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated using a Black-Scholes option pricing model with
the following weighted-average assumptions: risk free interest rate of 5.0%,
dividend yield of 0.0% and a volatility factor of the expected market price of
the Company's Common Shares of 0.53; and a weighted-average expected life of the
option of seven years. Using the Black-Scholes model, the weighted-average fair
value of options granted during 1995 and 1996 was $2.73 and $6.66, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated value of the options is
amortized to expense over the options' vesting period. The pro forma results are
not necessarily indicative of what would have occurred had the Company adopted
Statement 123. The Company's pro forma information follows:
YEAR ENDED DECEMBER 31,
---------------- -----------------
1995 1996
---- ----
Pro forma net income (loss) $ (795,548) $ 1,410,028
Pro forma income (loss) per share: $ (0.26) $ 0.28
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
10. RETIREMENT SAVINGS PLAN
The Company sponsors The Collaborative Clinical Research, Inc. Retirement
Savings Plan (the "Plan") as defined by section 401(k) of the Internal Revenue
Code of 1986, as amended. The Plan covers substantially all employees who elect
to participate. Participants may contribute up to 20% of their annual
compensation into a variety of mutual fund options. Matching and profit sharing
contributions by the Company are discretionary. The Company has never made any
contributions to the Plan.
11. ACQUISITIONS
During the year ended December 31, 1996, the Company completed two acquisitions.
Effective January 31, 1996, the Company acquired GFI, located in Evansville,
Indiana. The purchase price was $6.0 million and consisted of $2.0 million each
of cash, Common Shares (148,148) and notes payable. The notes payable were paid
in full in June 1996. Effective October 25, 1996, WCE, in Indianapolis, Indiana
was acquired by the Company for $3.0 million in cash. The excess purchase price
over the fair value of the net assets acquired was recorded as goodwill in both
acquisitions.
F-14
42
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
===============================================================================
Both acquisitions have been accounted for under the purchase method of
accounting, and the consolidated results of operations include the results of
each business from the date of acquisition. Unaudited pro forma data for the
year ended December 31, 1995 and 1996 as though the Company had completed its
initial public offering and used the net proceeds to repay approximately $3.25
million in indebtedness and purchase GFI and WCE at the beginning of 1995 are
set forth below. The pro forma operating results are not necessarily indicative
of what would have occurred had the transactions taken place on January 1, 1995.
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996
---- ----
Pro forma revenue $ 19,907,997 $ 28,769,847
Pro forma net income (loss) $ (1,380,034) $ 1,469,184
Pro forma income (loss) per share $ (0.38) $ 0.22
12. INVESTMENT IN HRI
In June 1995, the Company entered into an equally-owned joint venture, Health
Research Innovations L.L.C. ("HRI"), with Pharmaceutical Marketing Services,
Inc. ("PMSI") to collect health care information. Through HRI, the Company and
PMSI will market their health care data collection and analysis capabilities to
the health care industry. The Company accounts for its investment in HRI using
the equity method.
13. QUARTERLY DATA (UNAUDITED)
During the fourth quarter of 1996, the Company adjusted its income tax provision
to 19% for the year ended December 31, 1996 versus 25% for the nine months ended
September 30, 1996, resulting in a fourth quarter, 1996 benefit of $84,000. The
reduction in the Company's effective tax rate was primarily due to the state of
Ohio taxing the Company on the net worth as opposed to the net income basis.
Selected quarterly data is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenue $ 1,920 $ 2,116 $ 2,751 $ 3,666
Gross profit 469 358 459 676
Income (loss) from operations (184) (338) (367) 19
Net income (loss) (126) (287) (375) 35
Net income (loss) per share (0.04) (0.09) (0.12) 0.01
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Revenue $5,303 $6,842 $7,176 $6,394
Gross profit 1,290 2,012 2,294 2,143
Income from operations 98 347 411 136
Net income 56 288 709 594
Net income per share 0.02 0.08 0.11 0.09
F-15
43
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
2.1 Stock Purchase Agreement among GFI, Ohio Valley IRB, Inc., Debra S. Adamson,
the Revocable Trust of Debra S. Adamson, UAT dated August 26, 1992, Mary L.
Westrick and the Company, dated February 5, 1996 (A)
2.2 Asset Purchase Agreement, dated October 16, 1996, between Collaborative
Holdings, Inc. and Walker Information, Inc. (B)
3.1 Fifth Amended and Restated Articles of Incorporation (C)
3.2 Third Amended and Restated Code of Regulations (C)
4.1 Specimen Certificate of the Company's Common Shares, without par value (A)
4.2 Demand Promissory Note, dated as of June 30, 1996, payable to the order of Key Bank
4.3 Second Amended and Restated Registration Agreement, dated July 15,1994,
as amended on June 1, 1995 and February 5, 1996 (A)
10.1 Amended and Restated 1994 Directors' Share Option Plan (D)
10.2 Amended and Restated 1996 Outside Directors' Stock Option Plan (D)
10.3 Amended and Restated 1992 Share Incentive Plan (D)
10.4 Amended and Restated 1996 Key Employees' and Consultants
Stock Option Plan (D)
10.5 Form of Affiliation Agreement by and among the Company and physicians (A)
10.6 Form of Affiliation Agreement by and among the Company and research institutions (A)
10.7 Form of Indemnification Agreement (A)
10.8 Limited Liability Company Agreement, dated as of June 1, 1995, by and among the
Company and PMSI (A)
10.9 Employment Agreement between the Company and Debra S. Adamson, dated
February 1, 1996 (A)
10.10 Employment Agreement between the Company and Mary L. Westrick,
dated February 1, 1996 (A)
10.11 Employment Agreement between the Company and Richard J. Kasmer, dated
June 14, 1994 (A)
10.12 Employment Agreement between the Company and Jeffrey A. Green, dated
July 1, 1994 (A)
E-1
44
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.13 Employment Agreement between the Company and William H. Stigelman, Jr.,
dated July 15, 1994 (A)
10.14 Employment Agreement between the Company and Terry C. Black,
dated July 20, 1994 (A)
10.15 Employment Agreement between the Company and Nathan F. Messinger,
dated December 10, 1993 (A)
10.16 GFI Pharmaceutical Services, Inc. Associates' Profit Sharing and 401(k) Plan (A)
10.17 Lease Agreement between St. Mary's Medical Center of Evansville, Inc. and GFI
Pharmaceutical Services, Inc., dated January 5, 1996 (A)
10.18 Supplemental Lease Agreement between St. Mary's Medical Center of Evansville, Inc.
and GFI Pharmaceutical Services, Inc., dated June 28, 1996 (C)
10.19 License Agreement, dated October 16, 1996, between Collaborative Holdings, Inc. and
Walker Information, Inc. (B)
11.1 Statement re Computation of Net Income (Loss) Per Common Share.
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-1 (Registration statement
No. 333-2140).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated October 25, 1996
(Commission File No. 000-20699).
(C) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended June 30, 1996
(Commission file No. 000-20699).
(D) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-8 (Registration statement
No. 333-16061).
E-2