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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, 1997
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 27, 1998, the registrant had 6,422,372 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 $23,017,320 (based upon the closing price
of $4.38 per Common Share on the NASDAQ Stock Market, Inc. on February 27,
1998). For purposes of this calculation, the registrant deems the 1,167,276
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 28, 1998
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, 1997.
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TABLE OF CONTENTS
Part I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
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 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition 14
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 24
Part III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
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PART I
ITEM 1. BUSINESS
GENERAL
Collaborative Clinical Research, Inc. ("Collaborative" or the
"Company") is a multi-specialty Site Management Organization ("SMO") with an
international network comprised of over 540 clinical research sites ("Affiliated
Sites"). Each site is affiliated with the Company through a written agreement
which describes a cooperative relationship between the Company and the
Affiliated Site. The Network, with more than 3,700 clinical investigators,
provides rapid access to patients who can participate in clinical research
trials. Collaborative's customers ("Sponsors") for these trials are primarily
pharmaceutical and biotechnology companies and, to a lesser extent, contract
research organizations, ("CRO's").
The Company and its Affiliated Sites assist Sponsors in conducting the
clinical research necessary to obtain regulatory approval for new drugs. In
addition, Collaborative provides Sponsors with an innovative and timely means of
selecting clinical research sites and managing clinical trials as part of the
pharmaceutical product development process. Collaborative provides its
Affiliated Sites with sales and marketing, project budgeting and contract
negotiation services. The Company also owns three clinical research sites.
Throughout its history, the Company has been involved in over 400 clinical
trials providing services to approximately 120 Sponsors.
Founded in 1991 as an innovator of the SMO concept, Collaborative has
grown through a combination of internal expansion and strategic acquisition.
Collaborative acquired two companies in 1996, GFI Pharmaceutical Services, Inc.
("GFI") and WCE Clinical Evaluations ("WCE"). GFI conducts Phase I clinical
research at its 80 bed facility in Evansville, Indiana and Phase II through IV
clinical research at the Company's three owned clinical research sites. WCE's
services are directed primarily toward Over the Counter ("OTC") pharmaceutical
products, and include studies necessary to switch prescription drugs to OTC use,
label comprehension evaluations and consumer product testing.
In 1996, Collaborative formed a wholly owned subsidiary, DataTRAK, Inc.
("DataTRAK"). In January 1998, DataTRAK purchased the software now known as
DataTRAK EDC(TM). This software is the foundation of the DataTRAK(R) process.
DataTRAK will provide certain electronic data management services to Sponsors
through use of its Electronic Data Capture ("EDC") technology and Quality Review
Center ("QRC") process. Use of the DataTRAK(R) process offers Sponsors the
potential to increase the efficiency, accuracy and timeliness of collection and
management of clinical research data and access to patients through DataTRAK
certified sites. The research sites used in this service may be Affiliated Sites
of Collaborative or sites selected by the Sponsor. The DataTRAK EDC(TM) software
and its earlier versions have supported more than 30 clinical studies in
Europe encompassing over 500 clinical research sites and 3,000 patients.
In January 1998, the Company announced the termination of its
technology alliance agreement with ISSC, a unit of IBM Global Services. The
Company and IBM Global Services disagree on a number of issues concerning the
parties' financial responsibilities in connection with the termination of the
alliance, and have engaged in discussions concerning those matters. To date,
those discussions have not resulted in an acceptable resolution of these issues.
The Company does not believe that it has any continuing financial obligations to
IBM Global Services and, based on information known to date, does not believe
that additional expenditures associated with the termination of this alliance,
if any, will have a material adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
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CLINICAL RESEARCH INDUSTRY OVERVIEW
The clinical research industry is driven by regulatory requirements
that Sponsors adequately test new drugs and devices prior to marketing. The drug
development process has become more challenging, lengthy and expensive. In a
recent analysis covering three decades of pharmaceutical industry data, the
Tufts Center for the Study of Drug Development examined the time interval from
Investigational New Drug Application ("IND") to New Drug Application ("NDA")
approval. These approval times grew from 7.3 years in the period from 1963 to
1972, to 11.9 years from 1973 to 1982, and to 14.3 years from 1983 to 1992. The
estimated average cost of this process has also grown substantially.
Competitive and cost-containment pressures are forcing the
pharmaceutical and biotechnology industries to become more efficient in
developing new drugs. To improve returns on research and development
investments, pharmaceutical and biotechnology companies are expanding their
product pipelines and attempting to shorten the product development timeline.
In response to similar cost-containment pressures, many hospitals,
physicians, and other healthcare providers have added clinical research
capabilities as an additional revenue source. Clinical research allows
healthcare providers to extend their core competencies and capitalize on their
direct access to patients.
Industry Trends in Drug Development
Pipeline and Process Challenges
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Sponsors face many challenges in continuing to deliver an increasing
return on research and development expenditures. Lengthier drug development time
frames, increased drug development costs, margin pressures arising from emphasis
on cost-containment in healthcare, limited patent life, and competition from
generic drug companies, are forcing Sponsors to be as efficient and
cost-effective as possible in managing their clinical development processes.
One result of these challenges is that Sponsors are targeting
simultaneous regulatory approvals in many countries to accelerate global time to
market. A second result is that product pipelines are expanding as promising new
compounds come from advanced drug discovery efforts, high throughput screening
techniques, and the development of genomic libraries. These efforts have placed
more drugs into the clinical development process, and have increased pressure on
Sponsors to develop products faster to maintain growth and continue to achieve
acceptable returns on research and development expenditures.
Sponsors have attempted to create process efficiencies, control fixed
costs, and expand capacity by outsourcing certain clinical research activities.
The CROs are the most mature and established group used for outsourcing at this
time. The amount of clinical research that is outsourced varies by Sponsor,
however, the Company believes increases in outsourcing, including temporary
access to therapeutic focus and expertise to develop products across many
disease states, will continue.
Outsourcing
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Under traditional outsourcing in clinical research, the Sponsor
subcontracts various aspects of a preclinical or clinical development program to
a service provider. Such services typically include: protocol development, site
selection, site contracting, project management, monitoring, data management,
investigational drug packaging, regulatory consulting, NDA preparation, and
post-approval and marketing services.
The term outsourcing has not traditionally applied to the use of
clinical research sites, even though Sponsors generally do not own or operate
such sites. Clinical research contracts with investigator sites
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provide access to patients for a clinical trial. The Company provides access to
sites and patients, and believes that its services are viable to a Sponsor
regardless of whether a project is outsourced or managed internally by the
Sponsor.
Accelerating Clinical Development
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As drug development pipelines have grown, a substantially greater
number of compounds are scheduled for development today versus a few years ago.
Most Sponsors are facing critical strategic decisions to develop this influx of
new compounds efficiently. Outsourcing to service providers has increased
capacity to conduct these new clinical trials. However, outsourcing, per se,
does not appear to have accelerated the drug development process.
One of Collaborative's goals is to assist Sponsors in starting and
finishing their clinical trials on a more timely basis. The Company aims to
achieve this goal through its rapid activation of Affiliated Sites at the start
of a clinical trial, and by using the DataTRAK(R) process to expedite the data
collection and reporting process during a clinical trial.
BUSINESS STRATEGY
The Company's strategy is to help Sponsors accelerate the process of
obtaining regulatory approval for new drugs. Collaborative will implement this
strategy by providing rapid access to patients through a clinical research
network, and by automating the collection of clinical trial data through a
standardized technology platform.
Utilization of the Affiliated Site Network
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The Company's Network of Affiliated Sites provides a clinical research
model that responds to Sponsors' needs to bring new products to market faster.
The Network improves time-efficiency in the clinical research process primarily
in site identification and contracting. This provides Sponsors with the
opportunity to begin clinical research sooner, thereby shortening this phase of
the new drug development process.
Collaborative's network approach serves the independent research site
by delivering incremental clinical research revenue, by marketing the
capabilities of all Affiliated Sites and by negotiating one contract for all
Affiliated Sites participating in any one clinical trial. Affiliated Sites are
provided with a number of clinical research opportunities involving a wide
variety of therapeutic areas.
Expansion and Targeting of the Affiliated Site Network
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In targeting potential additions to the Affiliated Site Network, the
Company considers several factors, including clinical trial experience,
enrollment performance and overall work quality. In order to focus better on
projected drug development pipelines of Sponsors, Collaborative will refine its
Network into groups based on site-specific therapeutic specialties. Proficiency
in these identified specialty areas has become an additional consideration for
future site affiliations.
Development of the DataTRAK(R) Process
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DataTRAK is a service business that offers a process for electronic
data collection and clinical trial data management capabilities across a network
of sites. DataTRAK's objective is to improve the traditional process of
collecting clinical research and noninterventional health care data by providing
cleaner data faster than what is available in a paper environment. In order to
implement this strategy, the Company acquired the software technology now known
as DataTRAK EDC(TM) in January 1998. This
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software has been validated by several European Sponsors, and has been used in
over 30 clinical trials at 500 sites involving more than 3,000 patients.
Currently, clinical research associates ("CRAs") visit research sites
to review data manually entered on the case report form ("CRF") for accuracy and
integrity. During these physical visits, each CRF page is reviewed by the CRA.
These monitoring visits may last several days, and corrections to the CRFs are
frequently required before delivery to the Sponsor. Several weeks or even months
of data must be reviewed during each monitoring visit. At the completion of a
monitoring visit, the CRF pages are delivered to a central location where the
data is then entered into a database for statistical compilation. Using this
traditional method of data collection and quality control, the time duration
from patient visit to delivery of clean data to the Sponsor can range from six
to twelve months. Such delays are significant because errors or trends may not
be detected until long after the interaction between patient and investigator.
The Company believes the drug development process can be accelerated by
automating these procedures.
DataTRAK has two strategies. First is to place systems and software at
Collaborative's Network and Sponsor selected sites for long-term use in clinical
trials. Second is to provide any Sponsor, CRO, SMO or competing network the
opportunity to use the DataTRAK(R) process as a competitive advantage for their
clients. In this manner, the DataTRAK(R) process can develop into a standardized
electronic data capture platform for the clinical trial industry.
Clinical trial data will be collected on electronic CRFs across a
network of sites and routed across a secure communications environment to
DataTRAK's QRC. The QRC largely replaces traditional monitoring. Once the CRF
data has been reviewed to correct errors it is integrated directly into a
Sponsor's database in Sponsor specified formats.
THE AFFILIATED SITE NETWORK
Since 1991, the Company has developed a network of more than 540
Affiliated Sites and today provides Sponsors with rapid 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 Company's Network includes investigators experienced in infectious
disease and HIV/AIDS, orthopedics, cardiology, hematology/oncology, pulmonary,
endocrinology, gastroenterology/metabolism, and neurology, among other medical
specialties. Each Affiliated Site is a party to an affiliation agreement with
the Company, which defines the duties and responsibilities of each party. These
relationships produce expeditious access for Sponsors to qualified clinical
investigators and evaluable patients. Although Affiliated Sites remain free to
solicit and accept clinical research contracts directly from Sponsors, they are
prohibited from affiliating with another network. At the request of Sponsors,
the Company uses research sites outside of its Affiliated Site Network. For
example, Sponsors may request that the Company use research sites outside the
Affiliated Site Network in large, multi-site trials or to include trial
investigators of national standing in a particular therapeutic area or those
whom the Sponsor has worked with in the past. The Company regularly updates its
demographic database on each Affiliated Site.
SERVICES
The Company's core business is to provide site selection and project
management services for clinical trial programs in many therapeutic areas. The
Company also performs clinical research at its three owned sites. The Company
assists Sponsors in identifying and recruiting investigators, initiating
clinical trials at sites and managing clinical trials. On occasion, the Company
also provides other clinical trial
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services to meet specific Sponsor needs. The Company has managed trials which
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 identifies and recruits clinical research sites and
clinical investigators to participate in a clinical trial on behalf of a
Sponsor. A Sponsor may utilize certain site selection services, such as the
Company's abstract and survey to determine the specific interest of research
sites in a particular trial and anticipated evaluable patient population. The
Sponsor can use the results of the abstract and survey to determine the number
of sites required for a clinical trial and to predict whether the Company can
deliver the expected results.
Company-Owned Clinical Research Facilities
The Company's GFI subsidiary performs clinical research and provides
other clinical research services through its three research facilities for
conducting Phase II through Phase IV research (one facility also includes an 80
bed Phase I clinical research unit). 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 and clinical trial management. Additional
services include coordination of investigator meetings, the Institutional Review
Board ("IRB") approval process and other procedures that must be performed prior
to enrollment of patients into a study, and assistance in patient recruitment
and enrollment.
DataTRAK Services
DataTRAK will provide EDC services to Sponsors that will facilitate
rapid collection of clinical trial data. As a service provider, DataTRAK will
design electronic CRF's with validation routines and edit checks and train
appropriate investigative sites and Sponsors on the use of the electronic data
capture software and associated services. All clinical data collected from the
various sites for a given clinical trial will be reviewed for accuracy by
DataTRAK's QRC. DataTRAK will initiate a Site Certification Program, designed to
train sites on the DataTRAK(R) process.
OTC Services
The Company's WCE subsidiary provides contract research services on
pharmaceuticals, especially when being switched from prescription to OTC
products, and on medical devices, foods, and other products intended for broad
consumption. The contract research services provided by WCE include consultation
on and performance of studies necessary to switch prescription drugs to OTC
products, label comprehension evaluations, and consumer product testing.
CUSTOMERS AND MARKETING
Collaborative has served many leading pharmaceutical and biotechnology
companies and CRO's. Collaborative's business development strategy focuses on
marketing its clinical research expertise, as well as that of its Affiliated
Sites, its ability to gain timely access to patients with specific medical
conditions and its ability to rapidly and efficiently start up and manage
multi-site clinical research trials for Sponsors. Collaborative's sales staff
generally has scientific or pharmaceutical backgrounds and are located
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regionally throughout the United States. They are expected to provide Sponsors
with consultative selling support regarding Collaborative's capabilities and
services in the clinical research process. The Company concentrates a majority
of its marketing resources on direct selling to Sponsors. It also selectively
participates in scientific and medical meetings to promote its services and
occasionally uses direct mail and journal advertisements to build awareness of
its capabilities. DataTRAK markets its services through its United States and
European staff and through the Company's sales and marketing staff.
During each of the three years in the period ended December 31, 1997,
sales to companies in the pharmaceutical industry accounted for more than 69% of
the Company's revenue. During 1995 and 1996, respectively, sales to Merck & Co.,
Inc. accounted for approximately 76% and 22% 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. Bristol Myers
Squibb and Pharmacia & Upjohn each accounted for more than 10% of revenue during
1997. The extent to which the Company relies on sales to one customer varies
from period to period, depending upon the timing of new clinical research
contracts, the relationship between the Affiliated Sites' therapeutic expertise
and a Sponsor's specific therapeutic needs, the Company's ability to generate
new business, the timing and size of clinical trials, and other factors. Due to
the consolidation in the pharmaceutical industry and the Company's marketing
focus on the major pharmaceutical and biotechnology companies, management
expects continued concentration in its revenue in the future. It is not unusual
for companies involved in the placement and administration of clinical trials to
derive more than 10% of their revenue from a single customer. However, the
Company's small revenue base makes it more dependent on major customers than
many of the larger participants in the clinical research industry. The loss of
business from a significant customer could materially and adversely effect the
Company's revenue.
CONTRACTING AND BACKLOG
The Company's contracts provide a fixed price for each component or
service delivered. The ultimate contract value depends on such variables 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. As services are performed over the life of the
contract, revenue is earned under the percentage of completion method utilizing
units of delivery. Costs associated with contract revenue are recognized as
incurred. Cash flows vary with each contract, although generally a portion of
the contract fee is paid at the time the trial begins, with the balance paid as
pre-determined contract milestones are satisfied.
Generally, Sponsors may terminate a contract with the Company with or
without cause. In the event of termination, the Company is entitled to payment
for all work performed through the date of notice of termination and for 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, and decisions by the
Sponsor to de-emphasize or terminate either a particular trial or drug. A
Sponsor's decision to terminate a sizable trial in which the Company
participates could have a material adverse effect on the Company's backlog,
future revenue and profitability.
Backlog consists of anticipated revenue from letters of intent and
signed contracts yet to be completed. In certain cases, the Company will work on
a project prior to finalizing a letter of intent or contract. Such projects are
excluded from backlog until a definitive letter of intent or contract is
executed.
The Company's backlog is not necessarily a meaningful predictor of
future results. Contracts included in backlog are subject to termination or
delay at any time. There can be no assurance that the Company will realize
revenue from backlog or as to the amount of backlog that will be converted to
revenue within any fiscal period. Delayed contracts remain in the Company's
backlog until canceled. As
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of December 31, 1996 and 1997, the Company's backlog was $22.5 million and $25.9
million, respectively.
COMPETITION
The clinical research industry is highly fragmented and comprised of
several large, full-service CROs and many small CROs and limited service
providers. The major competitors in the industry include the research
departments of pharmaceutical companies, CROs and other SMOs. The Company
competes in this market on the basis of its ability to provide rapid access to
high-quality clinical investigators and patients through its Network of
Affiliated Sites. In addition, through DataTRAK, the Company will integrate
information technology to provide EDC and remote monitoring through its QRC in
order to further accelerate the clinical 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 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.
Further, the electronic data capture market, which is still developing,
is also highly fragmented. The major competitors include EDC software vendors,
clinical trial data service companies and in-house development efforts within
large pharmaceutical companies. There can be no assurance that the Company will
be able to capture or establish the market presence necessary to effectively
compete in this emerging sector of the clinical research industry.
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
products are safe and effective before broad public use. The Food and Drug
Administration ("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 appropriate regulatory authorities in other countries where
the Company offers its services. The level of regulation in other countries
generally has been less comprehensive than that present in the United States.
However, through the efforts of the International Committee on Harmonization,
the governing regulations of participating nations are moving toward
equivalence. Depending on the nature of services provided with respect to a
particular research trial, the Company may be required to comply with FDA
regulations governing such activities as selecting investigators, obtaining
documentation from investigators, verifying that patient informed consent is
obtained, monitoring the validity and accuracy of data, verifying drug
accountability and instructing investigators to maintain records and reports.
The Company must also maintain records for each study for specified periods for
inspection by the study Sponsor and the FDA. If FDA audits indicate that the
Company has failed to adequately comply with federal regulations and guidelines,
it could have a material adverse effect on the Company. In addition, the failure
of the Company to comply with applicable regulations could result in termination
of on-going research or the
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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 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 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 is
required to be performed within the United States on 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. After a drug is approved for marketing,
the FDA will often require Sponsors 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 NDA is submitted to the FDA. The NDA is a
comprehensive filing that includes the results of all pre-clinical and clinical
studies, with the majority of its clinical data derived from Phase II and Phase
III trials. In addition, the NDA contains information about the drug's
composition and the Sponsor's plans for producing, packaging and labeling the
product. The FDA's review process for an NDA can take anywhere from a few
months, for drugs related to life threatening conditions, to many years, with
the average review
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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.
When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the manufacturer to make the new
drug available to a larger number of patients through the regulated mechanism of
a Treatment Investigational New Drug ("TIND"). Although less scientifically
rigorous than a controlled clinical trial, a TIND trial may enroll and collect a
substantial amount of data from tens of thousands of patients.
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.
FDA Guidance for Industry: Computerized Systems Used in Clinical Trials
On June 18, 1997, the FDA issued draft guidelines, on the use of
computer systems in clinical trials, for review and comment by the public and
affected industries. The FDA draft includes guidelines related to standard
operating procedures, data entry, system design, security, system dependability
and controls, personnel training, records inspection, and certification of
electronic signatures. Based on its review of these draft guidelines, the
Company believes the DataTRAK(R) process for electronic data capture and
management is consistent with this draft guidance. Because the FDA's development
of this guidance is still in the early stages, the Company will continue to
monitor this guidance to ensure compliance.
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 clinical trial
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 Sponsors 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 the risk of liability associated with
clinical trials is mitigated by various regulatory requirements, including the
role of IRB's. 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. The FDA requires each human clinical trial to be reviewed
and approved by the IRB at each research site 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
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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.
In order to reduce its exposure to liability, the Company generally
obtains indemnification from Sponsors and, in some cases, from investigators and
Affiliated Sites contracted by the Company. The Affiliated Sites' agreement
obligates the Company to pursue contracts only with Sponsors that provide
indemnification for adverse outcomes, 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
negligence or misconduct. Furthermore, these indemnities are contractual
arrangements that are subject to negotiation, and the terms and scope of such
indemnities may vary. 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
indemnification depends on the financial viability of the indemnifying party,
there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. The financial position
of the Company could be materially adversely affected if the Company was forced
to undertake the defense of, or was found financially responsible for, claims
based upon the foregoing or related risks.
The Company 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 holds registered service marks incorporating the
Collaborative Clinical Research logo, the DataTRAK(R) process, and various
DataTRAK trademarks, including the DataTRAK EDC(TM) software. Through
acquisitions the Company holds additional registered service marks. The DataTRAK
EDC(TM) software is the foundation of the DataTRAK(R) process. 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
purchased or developed to date. The Company anticipates that DataTRAK will
constitute a material portion of its business in the future, and the
DataTRAK(R) process will become an important component of the Company's
business.
INFORMATION TECHNOLOGY
Information systems are an integral part of the services the Company
provides. The Company is reviewing its systems to assess the Year 2000 issue.
Management believes that neither the costs nor expenses of the Year 2000 issue
will be material to the Company. The Company's services are also dependent on
the systems used by its Affiliated Sites, Sponsors, and other customers and
vendors. Year 2000 issues encountered by these companies could have a material
adverse effect on the Company.
EMPLOYEES
As of January 31, 1998, the Company had approximately 150 full-time
employees, of whom eight had executive and managerial responsibilities. None of
the Company's employees are represented by a union. The Company considers
relations with its employees to be satisfactory.
The Company's growth continues to place significant demands on its
management resources. The success of the Company's business is dependent on the
services of its senior management team, which changed substantially in 1997. The
Company has employment agreements with all but one of its executive officers.
The loss of the services of any of its 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
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motivate 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, an 80 bed in-patient Phase I research facility. The Company also
leases property in two additional states and the United Kingdom, most of which
is used to conduct or manage clinical research projects. 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 September 5, 1997, a summons and complaint was filed by the Company
in the Netherlands against the shareholders of U-Gene Research B.V. for breach
of contract. The claim is for money damages for costs incurred and liquidated
damages related to an aborted acquisition of U-Gene Research B.V. To date,
responsive pleading by the defendants is pending.
On July 18, 1997, two former executive officers of the Company claimed
that their employment agreements were violated by the Company and, by letter,
each demanded payment from the Company of an amount equal to one year's annual
salary. The Company believes their claims are without merit, and is pursuing the
non-compete provisions of the employment contracts. Under the terms of their
employment agreements, the dispute will be resolved through arbitration. An
arbitration hearing was held on March 7, 1998 but to date, the arbitrator's
ruling has not been announced.
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, 1997.
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 42 President, Chief Executive Officer and Director
Herbert L. Hugill 49 Chief Operating Officer
Terry C. Black 40 Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
Patrick G. Chassaigne 45 President of DataTRAK, Inc.
Gregory A. Folz 40 Vice President of Marketing and Sales
Dr. Richard J. Kasmer 40 Vice President of Operations, General Counsel and
Assistant Secretary
Philip A. Stark 46 Vice President of Corporate Development
Dr. William H. Stigelman, Jr. 52 Vice President of Affiliated Site Relations
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
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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. Dr. Green is a graduate
of Purdue University (B.S.) and the University of Texas (Pharm.D.).
Herbert L. Hugill has served as the Company's Chief Operating Officer
since December 1997. Mr. Hugill is responsible for leading and managing
implementation of the Company's clinical business strategy on a worldwide basis.
From 1996 to 1997, Mr. Hugill was President and Chief Executive Officer and a
member of the Board of Directors of Mediscience Technology Corp., a development
stage, biomedical technology company. From 1985 through 1995 he was employed in
various senior management capacities at RpScherer Corporation where from 1991
through 1995 he was president of RpScherer North America, that firm's largest
operating division.
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 Chief Financial Officer for Action Auto Rental, Inc., a Cleveland,
Ohio based insurance replacement automobile rental company, from 1992 to 1994.
Before joining Action Auto Rental, Mr. Black served in a variety of financial
and accounting positions within the insurance replacement rental car industry.
In 1993, Action Auto Rental filed for protection from its creditors under
Chapter 11 of the United States Bankruptcy Code and was subsequently liquidated.
Patrick G. Chassaigne has served as the President of DataTRAK, Inc.
since July 1997. Mr. Chassaigne is responsible for the overall management of the
Company's DataTRAK subsidiary, including development of the marketing, strategic
planning and operating functions. Prior to joining the Company, Mr. Chassaigne
served as Director, Research and Technology Solutions in the Industry Expertise
Center of Digital Equipment Corporation in Littleton, Massachusetts. Over the
past sixteen years, he has held positions of increasing management
responsibility with the common function of delivering technology-based solutions
to Research and Development organizations in industries including
pharmaceuticals, chemicals, food, automotive and aerospace.
Gregory A. Folz has served as the Company's Vice President of Marketing
and Sales since September 1997. Mr. Folz is responsible for the strategic
marketing and business development initiatives for the Company. From June 1996
to September 1997, Mr. Folz served as the Executive Director of GFI. Prior to
joining the Company, Mr. Folz was an independent consultant providing strategic
marketing direction and research to GFI and other members of the healthcare
industry, including 20 major medical centers, health systems and managed care
organizations throughout the US.
Richard J. Kasmer, Pharm.D., J.D., has served as the Company's Vice
President of 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 responsible for managing the
Company's Affiliated Site operations. Prior to joining the Company, Dr. Kasmer
was employed by the VA Medical Center in Cleveland, Ohio for eight years and is
an established investigator with over 15 years of experience in Phase I through
Phase IV trials and has participated in over 80 individual investigations. Dr.
Kasmer is a graduate of Creighton University (Pharm.D.) and the Cleveland -
Marshall College of Law (J.D.).
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Philip A. Stark has served as the Company's Vice President of Corporate
Development since May 1997. Mr. Stark is responsible for direction and
negotiation of the Company's partnership, joint-venture, and merger and
acquisition activities. In addition, he oversees the Company's investor
relations program. Prior to joining the Company, Mr. Stark developed and
executed investor relations programs as a consultant. For nearly 20 years, Mr.
Stark worked as a banker, in corporate finance and as an investment banker.
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, including 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.
Dr. Stigelman is a graduate of the Massachusetts College of Pharmacy (B.S. and
M.S.) and the University of Texas (Pharm.D.).
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
("Nasdaq") 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 Nasdaq on that date. The following table sets forth, for the fiscal years
ended December 31, 1996 and 1997, 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
---- ---
1996
----
Second Quarter (from June 11, 1996) $ 15.00 $ 11.25
Third Quarter $ 15.25 $ 8.00
Fourth Quarter $ 15.50 $ 9.75
1997
----
First Quarter $ 12.75 $ 7.00
Second Quarter $ 8.25 $ 5.75
Third Quarter $ 7.38 $ 5.63
Fourth Quarter $ 6.63 $ 4.50
On February 27, 1998, the last sale price of the Common Shares as
reported by Nasdaq was $4.38 per share. As of February 27, 1998, there were 98
holders of record and approximately 1,100 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.
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue $ 1,423 $ 4,047 $ 10,453 $ 25,715 $ 17,327
Direct costs 975 2,908 8,491 17,976 12,637
-------- -------- -------- -------- --------
Gross profit 448 1,139 1,962 7,739 4,690
Selling, general and administrative expenses 686 1,386 2,770 6,141 10,009
Special items -- -- -- -- 2,995
Depreciation and amortization 118 59 62 606 1,015
-------- -------- -------- -------- --------
Income (loss) from operations (356) (306) (870) 992 (9,329)
Other income (expense) 5 92 117 1,038 1,888
-------- -------- -------- -------- --------
Income (loss) before income taxes (351) (214) (753) 2,030 (7,441)
Income tax expense (benefit) -- -- -- 383 (58)
-------- -------- -------- -------- --------
Net income (loss) $ (351) $ (214) $ (753) $ 1,647 $ (7,383)
======== ======== ======== ======== ========
Net income (loss) per share: basic $ (0.36) $ (0.13) $ (0.31) $ 0.36 $ (1.16)
======== ======== ======== ======== ========
Shares used in the computation of basic net
income (loss) per share 966 1,621 2,464 4,626 6,384
======== ======== ======== ======== ========
Net income (loss) per share: diluted $ (0.36) $ (0.13) $ (0.31) $ 0.33 $ (1.16)
======== ======== ======== ======== ========
Shares used in the computation of diluted net
income (loss) per share 966 1,621 2,464 5,052 6,384
======== ======== ======== ======== ========
December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 207 $ 4,105 $ 3,011 $ 34,683 $ 33,613
Working capital (deficit) (82) 3,879 2,961 39,626 33,021
Total assets 651 5,523 7,025 53,687 48,321
Long-term liabilities -- -- -- -- --
Retained earnings (accumulated deficit) (644) (858) (1,611) 36 (7,347)
Total shareholders' equity 30 4,004 3,323 49,548 42,350
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company is an SMO managing a clinical research network comprised of
over 540 Affiliated Sites. Collaborative also manages three owned clinical
research sites. Collaborative's revenue is derived by providing Sponsors with an
innovative, timely, cost effective and low risk means of selecting clinical
research sites and managing clinical trials as part of the pharmaceutical
product development process.
Since commencing operations in 1991, Collaborative has grown through a
combination of internal expansion and strategic acquisitions. Collaborative
acquired two companies in 1996, GFI and WCE. GFI conducts Phase I through IV
clinical research at the Company's three owned clinical research sites. WCE's
services include studies necessary to switch prescription drugs to OTC products,
label comprehension
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evaluations and consumer product testing. 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 $8.4 million of
goodwill in connection with the acquisitions. The Company amortizes goodwill
using the straight-line method over a period of 20 years.
The Company's wholly owned subsidiary, DataTRAK, was formed in 1996.
DataTRAK will provide certain electronic data management services, through its
EDC software and QRC, to improve quality, efficiency, and timeliness of the
clinical research process.
The Company's backlog at December 31, 1997 was $25.9 million, as
compared to backlog of $22.5 million at December 31, 1996. Backlog is composed
of a number of contracts, each with a different term and duration. As is
customary, these contracts are subject to modification and/or possible
cancellation. Therefore, the amount of backlog is not necessarily indicative of
the Company's future quarterly or annual revenues. The Company has taken several
steps to reorganize its sales and operating structure, however its future
financial performance continues to depend on its success in bringing in new
business and converting backlog into revenue. To that end, management expects
its financial performance in the first half of 1998 to continue to reflect the
weaknesses experienced in the second half of 1997, but believes the remainder of
the year will begin to evidence a turn-around in the Company's business.
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. Some of the reasons clinical trials may be terminated include
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, a Sponsor's decision to terminate or delay the trial could
have a material adverse effect on the Company's backlog, future revenue and
profitability.
The Company's quarterly results can fluctuate as a result of a number
of factors, including 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 to cancel or delay ongoing trials, the impact of acquisitions
made by the Company and other factors, many of which are beyond the Company's
control.
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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,
--------- ---------- ---------
1995 1996 1997
---- ---- ----
Revenue 100.0% 100.0% 100.0%
Direct costs 81.2 69.9 72.9
Gross profit 18.8 30.1 27.1
Selling, general and administrative expenses 26.5 23.9 57.8
Special items --- --- 17.3
Depreciation and amortization 0.6 2.3 5.8
Income (loss) from operations (8.3) 3.9 (53.8)
Other income 1.1 4.0 10.9
Income (loss) before income taxes (7.2) 7.9 (42.9)
Income tax expense (benefit) --- 1.5 (.3)
Net income (loss) (7.2) 6.4 (42.6)
- --------------
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenue decreased by $8.4 million, or 32.7%, from $25.7 million in 1996
to $17.3 million in 1997. The decrease was the result of a $12.8 million decline
in revenue from clinical trials conducted within the Company's Network of
Affiliated Sites, offset, in part, by the $4.4 million increase in revenue
attributable to operations acquired in 1996. The low level of revenue generated
by the Affiliated Sites was the result of the Company's inability to attract
sufficient new business and convert existing backlog into revenue during 1997.
Management has taken actions that it believes will result in growth in the
Company's level of backlog during 1998.
Direct costs include compensation and related fringe benefits for
non-administrative employees (including those 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 decreased
by $5.4 million, or 30.0%, from $18.0 million in 1996 to $12.6 million in 1997.
Direct costs increased as a percentage of revenue from 69.9% in 1996 to 72.9% in
1997. Of the $5.4 million decrease, $9.0 million was caused by the decline in
revenue generated by the Affiliated Sites, which was partially offset by an
increase of $3.6 million due to the GFI and WCE acquisitions. The increase in
direct cost percentage was the result of the Company's low level of revenue and
its subsequent inability to leverage fixed 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 $3.9 million, or 63.9%, from $6.1 million
in 1996 to $10.0 million in 1997. Of the $3.9 million increase, approximately
$3.3 million reflects normal ongoing expenses, including $1.0 million incurred
at acquired research facilities and $1.2 million associated with DataTRAK. The
$3.9 million increase also includes approximately $600,000 of expenses related
to terminated negotiations for potential acquisitions. As a percentage of
revenue, selling, general and administrative expenses increased from 23.9% in
1996 to 57.8% in 1997. The increase in selling, general and administrative
expenses as a percentage of revenue reflects the lower absorption of fixed
operating costs resulting from decreased revenues, as well as the impact of
additional expenses incurred to support the Company's efforts to rebuild sales
and backlog, and its strategic initiatives.
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Special items include charges of $3.0 million for costs associated with
exiting certain Company activities. The charges were recorded in the fourth
quarter of 1997. These charges relate to changes in DataTRAK's business
including the write off of software and licenses, and changes in other parts of
the Company's business, including the disposal of certain medical equipment,
computer equipment, software and licenses, and the closing of a leased facility.
Depreciation and amortization expense increased by $394,000 from
$606,000 in 1996 to $1.0 million in 1997. Of the $394,000 increase, $57,000
resulted from the depreciation of assets acquired with GFI and WCE, $133,000
resulted from the amortization of goodwill and $204,000 resulted from increased
capital expenditures.
Other income increased from $1.0 million in 1996 to $1.9 million in
1997. This was the result of a $791,000 increase in interest income on invested
cash (primarily the proceeds of the Company's initial public offering), and a
$93,000 decrease in interest expense. Interest expense for 1996 was related the
issuance of notes payable to the former shareholders of GFI, and borrowings
against the Company's line of credit. Also, there was a $33,000 increase in the
Company's share of Health Research Innovations L.L.C's. ("HRI") net loss for the
twelve months ended December 31, 1997. The HRI joint venture, between the
Company and Pharmaceutical Marketing Services, Inc., was terminated during the
second quarter of 1997.
As a result of the Company's net operating loss for the year ended
December 31, 1997, a $198,000 federal income tax benefit has been recorded at
December 31, 1997. This benefit represents the refund the Company is to receive
from its net operating loss carryback for federal income tax purposes. At
December 31, 1997, the Company has a net operating loss carryforward of
approximately $5.0 million which will expire in the year 2012. The Company's
federal tax benefit is offset by $140,000 of state income taxes for 1997.
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. 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 increased by $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 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
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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.
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, at
December 31, 1995, for federal income tax purposes during 1996.
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 received upon completion of negotiated performance milestones
throughout the life of the contract. Cash receipts do not necessarily correspond
to costs incurred or revenue recognized. The Company typically receives a low
volume of large-dollar receipts. Accounts receivable will fluctuate due to the
timing and size of cash receipts. Accounts receivable (net of allowance for
doubtful accounts) was $4.5 million at December 31, 1997 and $8.4 million at
December 31, 1996. Deferred revenue was $852,000 at December 31, 1997 and
$932,000 at December 31, 1996.
Cash and cash equivalents increased $872,000 during the year ended
December 31, 1997. This was the result of $1.6 million provided by investing
activities, offset by $704,000 used in operating activities. Cash used for
operating activities resulted primarily from the Company's net loss and working
capital needs offset by the decrease in accounts receivable. Investing
activities included net proceeds of $3.0 million from purchases and maturities
of short-term investments offset by $1.4 million used to purchase property and
equipment.
In January 1998, the Company announced the termination of its
technology alliance agreement with ISSC, a unit of IBM Global Services. The
alliance was formed in June 1996 to develop and market an electronic data
collection and project management system for use in clinical trials. During
1997, the Company invested $1.0 million in the technology alliance. As a result
of the termination of the agreement, the unamortized portion of the Company's
investment was written off in December 1997. The amount written off does not
include expenses incurred by the Company in connection with the technology
alliance throughout 1997. The Company and IBM Global Services disagree on a
number of issues concerning the parties' financial responsibilities in
connection with the termination of the alliance, and have engaged in discussions
concerning those matters. To date, those discussions have not resulted in an
acceptable resolution of these issues. The Company does not believe that it has
any continuing financial obligations to IBM Global Services and, based on
information known to date, does not believe that additional
18
21
expenditures associated with the termination of this alliance, if any, will have
a material adverse effect on the Company's results of operations and financial
condition.
In January 1998, DataTRAK purchased the EDC software known as OpusTWO
from EDS. The Company will be responsible for funding the future development and
testing of this software, which has been renamed DataTRAK EDC(TM). The Company
will continue to invest in the development of the DataTRAK(R) process. As
related to 1997 fourth quarter expense levels, additional expenses of $1.0 to
$1.5 million will be incurred throughout 1998 to build DataTRAK's service
infrastructure.
In March 1998, the Company announced a reorganization plan including a
reduction of its personnel. In connection with this plan, the Company will
record a charge of approximately $1.4 million in the first quarter of 1998 to
recognize costs associated with employee severance and other special items.
The Company anticipates that its capital expenditures for 1998 will be
approximately $2.0 million for its DataTRAK and clinical divisions. The
Company's principal cash needs on both a short-term and long-term basis are for
the funding of its operations, capital expenditure requirements, and the
development of its DataTRAK(R) process and service business. The Company
expects to continue expanding its operations through internal growth, joint
ventures and alliances, and after its turn-around has been accomplished,
through strategic acquisitions. 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 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, 1997). The Company's accounts
receivable are pledged as collateral on the line of credit. The line of credit
agreement also requires that the Company maintain investments of $2.0 million
with the bank. Of the $5.0 million line of credit, $2.0 million is considered to
be committed and is subject to renewal at January 31, 2000. The $3.0 million
uncommitted amount is subject to renewal at July 31, 1998.
As the Year 2000 approaches, an issue has emerged regarding how
existing application software and operating systems can accommodate this date
value. The Company is reviewing its systems to determine if any Year 2000
problems may occur. Management does not anticipate incurring any material
operating expenses or significant computer system investments to be Year 2000
compliant. However, Year 2000 issues incurred by the Company's Affiliated Sites,
Sponsors or other vendors and customers could indirectly affect the Company.
The Company believes that cash generated from operations, maturities of
short-term investments and amounts available under its line of credit will be
sufficient to fund its working capital and capital expenditure requirements for
the foreseeable future. However, selective acquisitions and joint ventures may
play a role in the Company's growth strategy. To the extent that the Company
were 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. 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
19
22
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 has 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 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 THE
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, conducting clinical trials and to establish a standardized EDC
and QRC process for collection and management of clinical research data
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. 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 DELAY OR 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 delay or 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 delay or
terminate clinical trials for several reasons, including unexpected results or
adverse patient reactions to a potential product, inadequate patient enrollment
or investigator recruitment, manufacturing problems resulting in shortages of a
potential product or decisions by the Sponsor to de-emphasize or terminate a
particular trial or drug. A Sponsor's decision to delay or 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.
20
23
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, 1997, sales to companies in the
pharmaceutical industry accounted for more than 69% of the Company's revenue.
During 1995 and 1996, respectively, sales to Merck & Co., Inc. accounted for
approximately 76% and 22% 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, 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 AND JOINT VENTURES
The Company has made several acquisitions and has begun a number of
joint ventures. Management expects to continue to seek and evaluate such
opportunities in the future. There can be no assurance that the Company will be
able to successfully integrate and profitably manage the businesses acquired and
joint ventures entered to date or that it will be able to identify, acquire,
successfully integrate or profitably manage additional acquisitions and joint
ventures without substantial costs, delays or other problems. In addition, there
can be no assurance that such endeavors will be profitable at the time of their
acquisition or that these businesses will achieve or maintain revenue and
profitability that justify the investment therein. Such endeavors involve a
number of special risks, including adverse 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, or the write off of assets with
diminished value, 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 1995, 1996 and 1997, services provided to CROs represented
approximately 6%, 7% and 12%, 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
21
24
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 affiliation agreements with each Affiliated Site. The
obligations of Affiliated Sites under the affiliation agreements are limited.
Affiliated Sites have full discretion as to whether to participate in clinical
research opportunities presented by the Company, are free to pursue research
opportunities presented to them from sources other than the Company and may
withdraw from the Network at any time.
DEPENDENCE ON KEY PERSONNEL
As of January 31, 1998, the Company had approximately 150 full-time
employees, of whom eight had executive and managerial responsibilities. The
Company's growth continues to place significant demands on its management
resources. The success of the Company's business is dependent on the services of
its senior management team, which changed substantially in 1997. The Company has
employment agreements with all but one of its executive officers. The loss of
the services of any of its executive officers could have a material adverse
effect on the Company. The Company's performance depends on its ability to
attract and retain qualified personnel. The level of competition among employers
for skilled personnel is high. There can be no assurance that the Company will
be able to continue to attract and retain qualified personnel.
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 an NDA 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 FDA's guidelines related to the use of computerized systems in
clinical trials are still in the early stages of development. There can be no
assurance that the DataTRAK(R) process can be kept in compliance with these
guidelines as they develop.
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 CROs and limited service
providers. The major competitors in the industry include
22
25
the research departments of pharmaceutical companies, CROs and SMOs. 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.
The electronic data capture market, which is still developing, is also
highly fragmented. The major competitors include EDC software vendors, clinical
trial data service companies and in-house development efforts within large
pharmaceutical companies. There can be no assurance that the Company will be
able to capture or establish the market presence necessary to effectively
compete in this emerging sector of the clinical research industry.
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 site 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 Company has significant involvement in the patient
treatment process at its owned research facilities. Accordingly, the Company's
risk of liability for malpractice is 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.
ANTI-TAKEOVER PROVISIONS, PREFERRED SHARE PURCHASE RIGHTS
The Company's Articles of Incorporation and By-Laws contain provisions
that may discourage a third party from acquiring, or attempting to acquire the
Company. These provisions could limit the price that certain investors might be
willing to pay for Common Shares of the Company's stock. In addition Preferred
Shares of the Company's stock can be issued by the Company's Board of Directors,
without shareholder approval, whether under the Company's shareholder rights
plan or for other uses determined by the Board. The issuance of Preferred Shares
may adversely affect the rights of common shareholders, the market price of the
Common Shares and may make it more difficult for a third party to acquire a
majority of the outstanding Common Shares of the Company. At the present time,
the Company does not plan to issue any Preferred Shares.
23
26
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, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
Quarterly results of operations for the year ended December 31, 1997
are included in Note 16 of the Consolidated Financial Statements.
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 28, 1998
(the "1998 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 1998 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 1998 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
1998 Proxy Statement.
24
27
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 1998 Proxy Statement.
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.
25
28
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 26, 1998
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/ Robert M. Stote Director
- --------------------------------
Robert M. Stote
/s/ Alan G. Walton Director
- --------------------------------
Alan G. Walton
Date: March 26, 1998
26
29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
F - 1
30
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, 1996
and 1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
January 30, 1998
F - 2
31
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
DECEMBER 31,
---------------------------------------
1996 1997
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 5,509,460 $ 6,381,512
Short-term investments 29,173,736 27,231,976
Accounts receivable, net 8,420,539 4,497,255
Taxes receivable -- 197,990
Notes receivable - officer -- 165,000
Prepaid expenses 661,292 517,510
------------------ ------------------
Total current assets 43,765,027 38,991,243
Property, plant and equipment
Equipment 1,839,614 2,050,715
Leasehold improvements 239,373 341,427
------------------ ------------------
2,078,987 2,392,142
Less accumulated depreciation 458,206 831,291
------------------ ------------------
1,620,781 1,560,851
Goodwill, less accumulated amortization of $288,000
and $714,000 as of December 31, 1996 and 1997, respectively 8,131,875 7,727,014
Other assets 168,910 41,530
------------------ ------------------
8,300,785 7,768,544
------------------ ------------------
Total assets $ 53,686,593 $ 48,320,638
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,900,060 $ 779,542
Accrued expenses 1,306,285 4,338,686
Deferred revenue 932,460 852,132
------------------ ------------------
Total current liabilities 4,138,805 5,970,360
Shareholders' equity
Serial Preferred Shares, without par value; authorized
1,000,000 shares; none issued -- --
Common Shares, without par value, authorized 15,000,000
shares; issued and outstanding 6,310,414 and 6,412,872
shares as of December 31, 1996 and 1997, respectively 49,511,964 49,697,057
Retained earnings (accumulated deficit) 35,824 (7,346,779)
------------------ ------------------
Total shareholders' equity 49,547,788 42,350,278
------------------ ------------------
Total liabilities and shareholders' equity $ 53,686,593 $ 48,320,638
================== ==================
See accompanying notes.
F - 3
32
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997
---- ---- ----
Revenue $ 10,452,920 $ 25,715,004 $ 17,327,232
Direct costs 8,490,465 17,976,472 12,637,223
------------------ ------------------ ------------------
Gross profit 1,962,455 7,738,532 4,690,009
Selling, general and administrative expenses 2,770,590 6,140,400 10,009,638
Special items - - 2,994,597
Depreciation and amortization 61,500 606,061 1,014,548
------------------ ------------------ ------------------
Income (loss) from operations (869,635) 992,071 (9,328,774)
Other income (expense):
Interest income 222,054 1,146,111 1,936,389
Interest expense - (93,330) -
Loss from joint venture (105,144) (15,042) (47,788)
------------------ ------------------ ------------------
Income (loss) before income taxes (752,725) 2,029,810 (7,440,173)
Income tax expense (benefit) - 383,200 (57,570)
------------------ ------------------ ------------------
Net income (loss) $ (752,725) $ 1,646,610 $ (7,382,603)
================== ================== ==================
Net income (loss) per share:
Basic
Net income (loss) per share $ (0.31) $ 0.36 $ (1.16)
================== ================== ==================
Weighted average shares outstanding 2,464,176 4,625,924 6,384,469
================== ================== ==================
Diluted
Net income (loss) per share $ (0.31) $ 0.33 $ (1.16)
================== ================== ==================
Weighted average shares outstanding 2,464,176 5,052,494 6,384,469
================== ================== ==================
See accompanying notes.
F - 4
33
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, 1995 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 -- -- -- -- -- --
Exercise of Common Share Options
Stock compensation
Net loss
----------- ---------- --------- -------------- -------------- ------------
BALANCE AT DECEMBER 31, 1997 -- $ -- -- $ -- -- $ --
=========== ========== ========= ============== ============== ============
COMMON SHARES RETAINED
ADDITIONAL ----------------------------- EARNINGS
PAID-IN NUMBER STATED (ACCUMULATED
CAPITAL OF SHARES AMOUNT DEFICIT) TOTAL
------------- ------------- -------------- ------------- -------------
BALANCE AT JANUARY 1, 1995 $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
Exercise of Common Share Options 102,458 170,737 170,737
Stock compensation 14,356 14,356
Net loss (7,382,603) (7,382,603)
------------- ------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 $ -- 6,412,872 $49,697,057 $ (7,346,779) $42,350,278
============= ============= ============== ============= =============
See accompanying notes.
F - 5
34
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ (752,725) $ 1,646,610 $ (7,382,603)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Equity loss in HRI 105,144 15,042 47,788
Depreciation and amortization 61,500 606,061 1,014,548
Provision for doubtful accounts 24,000 93,643 194,044
Accretion of discount on investments (143,526) (919,723) (1,078,577)
Stock compensation expense 71,730 29,069 14,356
Special items - - 2,994,597
Changes in operating assets and liabilities:
Accounts and taxes receivable (1,758,815) (2,628,285) 3,531,250
Prepaid expenses (623,770) 78,629 143,782
Other assets (19,653) (91,972) 85,062
Accounts payable and accrued expenses 2,245,428 (1,056,152) (188,122)
Deferred revenue (62,403) (199,964) (80,328)
------------ ------------ ------------
Net cash used in operating activities (853,090) (2,427,042) (704,203)
INVESTING ACTIVITIES
Purchases of property and equipment (241,722) (932,953) (1,422,979)
Purchases of businesses (net of cash acquired) - (7,278,038) (21,370)
Maturities of short-term investments 3,075,700 25,749,178 50,519,484
Purchases of short-term investments (1,798,072) (52,148,794) (47,499,147)
Investment in HRI (143,081) (27,225) (5,470)
------------ ------------ ------------
Net cash provided by (used in) investing activities 892,825 (34,637,832) 1,570,518
FINANCING ACTIVITIES
Borrowings on line of credit - 1,271,111 -
Payments on line of credit - (2,402,520) -
Issuance of notes receivable - officer - - (165,000)
Proceeds from issuance of shares 375 42,548,818 170,737
------------ ------------ ------------
Net cash provided by financing activities 375 41,417,409 5,737
------------ ------------ ------------
Increase in cash and cash equivalents 40,110 4,352,535 872,052
Cash and cash equivalents at beginning of year 1,116,815 1,156,925 5,509,460
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,156,925 $ 5,509,460 $ 6,381,512
============ ============ ============
Cash paid during the year for interest $ - $ 93,330 $ -
============ ============ ============
Cash paid during the year for income taxes $ - $ - $ 397,012
============ ============ ============
See accompanying notes.
F - 6
35
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Collaborative Clinical Research, Inc. (the "Company") is an SMO managing 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, timely, cost effective and low risk means of selecting clinical
research sites and managing clinical trials as part of the pharmaceutical
product development process.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 1995 1996 1997
-------- ---- ---- ----
A $7,935 $5,754 $*
B * 7,925 *
C * * 1,779
D * * 2,184
* Less than 10% of revenue.
CONCENTRATION OF CREDIT RISK
The Company is subject to credit risk through accounts receivable and short-term
investments. Credit risk with respect to accounts receivable is minimized
because of the diversification of the Company's customer base and its
geographical dispersion. The Company generally does not require collateral and
the majority of its accounts receivable is unsecured. Short-term investments are
placed with high credit-quality financial institutions or in short-duration with
high credit-quality debt securities. The Company limits the amount of credit
exposure in any one institution or type of investment instrument.
F - 7
36
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments in cash
equivalents are carried at cost which approximates market value.
PREPAID EXPENSES
Included in prepaid expenses is $108,300 and $126,600 at December 31, 1996 and
1997, 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 3 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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("Statement 128"), which replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the Statement 128 requirements.
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").
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
F - 8
37
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
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.
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.
FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value due to
the short-term of these financial instruments. Investments are reported at
amortized cost which approximates fair value.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Advertising expenses were $309,000, $173,000 and
$302,000 for 1995, 1996 and 1997, respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
reporting presentation.
2. SPECIAL ITEMS
Results of operations for 1997 include fourth quarter charges of $2,994,597 or
($0.47) per share for costs associated with exiting certain Company activities.
These charges were for the disposal of certain medical equipment, computer
software and licenses and the closing of a leased facility. In addition the
Company has made a provision for its best estimate of costs associated with the
termination of the technology alliance between IBM and the Company's wholly
owned subsidiary, DataTRAK, Inc.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31,
----------------- ----------------
1996 1997
---- ----
Billed $ 6,731,028 $ 3,527,078
Unbilled 1,953,011 1,280,177
Allowance for doubtful accounts (263,500) (310,000)
------------ ------------
$ 8,420,539 $ 4,497,255
============ ============
F - 9
38
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
4. NOTE RECEIVABLE - OFFICER
In September 1997, the Company loaned an officer of DataTRAK, Inc. $165,000 as
part of a relocation package. The loan bears interest at the applicable federal
rate, adjusted on a monthly basis. The note, plus any accrued but unpaid
interest, is payable on demand.
5. 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, 1996 and 1997). The Company's
accounts receivable are pledged as collateral on the line of credit. The line of
credit agreement also requires that the Company maintain investments of $2.0
million with the bank. Of the $5.0 million line of credit, $2.0 million is
considered to be committed and is subject to renewal at January 31, 2000. The
$3.0 uncommitted amount is subject to renewal at July 31, 1998.
6. SHORT-TERM INVESTMENTS
The following is a summary of held-to-maturity securities:
DECEMBER 31,
----------------------------------------------------------------------
1996 1997
---------------------------------- --------------------------------
AMORTIZED AMORTIZED
COST COST COST COST
---- ---- ---- ----
U.S. Treasury securities and
obligations of U.S. government
agencies $17,419,974 $17,640,993 $ 8,985,366 $ 9,132,615
Obligations of states and political
subdivisions 2,500,000 2,506,783 --- ---
U.S. corporate securities 8,893,180 9,025,960 17,728,082 18,099,361
----------- ----------- ----------- -----------
Total $28,813,154 $29,173,736 $26,713,448 $27,231,976
=========== =========== =========== ===========
7. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31, 1996 and 1997:
December 31, 1996 December 31, 1997
------------------------------------------------ -------------------------------------------
Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- -----
Federal $ 209,200 $ (10,000) $ 199,200 $ (197,990) $ --- $ (197,990)
State and local 185,700 (1,700) 184,000 140,420 --- 140,420
--------- ---------- ---------- ------------ --------- -----------
$ 394,900 $ (11,700) $ 383,200 $ ( 57,570) $ --- $ ( 57,570)
========= ========== ========== ============ ========= ===========
F - 10
39
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
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 and 1997 is
as follows:
December 31,
-------------------------------
1996 1997
----------- -----------
Income taxes at the United States statutory rate $ 706,800 $(1,897,400)
State and local income taxes 162,500 140,420
Net operating loss carryforwards (476,500) ---
Valuation allowance --- 2,396,000
Allowances and accruals (9,600) (696,590)
----------- -----------
$ 383,200 $ (57,570)
=========== ===========
At December 31, 1997 the Company had a net operating loss carryforward of
approximately $5.0 million which will expire in the year 2012. The significant
components of the Company's deferred tax assets (liabilities) are as follows:
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
---- ---- ----
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 568,000 $ --- $ 1,706,000
Allowances and accruals 79,000 106,000 873,000
Depreciation and amortization (9,000) (53,000) (130,000)
---------------- ---------------- ----------------
638,000 53,000 2,449,000
Valuation allowance (638,000) (53,000) (2,449,000)
---------------- ---------------- ----------------
Net deferred tax assets recorded $ --- $ --- $ ---
================ ================ ================
8. OPERATING LEASES
The Company leases certain office equipment and space. Rent expense relating to
these operating leases was approximately $123,000, $580,000 and $1,010,000 in
1995, 1996 and 1997, respectively. Future minimum lease payments for the Company
under noncancelable operating leases as of December 31, 1997 are as follows:
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------
1998 $ 867,400
1999 936,600
2000 912,400
2001 836,000
2002 342,000
------------
$3,894,400
============
9. 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
F - 11
40
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
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 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 and 1997, the Company had 1,000,000 Serial Preferred
Shares, without par value, authorized, with none outstanding.
10. SHARE OPTION PLANS
The Company has four share option plans. At December 31, 1997, the Company had
reserved 955,833 Common Shares for the exercise of Common Share options. The
weighted average contractual life of all options outstanding was 8.3 years as of
December 31, 1997. The range of exercise prices for all options outstanding at
December 31, 1997 was $0.15 to $15.00; the weighted average exercise price was
$5.29. At December 31, 1997 there were 196,500 options exercisable at a weighted
average price of $2.54.
The Amended and Restated 1994 Directors' Share Option Plan ("Director Plan") was
established by the Company in July 1994. The Director Plan provided 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 provided 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 the 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 $71,730 in 1995, $29,069 in 1996 and $14,356 in 1997. 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 $5,584 will be recognized through
1998. Subsequent to April 1995, all options to purchase Common Shares awarded
under the 1992 Plan were granted at exercise prices that represented the fair
market value of a Common Share on the date of grant. All options granted under
the 1992 Plan expire ten years after the grant date.
F - 12
41
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
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 50,000 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 557,667 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 - 13
42
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
Information regarding the Company's share option plans is summarized below:
1992 DIRECTOR 1996 1996 DIRECTOR
PLAN PLAN PLAN PLAN
---- ---- ---- ----
Outstanding at January 1, 1995 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
Granted --- --- 278,600 9,000
Exercised (102,458) --- --- ---
Canceled (94,000) (3,167) (40,200) (6,000)
-------- -------- -------- --------
Outstanding at December 31, 1997 213,742 6,833 332,200 12,000
======== ======== ======== ========
Options available to grant at:
December 31, 1997 --- --- 245,467 38,000
======== ======== ======== ========
Average option price per share:
At December 31, 1995 $ 1.85 $ 3.45 $ --- $ ---
At December 31, 1996 1.75 4.27 11.36 9.60
At December 31, 1997 0.70 4.54 7.74 8.93
Options exercisable:
At December 31, 1995 118,183 5,666 --- ---
At December 31, 1996 200,450 10,000 --- 9,000
At December 31, 1997 158,617 6,833 19,050 12,000
Average price of options granted:
At December 31, 1995 $ 4.35 $ 3.46 $ --- $ ---
At December 31, 1996 --- 9.60 11.36 9.60
At December 31, 1997 --- --- 6.95 8.25
Average price of options exercised:
At December 31, 1995 $ 0.15 $--- $--- $---
At December 31, 1996 0.37 --- --- ---
At December 31, 1997 1.67 --- --- ---
Average price of options canceled:
At December 31, 1995 $ 0.18 $--- $--- $---
At December 31, 1996 3.39 --- --- ---
At December 31, 1997 2.81 3.68 10.78 8.93
F - 14
43
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
11. 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 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 10).
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 for 1995, 1996 and 1997,
respectively: risk free interest rate of 5.0%, 5.0% and 6.0%, a volatility
factor of the expected market price of the Company's Common Shares of 0.53, 0.53
and 0.66, and a dividend yield of 0.0% for each year 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, 1996 and 1997 was
$2.73, $6.66, and $5.18, 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 1997
---- ---- ----
Pro forma net income (loss) $ (795,548) $ 1,410,028 $ (7,835,677)
Pro forma basic income (loss) per share $ (0.33) $ 0.31 $ (1.29)
Pro forma diluted income (loss) per share $ (0.33) $ 0.28 $ (1.29)
12. 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 or Common Shares of the
Company's stock. Matching and profit sharing contributions by the Company are
discretionary.
13. 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
F - 15
44
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
$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.
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 basic income (loss) per share $ (0.46) $ 0.24
Pro forma diluted income (loss) per share $ (0.46) $ 0.22
14. 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 marketed their health care data collection and analysis capabilities to the
health care industry. During 1997, the joint venture was terminated. The Company
accounted for its investment in HRI using the equity method.
15. NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement 128, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported net income (loss) per share. In addition, effective February
3, 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 98. SAB 98 revises the views of the staff contained in certain topics
of the staff accounting bulletin series, including SAB 83, "Earnings Per Share
Computations in an Initial Public Offering," to be consistent with the
provisions of Statement 128. All earnings per share amounts for all periods have
been restated to conform to the requirements of Statement 128 and SAB No. 98.
F - 16
45
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
The following table sets forth the computation of basic and diluted earnings per
share.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
---- ---- ----
Net income (loss) used in the calculation of
basic and diluted earnings per share $ (752,725) $ 1,646,610 $(7,382,603)
=========== =========== ===========
Denominator for basic net income (loss) per
share - weighted average Common Shares
outstanding 2,464,176 4,625,924 6,384,469
Effect of dilutive Common Share options and
warrants --- 426,570 ---
----------- ----------- -----------
Denominator for diluted net income (loss)
per share 2,464,176 5,052,494 6,384,469
=========== =========== ===========
Basic net income (loss) per share $ (0.31) $ 0.36 $ (1.16)
=========== =========== ===========
Diluted net income (loss) per share $ (0.31) $ 0.33 $ (1.16)
=========== =========== ===========
Certain Common Share options were excluded from the computation of diluted
earnings per share since the exercise prices were greater than the average
market price of Common Shares which would have an antidilutive effect on net
income (loss) per share.
16. QUARTERLY DATA (UNAUDITED)
Selected quarterly data is as follows (in thousands):
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: basic 0.02 0.09 0.11 0.09
Net income per share: diluted 0.02 0.08 0.11 0.09
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- -------- -----------
Revenue $ 4,578 $ 4,459 $ 3,647 $ 4,643
Gross profit 1,407 1,240 838 1,205
Loss from operations (797) (1,079) (1,957) (5,496)
Net loss (418) (487) (1,462) (5,016)
Net loss per share: basic (0.07) (0.08) (0.23) (0.78)
Net loss per share: diluted (0.07) (0.08) (0.23) (0.78)
Note: Net income per share for the year ended December 31, 1996 does not equal
the sum of the quarterly net income per share amounts because of the Company's
initial public offering in 1996.
F - 17
46
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 Credit Agreement between the Company and Key Bank, dated October 1, 1997
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 Richard J. Kasmer, dated
June 14, 1994 (A)
10.10 Employment Agreement between the Company and Jeffrey A. Green, dated
July 1, 1994 (A)
10.11 Employment Agreement between the Company and William H. Stigelman, Jr.,
dated July 15, 1994 (A)
10.12 Employment Agreement between the Company and Terry C. Black,
dated July 20, 1994 (A)
10.13 Employment Agreement between the Company and Philip A. Stark,
dated May 2, 1997 (E)
E - 1
47
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.14 Employment Agreement between the Company and Patrick G. Chassaigne,
dated July 6, 1997 (F)
10.15 Employment Agreement between the Company and Herbert L. Hugill,
dated December 8, 1997
10.16 Collaborative Clinical Research, Inc. Retirement Savings Plan (G)
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)
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) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended June 30, 1997
(Commission file No. 000-20699).
(F) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended September 30, 1997
(Commission file No. 000-20699).
(G) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-8 (Registration statement No.
333-26251).
E - 2