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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)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [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 26, 1999, the registrant had 6,430,872 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 $21,692,870 (based upon the closing price
of $4.13 per Common Share on the NASDAQ Stock Market, Inc. on February 26,
1999). For purposes of this calculation, the registrant deems the 1,178,361
Common Shares beneficially held by all of its Directors and executive officers
to be the Common Shares held by affiliates.
Except as otherwise stated, the information contained in this Form 10-K is
as of December 31, 1998.
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TABLE OF CONTENTS
Part I
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Shares and Related Shareholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 41
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41
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PART I
ITEM 1. BUSINESS
The Company
General. Collaborative Clinical Research, Inc. ("Collaborative" or the
"Company") operates two separate businesses within the clinical research
industry. Through its clinical business, the Company operates a multi-specialty
site management organization ("SMO") that provides clinical research services to
companies in the clinical pharmaceutical, biotechnology, contract research
organization ("CRO") and medical device research industries (collectively,
"Sponsors"). Through DataTRAK, Inc. ("DataTRAK"), the Company provides
electronic data capture ("EDC") and other services to assist Sponsors in
accelerating the completion of clinical trials. DataTRAK had no revenue prior
to 1998.
On December 21, 1998, the Company, GFI Pharmaceuticals, Inc. ("GFI")
Collaborative Holdings, Inc. ("WCE") and DataTRAK entered into an asset purchase
agreement with The West Company, Incorporated ("West") (the "Agreement"). The
Agreement contemplates the sale of the assets and liabilities of the Company's
Affiliated Site Network, and the clinical research operations conducted by GFI
and WCE (the businesses of the Affiliated Site Network, GFI and WCE are
hereinafter collectively referred to as the "Clinical Business") to West for
$15.0 million in cash, less applicable transaction costs, adjustments for
working capital and the collection of net accounts receivable (the "Proposed
Sale"). The Proposed Sale is subject to shareholder approval and, if approved,
is expected to be completed by the end of April 1999. The Proposed Sale is a
sale of a business and upon completion of the Proposed Sale, the Company will no
longer operate the Clinical Business.
The Proposed Sale would transfer substantially all of the Company's backlog
to West, and the Company would no longer generate revenue from the operation of
the Clinical Business. Consequently after the Proposed Sale, the DataTRAK
business will be the sole source of the Company's revenue, and approximately 95%
of the Company's assets, or approximately $39.0 million, will be held in cash,
cash equivalents and short-term investments. After the Proposed Sale, the
Company anticipates that DataTRAK's operating results will fluctuate
significantly from period to period. There can be no assurance of DataTRAK's
long-term future prospects.
If the Proposed Sale is approved by the Company's shareholders, the Company
will change its name to DataTRAK International, Inc. The change of the Company's
name is also subject to shareholder approval.
Overview of the Clinical Research Industry. The Company's Clinical Business
and DataTRAK serve companies in the clinical pharmaceutical, biotechnology, CRO
and medical device research industry. This industry is driven by regulatory
requirements that Sponsors adequately test new drugs and medical devices prior
to marketing. Competitive and cost-containment pressures are forcing the
pharmaceutical and biotechnology industries to become more efficient in
developing new products. To improve returns on research and development
investments, pharmaceutical and biotechnology companies are adding products to
their product pipelines and attempting to shorten the product development
timeline. These efforts have placed more drugs into the clinical development
process and have increased the pressure for Sponsors to develop products faster
in order 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.
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.
Employees. As of February 26, 1999, the Company had approximately 120
full-time employees. Upon the consummation of the Proposed Sale, the Company
will have 17 full-time employees, three of which will have executive and
managerial responsibilities. None of the Company's employees are represented by
a
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union. The Company considers relations with its employees to be satisfactory.
The Company has employment agreements with all of its executives. The loss of
the services of any of these executives could have a material adverse effect on
the business or operations of the Company. To address these risks, the Company
must, among other things, continue to attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks.
DataTRAK
General. In 1996, Collaborative formed DataTRAK, a wholly owned subsidiary.
In January 1998, DataTRAK purchased the software now known as DataTRAK EDC(TM)
from PadCom. DataTRAK EDC(TM) was developed to provide clinical research data to
Sponsors of clinical research trials faster and more efficiently than current
information-processing. DataTRAK provides information-processing capabilities
designed for the clinical research environment through its EDC technology and
quality review center ("QRC") process. 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 17,000 patients. To date, the
Company has devoted substantially all efforts related to DataTRAK to further
developing and improving the EDC technology employed by the DataTRAK software.
DataTRAK Software and Services. Currently, clinical research associates
visit research sites to review data manually entered on the paper case report
form for accuracy and integrity. During these physical visits, the research
associate must review each page of each case report form. These monitoring
visits may last several days, and corrections to the case report forms are
frequently required before the data can be delivered 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 case report form pages are physically
transferred to a central location where the data is then entered into a database
for statistical compilation. Using this 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 nine months. Such delays are
significant because errors or trends may not be detected until long after the
interaction between patient and investigator.
DataTRAK EDC(TM) is a technology platform that consists of Windows(TM)
compatible software and intranet hardware designed to assist Sponsors in
starting and finishing their clinical trials on a more timely basis. The
DataTRAK combination of software and hardware expedites the data collection and
reporting process during a clinical trial. In addition to providing the DataTRAK
technology, DataTRAK is also a service business that offers electronic data
collection and clinical trial data management capabilities across numerous
research sites. DataTRAK's objective is to improve the traditional process of
collecting clinical research and noninterventional health care data by providing
cleaner data more quickly than what is available in a paper environment.
The DataTRAK system consists of five database modules designed for flexible
adaptation to the clinical research process. DataTRAK initially provides a set
of electronic data forms that can be modeled to suit the needs of the clinical
trial. Each form is then made available through data entry capability to each
research site. Once clinical trial data has been entered the data is processed
and reviewed either at DataTRAK's centrally located QRC or at the Sponsor. After
the data is reviewed and cleansed of all entry errors, DataTRAK's report
capability can be accessed by Sponsors and investigators to generate customized
reports.
Finally, DataTRAK's export feature allows completed data and reports to be
transmitted directly to a Sponsor's in-house database.
Under this model, research data is collected more quickly and with greater
accuracy than physical review of paper reports. The QRC largely replaces
traditional, paper-based forms of monitoring. Experienced clinical research
associates review the electronic data as it comes in to a central data
repository, reviewing medical alerts, protocol violations and recurring errors.
They review the incoming data for trends and communicate their findings
electronically to the clinical research site and/or the Sponsor. Once the case
report form data has been reviewed to correct errors it is integrated directly
into a Sponsor's database in
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Sponsor specified formats. Clinical trial data is transmitted to DataTRAK's QRC
or exported to a Sponsor's database through a global, secure intranet. In 1998,
the Company developed a web-compatible version of the DataTRAK EDC(TM) software.
To date, DataTRAK has not recognized any revenue from its QRC services.
In October 1998, an international pharmaceutical manufacturer presented
clinical metrics from its use of DataTRAK EDC(TM) in a multicenter,
international clinical trial involving 200 patients. Compared to a traditional
paper model in a similar trial of size and complexity, the clinical study showed
that DataTRAK EDC(TM) reduced overall trial duration by 30% and improved the
"cleanliness" of the data through a significant reduction in queries by 86%. The
Company believes that, by automating these procedures, the DataTRAK system can
be a timesaving component of the drug development process. DataTRAK can provide
any Sponsor or SMO with the DataTRAK(R) process as a competitive advantage by
accelerating the review and processing of clinical trial data.
Customers and Marketing. DataTRAK's market is largely comprised of
Sponsors. In connection with the Company's purchase of the software now known as
DataTRAK EDC(TM), the Company acquired agreements with a European Sponsor
licensing the use of DataTRAK EDC(TM) in a clinical trial presently underway in
Europe. Although the Company has not developed a defined marketing strategy, it
expects to market its software and services through DataTRAK's sales and
marketing staff located in the United States and Europe. Through DataTRAK's
marketing efforts, four large pharmaceutical companies have been identified who
are now seeking a worldwide EDC solution for their clinical trials. Since the
market for EDC in general and for DataTRAK specifically has been an emerging
one, the effectiveness of DataTRAK's marketing efforts with Sponsors has been
limited. However, DataTRAK has selectively participated in scientific and
medical meetings to promote its services and has occasionally used direct mail
and journal advertisements to build awareness of its capabilities. During the
year ended December 31, 1998, Bayer accounted for all of DataTRAK's revenue
totaling $130,000.
To assess the market potential of its DataTRAK EDC(TM) technology, the
Company hired an independent consulting firm in August 1998 to survey
pharmaceutical and biotechnology companies concerning their interest in adopting
EDC for clinical trials. Thirty-five senior level personnel from twenty-five
companies participated in the survey, which was completed in October 1998. The
results of this survey indicate that thirty-four out of thirty-five company
representatives feel that EDC will replace the pharmaceutical industry's current
paper method of data collection and monitoring. Nineteen of the twenty-two
respondents, from companies currently without EDC capabilities, stated that
their companies were going to make a commitment towards EDC within the next
twelve to twenty-four months. In the survey, the majority of Sponsors believed
that EDC will decrease the time and cost of clinical research and development.
The EDC market has been slow to develop. Most EDC vendors have
insignificant revenues and are classified as start-ups. The growth of the
Internet over the past two years has drastically altered business strategies and
pricing models in this specific sector. Nonetheless, the Company believes that
automation of some sort is inevitable, and that DataTRAK EDC(TM) can be
competitive in this emerging marketplace. The product is fully validated,
web-enabled, has multilanguage capability which has been utilized in actual
clinical trials, has been deployed in more than 30 studies involving a total of
17,000 patients, has international experience, and possesses sponsor-published
metrics documenting clinical trial acceleration and enhancement of quality
through significant reductions in queries.
Contracting and Backlog. DataTRAK contracts provide a fixed price for each
component or service to be delivered. Services provided by DataTRAK that are in
addition to those provided for in its contracts are billed on a fee for service
basis for services completed. Generally, these contracts range in duration from
twelve to eighteen months. The ultimate contract value is dependent upon the
length of the customer's use of DataTRAK EDC(TM) and the services provided by
DataTRAK. As services are performed over the life of the contract, revenue is
recognized under the percentage of completion method utilizing units of
delivery. Costs associated with contract revenues are recognized as incurred.
These contracts can be terminated at any time
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by the Sponsor with or without cause. DataTRAK is entitled to payment for all
work performed through the date of notice of termination and for recovery of
some or all costs incurred to terminate a contract. The termination of a
contract will not result in a material adjustment to revenue or costs previously
recognized.
DataTRAK is also a seller and licenser of software. Generally, revenue is
recognized upon delivery of sold software. Licensing revenue is recognized
ratably over the life of the license. To date DataTRAK has not recognized any
revenue from software sales.
Backlog consists of anticipated revenue from letters of intent and signed
contracts yet to be completed. DataTRAK's backlog at December 31, 1998 was
$30,000. DataTRAK'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. The Company expects that the entire $30,000 backlog will be converted
to revenue during 1999.
Competition. DataTRAK competes within the clinical research and the EDC
markets. Both of these industries are highly competitive and fragmented. In
addition, the EDC industry is currently emerging and is characterized by rapidly
evolving technology. The Company expects that DataTRAK will compete within this
market on the strength of its functionality, its design architecture and its
data entry and review tools, which the Company believes equal or exceed those
available in the market. The Company also believes that DataTRAK may enhance its
competitive strength through the formation of strategic alliances with
established industry organizations. While the Company has received expressions
of interest from various parties in establishing such relationships, it is not
engaged in any discussions concerning a sale or merger of the Company.
DataTRAK's competitors within these fields consist of large, full-service
CROs, large information industry players and smaller, limited service providers.
DataTRAK's major competitors include software vendors specializing in EDC,
clinical trial data service companies and large pharmaceutical companies
currently developing their own in-house technology. Also, many current and
potential future competitors have or may have substantially greater financial
and technical resources, greater name recognition and more extensive customer
bases that could be leveraged, thereby gaining market share or product
acceptance to the Company's detriment. There can be no assurance that DataTRAK
will be able to capture or establish the market presence necessary to
effectively compete in this emerging sector of the clinical research industry.
The Company is aware of other EDC systems that compete or, in the future,
may compete directly with DataTRAK EDC(TM). The Company is also aware of other
current or developing technologies that provide some of the functionality of the
DataTRAK(R) process. There are other companies that have developed or are in the
process of developing technologies that are or, in the future, may be the basis
for competitive products in the clinical research EDC market. Some of those
technologies may have an entirely different approach or means of accomplishing
the desired effects of DataTRAK EDC(TM). There can be no assurance that either
existing or new competitors will not develop products that are superior to or
that otherwise achieve greater market acceptance than DataTRAK EDC(TM). In
addition, the Company believes that certain large players in the information
technology industry may be forming alliances and attempting to capitalize on the
data delivery options offered by the Internet. To the extent that DataTRAK's
approach to EDC may gain market acceptance, there can be no assurance that
larger players in the information technology industry will not develop competing
technology, nor as to the effect of such competing technology on DataTRAK's
operations.
Regulatory Matters. On June 18, 1997, the United States Food and Drug
Administration (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
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Company believes DataTRAK EDC(TM) is consistent with this draft guidance.
Because the FDA's development of this guidance is still in the early stages, no
assurance can be made that DataTRAK EDC(TM) will remain consistent with the
FDA's requirements. Any release of final FDA guidance that is significantly
inconsistent with the design of DataTRAK EDC(TM) may have a material adverse
effect on the business and operations of DataTRAK. The Company intends to
continue to monitor this guidance to ensure compliance.
Potential Liability and Insurance. Clinical pharmaceutical and medical
device research requires the review and handling of large amounts of patient
data. Potential liability may arise from a breach of contract or a loss of or
unauthorized release of clinical trial data. To date, DataTRAK has not received
any claims resulting from its services. However, the Company maintains an errors
and omissions professional liability insurance policy in amounts it believes to
be sufficient to cover claims that may be brought against DataTRAK. There can be
no assurance that this coverage will be adequate, or that insurance coverage
will continue to be available to DataTRAK.
Patents and Trademarks. The Company holds registered service marks
incorporating the DataTRAK(R) process, and various DataTRAK trademarks,
including the DataTRAK EDC(TM) software. The DataTRAK EDC(TM) software is the
foundation of the DataTRAK(R) process. The Company does not own any patents
relating to DataTRAK. Historically, the Company believed that its ability to
attract and retain highly skilled employees and manage the growth of its
business was more important to its performance than any intellectual property
rights that it has purchased or developed to date. However, upon the
consummation of the Proposed Sale, DataTRAK will become the sole component of
the Company's business, and intellectual property rights in DataTRAK will be
highly significant to the continued operation and development of the DataTRAK
business.
The Clinical Business
General. The Company was founded in 1991 as an Ohio corporation. Since
then, the Clinical Business, through the Company's Affiliated Site Network, has
assisted Sponsors in conducting the clinical research necessary to obtain
regulatory approval for new drugs and provided an innovative strategy for
developing and marketing a clinical research site management organization.
Collaborative acquired GFI and WCE in 1996. GFI conducts Phase I clinical
research at a Company-owned clinical research site. 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.
The Clinical Business assists Sponsors through its Affiliated Site Network,
in identifying and recruiting investigators, initiating clinical trials at
clinical research sites and managing clinical trials. The Clinical Business also
performs clinical research trials and provides other related research services.
The Clinical Business has managed trials ranging in size from single site trials
involving fewer than ten patients to a 300-site trial involving 3,000 patients.
The Affiliated Site Network. The Clinical Business's Affiliated Site
Network provides a clinical research model that responds to Sponsors' needs to
bring new products to market faster. Each Affiliated Site, although not owned by
the Company, is affiliated with the Company through a written affiliation
agreement (the "Affiliation Agreement"). Under the terms of the Affiliation
Agreement the sites agree to consider clinical research business opportunities
presented to them by Collaborative. The sites have no obligation to accept any
research business, but are restricted from independently pursuing any business
opportunities presented to them by the Company. The sites also agree not to
affiliate with another network of research sites during the term of the
Affiliation Agreement and for a period of 6 to 12 months after termination of
the Affiliation Agreement. Through the over 450 sites in the Affiliated Site
Network, the Clinical Business has the capacity to provide Sponsors with rapid
access to over 3,700 principal investigators. 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.
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The Affiliated Site Network consists of six therapeutic-focused
sub-networks that provide Phase II, III and IV clinical research services. The
Clinical Business is capable of using research sites outside of its Affiliated
Site Network if requested by the Sponsor. The Clinical Business regularly
updates its demographic database on each Affiliated Site.
The Clinical Business's network approach to clinical research 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.
GFI Pharmaceutical Services. GFI performs clinical research and
provides other clinical research services through its 80-bed facility located in
Evansville, Indiana for conducting Phase I through Phase IV research. 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.
WCE Clinical Evaluations. WCE 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.
The Clinical Business provides a variety of clinical trial management
services, whether clinical trials are performed at Affiliated Sites or
company-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.
Customers and Marketing. The Clinical Business has provided services
for many leading pharmaceutical and biotechnology companies and CROs. Its sales
personnel generally have scientific or pharmaceutical backgrounds and are
located regionally throughout the United States. The Clinical Business
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.
During each of the three years in the period ended December 31, 1998,
sales to companies in the pharmaceutical industry accounted for more than 72% of
the Clinical Business's revenue. During 1996, sales to Merck & Co., Inc. and Dey
Laboratories accounted for 22% and 31% of the Clinical Business's total revenue.
Other customers in the pharmaceutical industry have from time to time accounted
for more than 10% of the Clinical Business's annual revenue. Bristol Myers
Squibb and Pharmacia & Upjohn each accounted for more than 10% of revenue during
1997. During 1998, Procter & Gamble and Hoechst Marion Roussell, Inc. each
accounted for more than 10% of revenue. The extent to which the Clinical
Business 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.
Contracting and Backlog. The Clinical Business'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. All amounts received are recorded as a liability
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under "deferred revenue" until work has been completed and revenue has been
recognized. 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.
Backlog consists of anticipated revenue from letters of intent and
signed contracts yet to be completed. 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 of December 31, 1997 and 1998, the
Company's backlog was $25.9 million and $15.8 million, respectively. Of the
$15.8 million backlog at December 31, 1998, the Company expects that $10.4
million will be converted to revenue subsequent to 1999.
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 SMOs. The Clinical Business
competes in this market on the basis of its ability to provide rapid access to
high quality clinical investigators and patients through its Affiliated Site
Network. Many of the Clinical Business's competitors have substantially greater
financial and other resources than the Clinical Business's, and there can be no
assurance of the Clinical Business's ability to continue to compete effectively
with these larger competitors. To the extent the Clinical Business'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 Clinical Business's operations. The Clinical Business may also face
competition from other networks of research sites in the recruitment of
potential Affiliated Sites.
Regulatory Matters. The clinical investigation of new pharmaceutical
and biotechnology products is highly regulated. The FDA has promulgated
regulations and guidelines pertaining to applications to initiate trials of new
compounds, approval and conduct of studies, report and record retention,
informed consent, applications for approval of new compounds and post-marketing
requirements. The services provided by the Clinical Business are ultimately
subject to FDA regulation. If FDA audits indicate that the Clinical Business 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
Clinical Business to comply with applicable regulations could result in
termination of on-going research or the disqualification of data, either of
which could also have a material adverse effect on the Clinical Business's
results of operations, financial condition and reputation.
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. To date, the Company has not received any claims resulting
from either the testing of new drugs or professional malpractice. In order to
reduce its exposure to liability, the Clinical Business generally obtains
indemnification from Sponsors and, in some cases, from investigators and
Affiliated Sites contracted by the Clinical Business. The value of the
indemnification depends on the financial viability of the indemnifying party. In
order for such indemnification to be valid, the Clinical Business and its
employees and agents must act within the bounds of specific procedural
requirements governing the conduct of the clinical trial. 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 to cover claims that may be brought against the Clinical Business.
However, there can be no assurance that this coverage will be adequate, or that
insurance coverage will continue to be available to the Clinical Business.
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ITEM 2. PROPERTIES
The Company presently maintains its executive, DataTRAK and Affiliated Site
Network offices in approximately 9,000 square feet of space in Cleveland, Ohio
pursuant to a lease with an unaffiliated third party. The Company also maintains
a lease of approximately 7,000 square feet of office space in Bonn, Germany for
its DataTRAK GmbH operations.
The Clinical Business presently leases approximately 32,000 square feet of
office and medical space in Evansville, Indiana, housing, among other things, an
80 bed in-patient Phase I research facility for its GFI operations. WCE operates
from approximately 7,600 square feet of office space in Indianapolis, Indiana.
The Affiliated Site Network shares 9,000 square feet of leased office space with
the Company's corporate headquarters and DataTRAK operations in Cleveland, Ohio.
Upon completion of the Proposed Sale, the GFI and WCE leases will be assigned to
West. The Company will sublet to West approximately 4,500 square feet of office
space in Cleveland, Ohio at terms substantially similar to its current lease
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. Responsive
pleadings by the defendants were filed on March 12, 1999. The Company is
currently reviewing these pleadings.
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. On June 8, 1998, the Company reached a settlement with the two former
executive officers. The Company has provided for this settlement in its 1998
results of operations.
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, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded on The Nasdaq National Market
("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, 1997 and 1998, 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
------ -----
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
1998
- ----
First Quarter $ 5.25 $3.75
Second Quarter $ 4.75 $4.06
Third Quarter $ 4.38 $2.69
Fourth Quarter $ 4.31 $2.50
On February 26, 1999, the last sale price of the Common Shares as
reported by Nasdaq was $4.13 per share. As of February 26, 1999, there were
86 holders of record and approximately 1,200 beneficial holders of the Common
Shares.
The Company has never declared or paid cash dividends on its Common
Shares. 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. The Board of Directors expects
to distribute some portion of the Company's retained cash after the Proposed
Sale to the Company's shareholders or offer to repurchase some of the Company's
outstanding Common Shares.
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenue $ 4,047 $10,453 $25,715 $ 17,327 $ 13,226
Direct costs 2,908 8,491 17,976 12,637 10,511
------- ------- ------- -------- --------
Gross profit 1,139 1,962 7,739 4,690 2,715
Selling, general and administrative expenses 1,386 2,770 6,141 10,009 8,969
Impairment charge --- --- --- --- 6,056
Special items --- --- --- 2,995 1,998
Depreciation and amortization 59 62 606 1,015 1,155
------- ------- ------- -------- --------
Income (loss) from operations (306) (870) 992 (9,329) (15,463)
Other income (expense) 92 117 1,038 1,888 1,467
------- ------- ------- -------- --------
Income (loss) before income taxes (214) (753) 2,030 (7,441) (13,996)
Income tax expense (benefit) --- --- 383 (58) 80
------- ------- ------- -------- --------
Net income (loss) $ (214) $ (753) $ 1,647 $ (7,383) $(14,076)
======= ======= ======= ======== ========
Net income (loss) per share: basic $ (0.13) $ (0.31) $ 0.36 $ (1.16) $ (2.19)
======= ======= ======= ======== ========
Shares used in the computation of basic net
income (loss) per share 1,621 2,464 4,626 6,384 6,422
======= ======= ======= ======== ========
Net income (loss) per share: diluted $ (0.13) $ (0.31) $ 0.33 $ (1.16) $ (2.19)
======= ======= ======= ======== ========
Shares used in the computation of diluted net income
(loss) per share 1,621 2,464 5,052 6,384 6,422
======= ======= ======= ======== ========
Supplemental pro forma net loss (a) $ (3,946)
========
Supplemental pro forma net loss per share:
basic and diluted (a) $ (0.61)
========
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments $ 4,105 $ 3,011 $ 34,683 $33,613 $ 26,693
Working capital 3,879 2,961 39,626 33,021 24,489
Total assets 5,523 7,025 53,687 48,321 33,540
Long-term liabilities --- --- --- --- ---
Retained earnings (accumulated deficit) (858) (1,611) 36 (7,347) (21,423)
Total shareholders' equity 4,004 3,323 49,548 42,350 28,238
Book value per common share $ 1.63 $ 1.29 $ 7.85 $ 6.60 $ 4.40
Pro forma book value per common share (b) $ 6.18
Cash dividends declared --- --- --- --- ---
(a) Gives effect to the Proposed Sale as if it had occurred at the beginning of
1998.
(b) Gives effect to the Proposed Sale as if it had occurred on December 31,
1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Collaborative operates two separate businesses within the clinical research
industry. Through its Clinical Business, the Company operates a multi-specialty
SMO that provides clinical research services to companies in the clinical
pharmaceutical, biotechnology, CRO and medical device research industries.
Through DataTRAK, the Company provides EDC and other services to assist Sponsors
in accelerating the completion of clinical trials. DataTRAK had no revenue prior
to 1998.
On December 21, 1998, the Company signed the Agreement with West providing
for the sale of assets of the Company related to the Clinical Business. The sale
is subject to shareholder approval and, if approved, is expected to be completed
by the end of April 1999. Upon completion of the Proposed Sale, the Company will
no longer operate the Clinical Business.
The Proposed Sale would transfer substantially all of the Company's backlog
to West, and the Company would no longer generate revenue from the operation of
the Clinical Business. Consequently after the Proposed Sale, the DataTRAK
business will be the sole source of the Company's revenue, and approximately 95%
of the Company's assets, or approximately $39.0 million, will be held in cash,
cash equivalents and short-term investments. After the Proposed Sale, the
Company anticipates that DataTRAK's operating results will fluctuate
significantly from period to period. There can be no assurance of DataTRAK's
long-term future prospects.
The discussion that follows highlights the business conditions and certain
financial information specific to each of the Company's two business segments.
Clinical Business. The Clinical Business provides services to three
segments of the pharmaceutical and biotechnology industries. Through WCE, it
provides clinical research services relating to the reclassification of
prescription drugs into drugs available for OTC purchase and other OTC services.
In addition, the Clinical Business provides phase I research services from its
80-bed clinic at GFI. Finally, through its Affiliated Site Network which is
comprised of six therapeutically focused sub-networks drawn from over 450
affiliated research sites ("Affiliated Sites"), it provides phase II, III, and
IV research services. The Company has no ownership interest in any of its
Affiliated Sites.
The Clinical Business enters into contracts that 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, these 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. Pass-through costs that are paid directly by Sponsors,
and for which the Company does not bear the risk of economic loss, are excluded
from revenue. These clinical trial 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.
Contracts in the Clinical Business may generally 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.
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14
The net loss of the Clinical Business was $2.0 million, including a special
items charge of $260,000, for the year ended December 31, 1997 and $10.1 million
for the year ended December 31, 1998, including special items and impairment
charges totaling $7.3 million.
The Company's backlog at December 31, 1998, substantially all of which
relates to the Clinical Business, was $15.8 million, as compared to backlog of
$25.9 million at December 31, 1997. During 1998, a large contract, which had not
been performing as expected, together with several smaller contracts were
removed from backlog. The removal of these contracts reduced backlog by $16.9
million. The current backlog reflects the addition of $19.0 million of new
backlog during 1998. Other miscellaneous contract adjustments had the effect of
increasing backlog by $1.0 million. Of the $15.8 million backlog at December 31,
1998, the Company expects that $10.4 million will be converted to revenue
subsequent to 1999.
DataTRAK Business. Collaborative's wholly owned subsidiary, DataTRAK, uses
the software known as DataTRAK EDC(TM) to provide EDC and technology services to
Sponsors in order to assist in the more timely completion of clinical trials.
The Company is currently developing this business, has recognized minimal
revenue to date, and has experienced significant losses and negative cash flow
from operations since beginning operations in 1997. DataTRAK had no operating
results during 1996. During the year ended December 31, 1997, DataTRAK had no
revenue and a net loss of $3.9 million, including a special items charge of $2.7
million. For the year ended December 31, 1998, DataTRAK's net loss was $2.7
million, including special items charges of $161,000. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
DataTRAK(R) process.
DataTRAK contracts provide a fixed price for each component or service to
be delivered. Services provided by DataTRAK that are in addition to those
provided for in its contracts are billed on a fee for service basis for services
completed. Generally, these contracts range in duration from twelve to eighteen
months. The ultimate contract value is dependent upon the length of the
customers use of DataTRAK EDC(TM) and the services provided by DataTRAK. As
services are performed over the life of the contract, revenue and direct costs
of revenue are recognized under the percentage of completion method utilizing
units of delivery. Costs associated with contract revenues are recognized as
incurred. These contracts can be terminated by the Sponsor with or without
cause. DataTRAK is entitled to payment for all work performed through the date
of notice of termination and for recovery of some or all costs incurred to
terminate a contract. The termination of a contract will not result in a
material adjustment to revenue or costs previously recognized.
DataTRAK is also a seller and licenser of software. Generally, revenue is
recognized upon delivery of sold software. Licensing revenue is recognized
ratably over the life of the license. To date DataTRAK has not recognized any
revenue from software sales.
Since its purchase of the DataTRAK EDC(TM) software, in January 1998,
DataTRAK has recorded revenue related to two fixed unit price clinical trial
contracts. At December 31, 1998, DataTRAK's backlog, related to one contract,
was $30,000. In the future DataTRAK may also record revenue related to the sales
of software. Due to DataTRAK's early stage of development and its low level of
backlog, there can be no assurance as to its future levels of revenue.
12
15
Results of Operations
The following tables set forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Operations, expressed in thousands
by line of business.
Year ended December 31, 1998
Other
Clinical DataTRAK Corporate
Business Business Items Total
-------- -------- -------- --------
Revenue $ 13,094 $ 132 $ ---- $ 13,226
Direct costs 10,047 464 ---- 10,511
-------- ------- ------- --------
Gross profit (loss) 3,047 (332) ---- 2,715
Selling, general and
administrative expenses 4,898 1,839 2,232 8,969
Impairment charge 6,056 ---- ---- 6,056
Special items 1,245 161 592 1,998
Depreciation and amortization 685 359 111 1,155
-------- ------- ------- --------
Loss from operations (9,837) (2,691) (2,935) (15,463)
Other income (expense) (212) ---- 1,679 1,467
-------- ------- ------- --------
Loss before income taxes (10,049) (2,691) (1,256) (13,996)
Income tax expense 80 ---- ---- 80
-------- ------- ------- --------
Net loss $(10,129) $(2,691) $(1,256) $(14,076)
======== ======= ======= ========
Year ended December 31, 1997
Other
Clinical DataTRAK Corporate
Business Business Items Total
-------- --------- -------- --------
Revenue $17,327 $ ---- $ ---- $17,327
Direct costs 12,637 ---- ---- 12,637
------- ------- ------- -------
Gross Profit 4,690 ---- ---- 4,690
Selling, general and
administrative expenses 5,523 1,089 3,398 10,010
Special items 257 2,738 ---- 2,995
Depreciation and amortization 817 72 125 1,014
------- ------- ------- -------
Loss from operations (1,907) (3,899) (3,523) (9,329)
Other income (expense) ---- ---- 1,888 1,888
------- ------- ------- -------
Loss before income taxes (1,907) (3,899) (1,635) (7,441)
Income tax expense (benefit) 140 ---- (198) (58)
------- ------- ------- -------
Net loss $(2,047) $(3,899) $(1,437) $(7,383)
======= ======= ======= =======
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16
Year ended December 31, 1996
Other
Clinical DataTRAK Corporate
Business Business Items Total
--------- -------- --------- --------
Revenue $25,715 $ --- $ --- $25,715
Direct costs 17,976 --- --- 17,976
--------- -------- --------- --------
Gross Profit 7,739 --- --- 7,739
Selling, general and
administrative expenses 4,054 --- 2,087 6,141
Depreciation and amortization 546 --- 60 606
--------- -------- ---------- --------
Income (loss) from operations 3,139 --- (2,147) 992
Other income (expense) --- --- 1,038 1,038
--------- -------- ---------- --------
Income (loss) before income taxes 3,139 --- (1,109) 2,030
Income tax expense --- --- 383 383
--------- -------- ---------- --------
Net income (loss) $ 3,139 $ --- $ (1,492) $ 1,647
========= ======== ========== ========
During 1996, the Company's only line of business was the Clinical Business.
For comparative purposes, statement of operations items related to corporate
overhead have been shown in the "Other Corporate Items" column of the table for
the year ended December 31, 1996.
Year ended December 31, 1998 Compared with Year ended December 31, 1997
Clinical Business. Revenue for the year ended December 31, 1998 decreased
24.3% to $13.1 million as compared to $17.3 million for the year ended December
31, 1997. The decrease was the result of a decline in revenue from clinical
trials conducted by the Clinical Business, caused by the inability to attract
sufficient new business and convert existing backlog into revenue during the
year ended December 31, 1998. During both 1997 and 1998 the Clinical Business
performed services on approximately 200 contracts. The size, duration and
difficulty of each contact varies, therefore the amount of backlog converted
into revenue and revenue earned in any year is independent of the number of
contracts on which services are performed. During the second half of 1997, the
Company hired a new Vice President of Marketing and Sales and rebuilt its sales
force in an effort to increase backlog. In December of 1997 the Company hired a
Chief Operating Officer for the Clinical Business and a new General Manager for
GFI. During 1998, $19.0 million of new contracts was added to backlog, however,
due to the duration of many of these contacts, much of this new backlog was not
converted into revenue in 1998. The Clinical Business's backlog at December 31,
1998 was $15.8 million. The Company expects $5.4 million to be converted to
revenue in 1999. There can be no assurance as to the level of backlog that will
be added in 1999, or as to the Clinical Business's level of revenue in 1999 and
beyond.
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 $2.6 million, or 20.6%, from $12.6 million to $10.0 million for the years
ended December 31, 1997 and 1998, respectively. As a percentage of revenue,
direct costs increased from 72.8% during the year ended December 31, 1997 to
76.3% during the year ended December 31, 1998. The Clinical Business incurs a
high level of fixed direct costs at its owned research sites, due to the number
of clinical and support personnel required in order to offer clinical services
at these sites. The increase in direct costs as a percentage of revenue was the
result of the division's low level of revenue and its inability to leverage
fixed costs at its Company-owned research facilities.
Selling, general and administrative ("SG&A") expenses include all
administrative personnel costs, business development costs, and costs associated
with the growth and quality maintenance of the Affiliated Site Network, and all
other expenses not directly chargeable to a specific contract. Approximately 5%
of the Clinical Business's SG&A expenses are for costs associated with the
growth and quality maintenance of the Affiliated Site Network. These Affiliated
Site Network costs, which include among other things expenses related to
personnel, travel, advertising, database management and regulatory compliance,
are
14
17
expensed as incurred. SG&A costs for the year ended December 31, 1998 decreased
$600,000 to $4.9 million as compared to $5.5 million during the year ended
December 31, 1997. Of this decrease $300,000 was the result of the Company's
exiting of its European and other strategic initiatives, which were intended to
increase the types of research services offered by the Clinical Business. The
remainder of the decrease was the result of the Company's reorganization in the
first quarter of 1998. As a percentage of revenue, selling, general and
administrative expenses increased from 31.8% to 37.4% for the years ended
December 31, 1997 and 1998, respectively. The increase in SG&A expenses as a
percentage of revenue was the result of the Clinical Business's low level of
revenue being unable to absorb its fixed operating costs.
During 1998, the Clinical Business recorded asset impairment charges of
$6.1 million related to the impairment of goodwill. Of this charge, $1.9 million
was related to goodwill written off related to two Clinical Business locations
that were closed in September 1998 due to poor operating performance. The $1.9
million of goodwill represents the unamortized portion of goodwill that was
allocated to these sites at the time of their purchase. The remaining $4.2
million of the impairment charge was for goodwill associated with GFI's
operations. GFI's revenue was in continual decline and its net losses continued
to increase since its acquisition. In the third quarter of 1998, after
management's efforts to effect a turn around were exhausted, and concurrent with
the Company's planning process, it was determined that the possibility of
recovering the recorded value of the GFI goodwill through a sale of GFI,
exclusive of a sale of the entire Clinical Business was remote. In addition, it
was determined that GFI's future undiscounted cash flows were below the carrying
value of GFI's long-lived assets. Accordingly, during the third quarter of 1998,
the Company adjusted the carrying value of GFI's long-lived assets to their
estimated fair value of approximately $1.6 million, resulting in the non-cash
charge of $4.2 million. The estimated fair value was based on the purchase price
allocated to GFI pursuant to an initial offer from West to purchase the Clinical
Business. The write-downs of goodwill will result in a reduction of the Clinical
Business's depreciation and amortization expense by approximately $230,000 as
compared to 1998 expense levels.
The Clinical Business incurred special items charges of $1.2 million for
the year ended December 31, 1998. Of this total, $810,000 was incurred as part
of the Company's reorganization plan and included severance costs for 19
employees who were terminated in March of 1998, costs associated with the
relocation of certain Clinical Business employees and costs related to a lawsuit
settlement with two former Clinical Business executive officers. The remaining
$430,000 was a result of the Company exiting its United Kingdom activities and
costs related to the closing of two of its Clinical Business sites. During 1997,
the Clinical Business had special items charges of $260,000 relating to the
disposal of certain medical equipment, computer equipment, and the closing of a
leased facility. Management expects that these actions will lower the Clinical
Business's SG&A expenses by approximately $800,000 as compared to 1998 SG&A
expenses.
Depreciation and amortization expense decreased from $820,000 for the year
ended December 31, 1997 to $690,000 during the year ended December 31, 1998.
Approximately $90,000 of the $130,000 decrease was the result of the goodwill
write-down, and the remainder was due the disposal of certain assets at the end
of 1997.
Other expenses for the year ended December 31, 1998 of $210,000 were
recorded as a result of costs incurred relating to the Proposed Sale of the
Clinical Business.
Income tax expense for the Clinical Business was $140,000 for the year
ended December 31, 1997 and $80,000 for the year ended December 31, 1998. These
taxes were the result of state taxes incurred during both years.
DataTRAK Business. During the year ended December 31, 1998 DataTRAK had
revenue of $130,000. This revenue was the result of EDC services preformed on
two European clinical trials. Direct costs of this revenue, mainly personnel
costs at DataTRAK's German subsidiary ("DataTRAK GmbH"), were $460,000 resulting
in a gross margin loss of $330,000. Prior to 1998 DataTRAK had recorded no
revenue or direct costs.
15
18
SG&A expenses increased from $1.1 million to $1.8 million for the years
ended December 31, 1997 and 1998, respectively. Of this increase, $480,000 was
the result of expenses incurred by DataTRAK GmbH. DataTRAK GmbH was established
in January 1998 in connection with the purchase of the software known as
DataTRAK EDC(TM). The remainder of the increase, as well as the costs incurred
by DataTRAK GmbH, was the result of costs incurred for developing, testing and
marketing the DataTRAK(R) process and the DataTRAK EDC(TM) software.
DataTRAK had special items charges of $160,000 during the year ended
December 31, 1998. Of these charges, $30,000 resulted from the Company's first
quarter 1998 reorganization and included severance costs for one employee who
was terminated. The remaining $130,000 related to costs associated with the
termination of the technology alliance agreement between the Company and IBM
Global Services ("IBM"). DataTRAK recorded a special items charge of $2.7
million during 1997 as a result of the termination of its agreement with IBM.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year ended December 31, 1997 Compared with Year ended December 31,
1996; DataTRAK Business."
Depreciation and amortization expense increased from $70,000 during the
year ended December 31, 1997 to $360,000 during the year ended December 31,
1998. The increase was the result of the purchase of the DataTRAK EDC(TM)
software, and other assets, as well as capitalized software development costs.
Other Corporate Items. The Company recorded SG&A expenses of $3.4 million
and $2.2 million during the years ended December 31, 1997 and 1998, respectively
that were not allocated to either of Collaborative's operating divisions. Part
of the decrease in these expenses is due to the absence of $600,000 of expenses
related to the termination of potential acquisitions. The remaining $600,000
decrease was due to reduced personnel and other costs resulting from the
Company's reorganization in the first quarter of 1998.
Corporate special items charges relating to the Company's first quarter
1998 reorganization totaled $590,000. These charges included severance costs for
nine employees who were terminated in March of 1998. It is expected that the
first quarter of 1998 reorganization will have the effect of reducing corporate
related SG&A expenses by $170,000 as compared to 1998 expense levels.
Corporate related depreciation expense was $120,000 and $110,000 during the
years ended December 31, 1997 and 1998, respectively.
Other income decreased $210,000 for the year ended December 31, 1998
compared to the year ended December 31, 1997. The decrease was primarily the
result of a decrease in interest income caused by the Company's use of cash to
fund its operating losses and other working capital needs. This decrease was
partially offset by the termination of the Company's HRI joint venture. The HRI
joint venture, between the Company and Pharmaceutical Marketing Services, Inc.,
was terminated during the second quarter of 1997. During the year ended
December 31, 1997, the Company's share of the loss from this joint venture was
$50,000.
As a result of the Company's net operating loss for the year ended
December 31, 1997, a $200,000 federal income tax benefit was recorded at
December 31, 1997. This benefit represents the refund the Company received from
its net operating loss carryback for federal income tax purposes. Due to the
Company's net operating loss for 1998, no federal income tax provision was
recorded. At December 31, 1998, the Company had a net operating loss
carryforward of approximately $13.0 million, which will expire in the year 2013.
16
19
Year ended December 31, 1997 Compared with Year ended December 31, 1996
Clinical Business. 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 Clinical
Business's Affiliated Site Network, 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. During the second half of 1997, the Company hired a new
Vice President of Marketing and Sales and rebuilt its sales force in an effort
to increase backlog. In December of 1997, the Company hired a Chief Operating
Officer for the Clinical Business and a new General Manager for GFI.
Direct 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 70.0% in 1996 to 72.8% 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.
SG&A expenses increased by $1.5 million from $4.0 million in 1996 to $5.5
million in 1997. Of the $1.5 million increase, approximately $1.0 million was
incurred at acquired research facilities, and the remainder was due to growth of
the Clinical Business's infrastructure. As a percentage of revenue, SG&A
expenses increased from 15.6% in 1996 to 31.8% in 1997. The increase in SG&A
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.
Special items include charges of $260,000 related to the Clinical Business
that were recorded in the fourth quarter of 1997. These charges relate to the
disposal of certain medical equipment, computer equipment, and the closing of a
leased facility.
Depreciation and amortization expense increased by $270,000 from $550,000
in 1996 to $820,000 in 1997. Of the $270,000 increase, $60,000 resulted from the
depreciation of assets acquired with GFI and WCE, $130,000 resulted from the
amortization of goodwill and $80,000 resulted from increased capital
expenditures.
During 1997, the Clinical Business had state income tax expense of
$140,000.
DataTRAK Business. During 1997, DataTRAK had SG&A expenses of $1.1 million.
These costs were related to the testing and Affiliated Site training of the EDC
and clinical trial management system, that was being developed through a
technology alliance agreement with ISSC, a unit of IBM, and DataTRAK. This
technology agreement was terminated in 1997.
During 1997, the Company and IBM disagreed on several issues relating to
the strategic direction of its technology alliance. In December of 1997, the two
parties determined these differences to be irreconcilable and the technology
alliance was terminated. As a result of this termination, the Company returned
the software that was developed as a result of this alliance to IBM. The
unamortized cost of this software, totaling $740,000 was written off. The
Company and IBM disagreed on a number of issues concerning the parties'
financial responsibilities in connection with the termination of the alliance,
and the Company recorded a $2.0 million charge, which represented its best
estimate at December 31, 1997 of its financial obligations associated with the
termination of technology alliance. The total charge of $2.7 million was
recorded as part of special items expense for the year ended December 31, 1997.
DataTRAK had depreciation expense of $70,000 in 1997 related to software
and licenses associated with the technology alliance agreement with ISSC.
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Other Corporate Items. For the years ended December 31, 1996 and 1997, the
Company had SG&A expenses of $2.1 million and $3.4 million, respectively that
were not related to either of Collaborative's operating divisions. Of the $1.3
million increase, $600,000 was for expenses related to the terminated
negotiations for potential acquisitions. The remainder of the increase was due
to the Company's strategic initiatives, primarily related to personnel and other
costs incurred as a result of the Company's initiative to acquire clinical
research sites.
Unallocated depreciation and amortization was $60,000 and $120,000 for the
years ended December 31, 1996 and 1997, respectively. The increase was due to
increased capital expenditures, primarily related to computer systems.
Other income increased from $1.0 million in 1996 to $1.9 million in 1997.
This was the result of a $790,000 increase in interest income on invested cash
(primarily the proceeds of the Company's initial public offering), and a $90,000
decrease in interest expense. Interest expense for 1996 was related 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 $30,000 increase in the
Company's share of HRI's net loss for the year ended December 31, 1997.
As a result of the Company's net operating loss for the year ended December
31, 1997, a $200,000 federal income tax benefit was recorded at December 31,
1997. This benefit represents the refund the Company received from its net
operating loss carryback for federal income tax purposes. 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 resulted in $380,000 of income tax expense 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. All amounts received are recorded as a liability (deferred
revenue) until work has been completed and revenue is recognized. Cash receipts
do not necessarily correspond to costs incurred or revenue recognized. 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 $2.7 million at
December 31, 1998 and $4.5 million at December 31, 1997. Deferred revenue was
$630,000 at December 31, 1998 and $850,000 at December 31, 1997.
Cash and cash equivalents decreased $2.3 million during the year ended
December 31, 1998. This was the result of $4.5 million provided by investing and
financing activities, offset by $6.8 million used in operating activities.
Investing activities included net proceeds of $6.1 million from purchases and
maturities of short-term investments offset by $1.6 million used to purchase
property and equipment. Financing activities primarily consist of the collection
of a note receivable from an officer.
Cash used for operating activities, of $6.8 million, resulted primarily
from the Company's net loss and other cash uses. Cash provided by operating
activities includes a $2.0 million decrease in receivables due to completion of
contracts and increased collection efforts in 1998. Cash used in operating
activities includes the Company's net loss, exclusive of non-cash operating
items, of $6.3 million. Other cash uses related to operating activities were
$2.1 million related to the termination of the DataTRAK alliance with IBM,
$820,000 paid for costs related to the Company's first quarter of 1998
reorganization and $180,000
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related to other special items charges. Changes in other current assets and
liabilities resulted in a net $600,000 source of cash.
At December 31, 1998 the Company had working capital of $24.4 million, and
its cash, cash equivalents and short-term investments totaled $26.7 million. The
Clinical Business had working capital of $13,000 at December 31, 1998. The
Company's working capital decreased by $8.6 million from December 31, 1997. The
decrease was primarily the result of a $6.9 million decrease in cash, cash
equivalents and short-term investments, and the $2.0 million decrease in
receivables.
The Company has a line of credit agreement with a bank, which provides for
borrowings up to $2.0 million and bears interest at rates not to exceed prime
(no amounts were outstanding at any time during 1998). The line of credit
agreement requires that the Company maintain investments of $2.0 million with
the bank. This line of credit is considered to be committed and is subject to
renewal at January 31, 2000.
In connection with the sale of the Clinical Business, the Company will
receive $15.0 million. Based upon the Clinical Business's net working capital at
December 31, 1998, it is currently estimated that the $15.0 million purchase
price to be paid to the Company will be increased by a $13,000 working capital
adjustment and offset by applicable transaction costs of $1.2 million. The
actual proceeds received by the Company in the Proposed Sale will depend on the
Clinical Business's net working capital as of the closing date, and on the
collection of net accounts receivable during the 180 days following the closing
date. The Company has not yet determined how those proceeds, as well as its
other cash, cash equivalents and short-term investments will be used. The Board
is considering numerous alternatives consistent with its objective to permit
shareholders to realize the value of the DataTRAK technology. Among them, the
Board is considering using some of the proceeds to provide working capital to
finance DataTRAK's development and expansion (either independently or in
conjunction with one or more strategic partners). It is also considering using a
portion of the proceeds to repurchase outstanding Common Shares. The Board is
also considering a possible sale or merger of the Company. However, the Company
is not currently engaged in any discussions or negotiations concerning a sale or
merger of the Company.
Subsequent to the Proposed Sale, it is possible that the Company may be
required to voluntarily delist its Common Shares from quotation and trading on
Nasdaq, which may impair the liquidity of the trading market for the Common
Shares. However, if the Common Shares are delisted, the Company may list its
Common Shares for trading over-the-counter or may apply for listing of the
Common Shares on the Nasdaq SmallCap Market, subject to Nasdaq's approval. The
Company's liquidity and capital resources would not be materially effected if it
were required to voluntarily delist its Common Shares from quotation and trading
on Nasdaq. However, a delisting of the Common Shares could have a long-term
impact on the Company's ability to raise future capital through a sale of its
Common Shares.
In January 1998, DataTRAK purchased the EDC software now known as DataTRAK
EDC(TM) from EDS for $610,000. The Company is responsible for funding the future
development and testing of this software. The Company will also continue to
invest in the development of the DataTRAK(R) process. DataTRAK's primary source
of cash has been cash generated by the Clinical Business and the maturities of
corporate short-term investments. DataTRAK has had a negative cash flow of
approximately $9.0 million since it began operations in 1997. The Company
anticipates that it's cash needs for 1999 operations will be approximately $5.0
million, including $1.0 million related to the payment of special items charges
recorded in 1998. In addition, the Company anticipates software development
expenditures of $1.5 to $2.0 million over the next two years for continued
commercialization and product development of DataTRAK EDC(TM). The Company
expects such activities will be funded from existing cash and cash equivalents,
maturities of short-term investments, cash flow from operations, borrowings
under its line of credit, as needed, and the proceeds from the sale of its
Clinical Business.
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Year 2000 Readiness Disclosure
Many existing computer systems and software programs currently in use are
coded to accept only two digit entries in the date code field. These systems and
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000.
The Company understands that as the new millennium approaches it is vital
to all of its Sponsors, Affiliated Sites and suppliers that Collaborative's
internal information technology ("IT") and non-IT systems are Year 2000
compliant. In addition, just as important a priority is the compliance of
external IT and non-IT systems and services provided by others to Collaborative.
To meet the above compliance requirements Collaborative has utilized the
following methodology since mid-1997. It has: (i) developed a three-year plan
(1997-1999) with Year 2000 IT issues as a priority, (ii) established a corporate
Year 2000 program, (iii) performed a physical inventory of all IT and non-IT
systems and software, (iv) delegated internal Year 2000 evaluation and testing
responsibilities within the Company, (v) assessed its compliance with the above
plans on an on-going basis, (vi) identified and categorized any "Mission
Critical" items, (vii) repaired or replaced all non-compliant IT and non-IT
systems and services, (viii) internally tested all systems and services for
compliance, (ix) compiled appropriate documentation of all testing and vendor
compliance statements, (x) queried its utilities, Sponsors, Affiliated Sites and
suppliers as to their readiness and status, (xi) developed a business
contingency plan in the event of Year 2000 malfunctions, and (xii) issued a
public Year 2000 disclosure statement on the Company's web site.
The Company has also established internal policies that have actively
informed its employees of the Year 2000 problem and that assist in procurement
of only new equipment that is Year 2000 compliant.
At this point in the Company's Year 2000 effort, substantially all of the
Company's internal IT and non-IT hardware and software systems have been tested
and either replaced or repaired. The Company expects that all other
non-compliant IT and non-IT systems will either be Year 2000 ready or replaced
by June 30, 1999. There can be no assurance that additional coding errors or
other defects will not be discovered in the future though management believes
the possibility of such discoveries is quite low due to the recent vintage and
uniformity of IT and non-IT systems throughout Collaborative.
The Company is in the process of determining how it may be impacted by any
third parties' failure to remedy their own Year 2000 issues. The Company has
initiated formal communications with significant Sponsors, suppliers and other
third parties to determine the extent, if any, to which the Company's interface
systems could be impacted by those third-parties' failure to remedy their own
Year 2000 issues. The Company will continue these communications through
mid-1999. Management currently does not anticipate any material adverse impact
on its operations as a result of Year 2000 issues of third parties. However, at
this stage of the review no assurance can be given that the failure by one or
more third parties to become Year 2000 compliant will not have a material
adverse impact on the Company's financial position or results of operations.
Management of the Company believes an effective program for resolving
Year 2000 issues in a timely manner is in place. Since it is not possible to
anticipate all possible future outcomes, especially when third parties are
involved, there could be circumstances in which the Company's operations could
be interrupted. In addition, disruptions in the economy in general resulting
from Year 2000 issues could also adversely impact the Company. The most
significant Year 2000 issue and worst case scenario of concern to the Company
has been identified as being a long-term electrical power disruption. The
Company's contingency plans for large-scale Year 2000 disruptions focuses on two
critical high-level operational issues: (i) The preservation and availability of
critical company data as of December 31, 1999 and (ii) the use of manual
transaction processing until all disruptions are eliminated.
To date, the total cost of the Year 2000 systems review has been immaterial
to the Company's financial position and results of operations. Management does
not anticipate incurring any additional costs that would be material to the
Company's financial position and results of operations. As of January 1999,
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the Company has not utilized any outside consultants or technical
staff to meet its Year 2000 goals and has no current plans to do so.
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 contain certain
forward looking statements that are based on management's current beliefs,
estimates and assumptions concerning the operations, future results and
prospects of Collaborative and the clinical pharmaceutical research industry in
general. All statements that address operating performance, events or
developments that management anticipates will occur in the future, including
statements related to future revenue, profits, expenses, income and earnings per
share or statements expressing general optimism about future results, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 ("Exchange Act"). In addition, words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," variations of such
words, and similar expressions are intended to identify forward-looking
statements. Forward looking statements are subject to the safe harbors created
in the Exchange Act.
Any number of factors could affect future operations and results. 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 that could cause actual
results to differ materially from those expressed in forward looking statements
made by the Company. Collaborative undertakes no obligation to update publicly
any forward looking statements, whether as a result of new information, future
events or otherwise.
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.
Continuing Development of DataTRAK EDC(TM); Ability to Absorb Corporate Overhead
Although the DataTRAK EDC(TM) software has been used in clinical trials,
its continued development is necessary. Upon the Proposed Sale of the Clinical
Business, the Company will have a minimal backlog and minimal revenues from
which to support the costs of this continued development. There can be no
guarantee of DataTRAK's potential future revenue, or its ability to absorb its
corporate overhead and other fixed operating costs that will be necessary for
the success of the DataTRAK(R) process.
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
participates, 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
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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 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 business remains unproven. There can be no
assurance that the Company's strategy will continue to gain acceptance among
Sponsors, research sites or investigators. The Company'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.
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. Bayer accounted for all
of DataTRAK's 1998 revenue, totaling $130,000. During each of the three years in
the period ended December 31, 1998, sales to companies in the pharmaceutical
industry accounted for more than 72% of the Company's revenue. During 1996,
sales to Merck & Co., Inc. and Dey Laboratories accounted for approximately 22%
and 31% of the Clinical Business's revenue, respectively. Other customers in the
pharmaceutical industry have from time to time accounted for more than 10% of
the Clinical Business's annual revenue. During 1997 sales to Bristol Myers Squib
and Pharmacia & Upjohn each accounted for more than 10% of the Clinical
Business's revenue. During 1998 sales to Hoechst Marion Roussel and Procter &
Gamble each accounted for more than 10% of the Clinical Business's 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 and EDC
industries. 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.
Management of Growth; Need for Improved Systems
The Company believes that the expansion of its DataTRAK business will
continue to place a strain on its operational, human and financial resources. In
order to manage such expansion, the Company must continue to improve its
operating, administrative and information systems and accurately predict its
future
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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 Affiliated Site Network is essential to the Clinical
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 Affiliated Site Network at any time.
Dependence on Key Personnel
As of February 26, 1999, the Company had approximately 120 full-time
employees. Upon completion of the Proposed Sale to West, the Company will have
17 full time employees, of whom three will have 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 will change substantially upon
completion of the Proposed Sale. The Company has employment agreements with all
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 a New Drug Application by the FDA.
These requirements are more stringent and thus more burdensome than those
imposed by many other developed countries. In recent years, efforts have been
made to streamline the drug approval process and coordinate U.S. standards with
those of other developed countries. Changes in the level of regulation,
including a relaxation in regulatory requirements or the introduction of
simplified drug approval procedures could have a material adverse effect on the
demand for 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. Any release of final FDA guidance that is significantly
inconsistent with the design of DataTRAK EDC(TM) may have a material adverse
effect on the business and operations of DataTRAK.
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.
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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 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 EDC 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. Many current and potential future competitors have or may have
substantially greater resourses, greater name recognition and more extensive
customer bases that could be leveraged, thereby gaining market share or product
acceptance to the Company's detriment. 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.
Clinical pharmaceutical and medical device research also requires the
review and handling of large amounts of patient data. Potential liability may
arise from a breach of contract or a loss of or unauthorized release of clinical
trial data. To date, DataTRAK has not received any claims resulting from either
the testing of new drugs or professional malpractice.
The Company maintains an errors an omissions professional liability policy
it believes to be sufficient to cover claims that may be brought against the
Clinical Business or DataTRAK. There can be no assurance that this coverage will
be adequate or that insurance will continue to be available.
Management Discretion as to Use of Proceeds
The Company has not identified a specific use for the net proceeds of
approximately $14.0 million from the Proposed Sale of the Clinical Business. The
Board is considering numerous alternatives consistent with its objective to
permit shareholders to realize the value of the DataTRAK technology. Among them,
the Board is considering using some of the proceeds to provide working capital
to finance DataTRAK's development and expansion (either independently or in
conjunction with one or more strategic partners). It
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It is also considering using a portion of the proceeds to repurchase
outstanding Common Shares. The Board is also considering a possible sale or
merger of the Company. However, the Company is not currently engaged in any
discussions or negotiations concerning a sale or merger of the Company. There
can be no assurance as to the timing of the application of such proceeds or that
the application thereof will have a positive effect on the Company's future
results of operations or financial condition.
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.
General Economic Conditions
To date the Company believes that conditions such as the rate of
employment, inflation, interest rates, and the condition of the capital markets
have not had a material adverse effect on its results of operations or financial
condition. However any change in these conditions could adversely effect the
carrying value of the Company's short-term investments, its results of
operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
Quarterly results of operations for the year ended December 31, 1998 are
included in Note 18 of the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and positions of each of the Company's directors and
executive officers are as follows:
Name Age Position
---- --- --------
Dr. Jeffrey A. Green (1) 43 President, Chief Executive Officer and Director
Patrick G. Chassaigne 46 President of DataTRAK, Inc.
Herbert L. Hugill 50 Chief Operating Officer and Director
Terry C. Black 41 Vice President of Finance, Chief Financial Officer, Treasurer and
Assistant Secretary
Gregory A. Folz 41 Vice President of Marketing and Sales
Dr. Richard J. Kasmer 41 Vice President, General Manager of Affiliated Site Network,
General Counsel and Assistant Secretary
Dr. William H. Stigelman, Jr. 53 Vice President of Affiliated Site Relations
Timothy G. Biro (1) 45 Director
Robert E. Flaherty (2) 53 Director
Seth B. Harris (2) 59 Director
Dr. Mark J. Ratain (3) 44 Director
Dr. Roger G. Stoll (3) 56 Director
Dr. Robert M. Stote (2) 59 Director
Dr. Alan G. Walton (1) 63 Director
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Jeffrey A. Green, Pharm.D., FCP, is the Company's founder and has served as
its President, Chief Executive Officer and a Director 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.).
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.
Herbert L. Hugill has served as the Company's Chief Operating Officer since
December 1997, and has been a Director since April 1998. Mr. Hugill is
responsible for the overall management of the Company's Clinical Business,
including development of the marketing, strategic planning and operating
functions. 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
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RpScherer Corporation where from 1991 through 1995 he was President of RpScherer
North America, that firm's largest operating division. Upon completion of the
Proposed Sale, Mr. Hugill's employment with the Company will terminate and he
will become an employee of West.
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.
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 Affiliated Site Network. 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. Upon completion of the Proposed
Sale, Mr. Folz's employment with the Company will terminate and he will become
an employee of West.
Richard J. Kasmer, Pharm.D., J.D., has served as the Company's Vice
President, General Manager of Affiliated Site Network, General Counsel and
Assistant Secretary since January 1998. During 1996 and 1997, Dr. Kasmer served
as the Company's Vice President of Operations, General Counsel and Assistant
Secretary. 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 Network 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.). Upon completion of the Proposed
Sale, Dr. Kasmer's employment with the Company will terminate and he will become
an employee of West.
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 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.). Upon completion of the Proposed Sale, Dr. Stigelman's employment
with the Company will terminate and he will become an employee of West.
Timothy G. Biro has been a Director of the Company since 1992. Mr. Biro is
the General Partner of Ohio Innovation Fund I, L.P., a venture capital firm.
Prior to starting Ohio Innovation Fund in 1997, Mr. Biro was a consultant with
Cleveland Tomorrow, an economic development corporation. From 1991 to 1996,
Mr. Biro was a General Partner of Brantley Venture Partners II, L.P. and
Brantley Venture Partners III, L.P. Prior to joining Brantley Venture Partners
in 1991, Mr. Biro was Superintendent of Pharmaceutical Manufacturing at Merck &
Co., Inc. Mr. Biro is a graduate of Pennsylvania State University (B.S.), Temple
University (B.S.) and The Wharton School of Business at the University of
Pennsylvania (MBA). He is a Director of OXIS International, Inc., a developer
of pharmaceuticals to treat diseases of oxidative stress.
Robert E. Flaherty has been a Director of the Company since July 1998.
Mr. Flaherty is President and Chief Executive Officer of Athena Diagnostics,
Inc., a unit of the Athena Neurosciences division of
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Elan Corporation, plc. Mr. Flaherty has held his position with Athena
Diagnostics, Inc. since 1992. Athena Neurosciences is involved in the
discovery, development and marketing of therapeutic agents for the diagnosis and
treatment of central nervous system diseases and disorders. From 1976 through
1992 Mr. Flaherty was employed in various management positions with Becton
Dickinson & Company.
Seth B. Harris has been a Director of the Company since 1992 and has been
the Chairman of Freider the Source, a distributor of consumer products, since
1993. Mr. Harris is the Retired Chairman of the Board and President of Harris
Wholesale, Inc., a wholesale pharmaceutical distribution company. Mr. Harris is
also a Director of Bindley Western Industries, Inc., one of the largest
distributors of pharmaceuticals in the United States.
Mark J. Ratain, M.D. has been a Director of the Company since April 1998.
Dr. Ratain is a hematologist/oncologist and a clinical pharmacologist. He is a
Professor of Medicine and Chairman of the Committee on Clinical Pharmacology at
the University of Chicago. Dr. Ratain has been associated with the Department
of Medicine at the University of Chicago since 1983. He has authored and
co-authored more than 150 articles and book chapters principally relating to the
treatment of cancer. Prior to becoming a Director, Dr. Ratain served as
Chairman of Collaborative's Scientific Advisory Board for four years.
Dr. Ratain is a graduate of Harvard University (A.B.) and the Yale University
School of Medicine (M.D.).
Roger G. Stoll, Ph.D. has been a Director of the Company since April 1998.
Dr. Stoll serves on the Board of Directors of St. Jude Medical, Inc. in
St. Paul, Minnesota, and is a Trustee of St. Barnabus Medical Center in
Livingston, New Jersey. He is President and Chief Executive Officer of Ohmeda
Inc., a wholly-owned subsidiary of The BOC Group, plc. Dr. Stoll had held this
position since 1991, and has been a member of the Board of Directors of The BOC
Group, plc since 1994. Throughout his career in the pharmaceutical industry,
Dr. Stoll has served as an executive with Bayer A.G., Inc., and with Baxter
Travenol. Dr. Stoll is a graduate of Ferris State University (B.S.), and the
University of Connecticut (Ph.D.).
Robert M. Stote, M.D. has been a Director of the Company since 1993.
Dr. Stote has served as the Senior Vice President and Chief Science Officer and
a Director of Bentley Pharmaceuticals, Inc., a pharmaceutical company, since
1992. Prior to that time, Dr. Stote was employed for 20 years by SmithKline
Beecham Corporation, serving as Senior Vice President and Medical Director,
Worldwide Medical Affairs, from 1989 to 1992 and Vice President Clinical
Pharmacology - Worldwide from 1987 to 1989. Dr. Stote was Chief of Nephrology at
Presbyterian Medical Center in Philadelphia from 1972 to 1989 and served as
Clinical Professor of Medicine at the University of Pennsylvania.
Alan G. Walton, Ph.D. has been a Director of the Company since 1994. Since
1987, Dr. Walton has served as a General Partner of Oxford Partners III, Limited
Partnership and Oxford Partners III-A, Limited Partnership, the General Partners
of Oxford Venture Fund III, Limited Partnership and Oxford Venture Fund III-A
Limited Partnership. Since 1992, Dr. Walton has been a General Partner of OBP
Management L.P., the General Partner of Oxford BioScience Partners, L.P. and
Oxford BioScience (Adjunct), L.P. Dr. Walton has also been a General Partner of
OBP Management (Bermuda) Limited Partnership, the General Partner of Oxford
BioScience Partners (Bermuda) Limited Partnership. Prior to joining Oxford, Dr.
Walton was the President of University Genetics, Co., a publicly traded
biotechnology company and, until 1981, was Professor of Macromolecular Science
and Director of the Laboratory for Biological Macromolecules at Case Western
Reserve University. Dr. Walton is the author of numerous publications and
serves as a Director of Coelacanth Chemical Corp, NetGenics Inc., Gene Logic
Inc., Physiome Sciences, CardioPulmonary Corp, and Alexandria Real Estate
Equities, Inc.
Terms of Directors
The number of Directors is currently fixed at nine. The Board of Directors
is divided into three classes. The Directors serve staggered three year terms,
with the members of one class being elected in any year as follows:
(i) Mr. Biro, and Drs. Stote and Green have been designated as Class III
Directors and will serve until the 1999 annual meeting; (ii) Mr. Hugill and
Drs. Ratain and Stoll have been designated as
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Class I Directors and will serve until the 2000 annual meeting; and
(iii) Messrs. Flaherty and Harris and Dr. Walton have been designated as
Class II Directors and will serve until the 2001 annual meeting.
Committees of the Board of Directors
The Board of Directors has three standing committees: an Executive
Committee, a Compensation Committee and an Audit Committee. The Executive
Committee has the authority to exercise all powers of the Board of Directors in
the management of the business and affairs of the Company at any time when the
entire Board of Directors is not in session.
The Compensation Committee has the authority to administer the Company's
stock option plans, including the selection of optionees and the timing of
option grants; and review and monitor key employee compensation and benefits
policies and administer the Company's management compensation plans.
The Audit Committee recommends the annual appointment of the Company's
auditors, with whom the Audit Committee reviews the scope of audit and non-audit
assignments and related fees, the accounting principles used by the Company in
financial reporting, internal financial auditing procedures and the adequacy of
the Company's internal control procedures.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's Directors and certain of its executive officers and
persons who beneficially own more than 10% of the Company's Common Shares to
file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Commission and The Nasdaq Stock Market. Such persons are further required to
furnish the Company with copies of all such forms filed by them. Based solely on
the Company's review of the copies of such forms it has received, the Company
believes that all of the Section 16(a) filing requirements were satisfied by the
Company's Directors, executive officers and beneficial owners of more than 10%
of the Company's Common Shares, except for reports relating to the following:
(i) Mr. Harris's February 28, 1998 receipt of an option to purchase 1,500 Common
Shares, fully exercisable at $4.38 per share, on August 28,1998 under the
Company's Amended and Restated 1996 Outside Directors Stock Option Plan, as
amended ("1996 Director Plan"); (ii) Mr. Harris's July 23, 1998 receipt of an
option to purchase 10,000 Common Shares, exercisable in three equal yearly
increments each of 3,333 Common Shares beginning on July 23, 1999 and continuing
through July 23, 2001 at $4.19 per share under the 1996 Director Plan;
(iii) Dr. Stoll's April 21, 1998 receipt of an option to purchase 1,500 Common
Shares, fully exercisable at $4.50 per share, on October 21,1998 under the 1996
Director Plan; (iv) Dr. Stoll's July 23, 1998 receipt of an option to purchase
10,000 Common Shares, exercisable in three equal yearly increments each of 3,333
Common Shares beginning on July 23, 1999 and continuing through July 23, 2001 at
$4.19 per share under the 1996 Director Plan; (v) Dr. Stote's July 23, 1998
receipt of an option to purchase 10,000 Common Shares, exercisable in three
equal yearly increments each of 3,333 Common Shares beginning on July 23, 1999
and continuing through July 23, 2001 at $4.19 per share under the 1996 Director
Plan; and (vi) Dr. Ratain's April 1, 1998 receipt of an option to purchase 1,500
Common Shares, fully exercisable at $4.19 per share, on October 1 ,1998 under
the 1996 Director Plan.
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ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
The table below sets forth certain information concerning the annual
or long-term compensation for services in all capacities to the Company during
the fiscal years ended December 31, 1996, 1997 and 1998 to the Company's Chief
Executive Officer, the four other highest paid executive officers of the Company
whose annual salary and bonus exceeded $100,000 and the former Vice President of
Corporate Development (the "Named Executive Officers").
Summary Compensation
Long-Term
Annual Compensation (1) Compensation
----------------------- Awards
-------------
Securities
Underlying All Other
Name and Principal Year Salary Bonus Options/ Compensation
Position ($) ($) Sars(#) ($) (2)
- --------------------------- ---- -------- ------ --------- -------------
Dr. Jeffrey A. Green 1998 $180,000 $ -- -- $ --
President, Chief Executive 1997 160,984 -- -- --
Officer and Director 1996 150,000 -- 25,000 (3) --
Herbert L. Hugill (4) 1998 170,000 -- -- --
Chief Operating Officer 1997 11,789 -- 50,000 (5) --
and Director 1996 -- -- -- --
Terry C. Black 1998 125,645 -- -- --
Vice President of Finance, 1997 86,145 -- 15,000 (6) --
Chief Financial Officer, 1996 90,000 -- -- --
Treasurer and Assistant
Secretary
Patrick G. Chassaigne (4) 1998 150,000 -- -- --
President of DataTRAK, Inc. 1997 68,081 -- 30,000 (7) --
1996 -- -- -- --
Gregory A. Folz 1998 130,000 -- -- --
Vice President of Marketing 1997 101,904 22,107 -- --
and Sales 1996 53,653 -- 10,100 (8) --
Philip A. Stark (4) 1998 47,462 8,000 -- --
Vice President of 1997 77,618 8,000 40,000 (10) 255,342 (9)
Corporate Development 1996 -- -- -- --
- ----------------
(1) No Named Executive Officer received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus. No long-term incentive plan payouts or restricted stock awards
have been made to any of the Named Executive Officers.
(2) No other compensation was received by the Named Executive Officers.
(3) Dr. Green's options were granted on January 2, 1997, at an exercise price
of $10.75 per share, 25% of which are exercisable on each of January 2,
1998, January 2, 1999, January 2, 2000 and January 2, 2001.
(4) Messrs. Hugill, Stark and Chassaigne were not employees of the Company at
any time during 1996.
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(5) Mr. Hugill's options were granted on December 9, 1997, at an exercise price
of $4.50 per share, 25% of which are exercisable on each of December 9,
1998, December 9, 1999, December 9, 2000 and December 9, 2001.
(6) Mr. Black's options were granted on January 2, 1997, at an exercise price
of $10.75 per share, 25% of which are exercisable on each of January 2,
1998, January 2, 1999, January 2, 2000 and January 2, 2001.
(7) Mr. Chassaigne's options were granted on July 7, 1997, at an exercise price
of $7.13 per share, 33.3% of which are exercisable on each of July 7, 1998,
July 7, 1999, July 7, 2000 and July 7, 2001.
(8) Mr. Folz's options were granted on July 29, 1996, at an exercise price of
$10.50 per share, 25% of which are exercisable on each of July 29, 1997,
July 29, 1998, July 29, 1999 and July 29, 2000.
(9) In connection with the Company's 1998 corporate reorganization, Mr. Stark's
employment with the Company was terminated on May 4, 1998. Pursuant to
Mr. Stark's employment agreement, Mr. Stark was entitled to receive
severance pay of $255,342 upon his involuntary termination. In 1998, $126,
402 of the $255,342 was paid to Mr. Stark and the remainder will be paid to
him in 1999.
(10) Mr. Stark's options were granted on May 2, 1997 at an exercise price of
$6.25 per share, 25% of which became exercisable on May 2, 1998 and 75% of
which became exercisable on May 4, 1998, pursuant to the terms of
Mr. Stark's employment with the Company, when Mr. Stark's employment with
the Company was terminated. These options were not exercised, and were
subsequently cancelled.
Option Exercises and Fiscal Year End Option Values. The table below sets
forth certain information with respect to the exercise of options to purchase
Common Shares by the Named Executive Officers and unexercised options to
purchase Common Shares for the Named Executive Officers as of December 31, 1998.
Aggregate Option Exercises in Last Fiscal Year
and December 31, 1998 Option Value
Number Of Securities
Underlying Unexercised Value of Unexercised
Options At In-The-Money Options At
December 31, 1998(#) December 31, 1998($)(1)
----------------------- -------------------------
Stock
Acquired On Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable(2) Unexercisable
- ---- ------------ ------------ ----------- ------------- --------------- -------------
Dr. Jeffrey A. Green -- $-- 25,000 25,000 $ -- $--
Herbert L. Hugill -- -- 12,500 37,500 -- --
Terry C. Black -- -- 26,250 13,750 57,750 --
Patrick G. Chassaigne -- -- 10,000 20,000 -- --
Gregory A. Folz -- -- 5,050 5,050 -- --
Philip A. Stark -- -- -- -- -- --
- --------------
(1) Options are in-the-money if the market value of the Common Shares exceeds
the exercise price.
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(2) Represents the total gain which would be realized if all in-the-money
options beneficially held at December 31, 1998 were exercised, determined by
multiplying the number of shares underlying the options by the difference
between the per share option exercise price and $4.00, the closing price for
the Common Shares as reported on the Nasdaq National Market on December 31,
1998.
Compensation of Directors
Directors do not receive cash compensation for their service on the
Company's Board. However, they do receive reimbursement for reasonable expenses
incurred in attending Board meetings. Directors who are not also employees
receive options to purchase Common Shares under the Company's Amended and
Restated 1996 Outside Directors' Stock Option Plan, as amended. Under the terms
of this plan, each non-employee Director receives an annual option grant to
purchase 1,500 Common Shares at an exercise price equal to the fair market value
of a share on the date of grant. As of December 31, 1998, options to purchase an
aggregate of 92,500 Common Shares (including the options to purchase 70,000
shares that were awarded July 23, 1998, subject to shareholder approval) have
been awarded and were outstanding under this plan at a weighted average exercise
price of $4.82 per share. Options awarded under this plan vest six months after
the date of grant, or in equal increments over a three year period commencing on
the first anniversary date of the grant, and expire ten years from the date of
grant. Prior to the Company's initial public offering in June 1996, Directors
received options under other option plans maintained by the Company, as
described below.
Non-employee Directors received options to purchase Common Shares under the
Company's Amended and Restated 1992 Share Incentive Plan (the "1992 Plan").
Options to purchase an aggregate of 80,000 Common Shares were awarded to
non-employee Directors under the 1992 Plan at an exercise price of $0.15 per
share. Each Director who is not an executive officer named in the Executive
Compensation tables above received options to purchase the following numbers of
shares under the 1992 Plan: Mr. Harris, 25,000 shares; Dr. Stote, 25,000 shares;
and Dr. Ratain, 30,000 shares. Dr. Ratain was awarded stock options for his
service as a consultant to the Company prior to his current service on the
Company's Board. In addition, prior to the Company's initial public offering in
June 1996, members of the Board who were designated to serve as such by certain
of the Company's private investors received, in lieu of Directors' fees, options
to purchase Common Shares having a value equal to $1,000 for each meeting
attended ($500 for each meeting attended by telephone). These awards were made
under the Company's Amended and Restated 1994 Directors' Share Option Plan (the
"1994 Plan"). An aggregate of 6,833 Common Shares were awarded and are
outstanding under the 1994 Plan at a weighted average exercise price of $4.54
per share.
Employment Agreements
Dr. Jeffrey A. Green. In 1994, the Company entered into an employment
agreement with Dr. Green providing for an initial term of four years. This
agreement will automatically renew for successive one-year periods thereafter
unless certain prior notice requirements are satisfied. The base salary provided
for in this agreement may be changed from time to time as determined by the
Compensation Committee and so long as evidenced by a written memorandum executed
by the parties. Bonuses may be paid to Dr. Green at the discretion of the
Compensation Committee. The agreement also provides Dr. Green with the right to
participate in all benefit plans made available to the Company's executives
and/or employees. Dr. Green's employment with the company may be terminated with
or without cause, upon his death or disability or with sufficient cause.
Additionally, under this agreement, Dr. Green is entitled to terminate his
employment for "good reason". "Good reason" for such termination will exist if
at any time, except in connection with the termination of Dr. Green's employment
in strict compliance with the terms of the agreement, the Board of Directors
fails to elect Dr. Green to his current position with the Company or
significantly diminishes his responsibilities, duties, power or authority. If
Dr. Green terminates his employment with the Company for good reason, he will be
entitled to continue to receive his base salary for two years following the date
of such termination. If Dr. Green's employment with the Company is terminated
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in connection with the sale of the Company, he will be entitled to continue to
receive his base salary for one year following the date of such termination. If
his employment is terminated without cause or without sufficient reason, he will
be entitled to continue to receive his base salary for a period of two years
subsequent to the date of termination. If Dr. Green terminates his employment
with the Company without good reason, or if he is terminated by the Company for
"cause," then he will be entitled to receive his base salary through the date of
termination. For purposes of Dr. Green's agreement, "cause" is defined as a
determination by the Board of Directors that the employee was engaged in
(i) fraud, (ii) a breach of the material provisions of the employment agreement
or (iii) a willful failure to perform his duties as required under this
agreement. "Sufficient reason" shall mean a good faith determination that the
employee failed to adequately perform his duties as an officer of the Company or
achieve the business objectives mutually agreed upon by the parties. Dr. Green
also agreed to certain noncompetition and nondisclosure provisions which, under
certain conditions, continue for a period of up to eighteen months following a
termination of Mr. Green's employment with the Company.
Herbert L. Hugill. In 1997, the Company entered into an employment
agreement with Mr. Hugill providing for a term of four years. The base salary
provided for in this agreement is $170,000 per year. Mr. Hugill was granted
50,000 options to purchase Common Shares within the first 30 days of employment
with the Company, and is entitled to 50,000 additional options on each of
January 1, 1999, 2000 and 2001, so long as certain performance objectives are
met. Mr. Hugill was not awarded 50,000 options on January 1, 1999. The agreement
also provides Mr. Hugill with the right to participate in all benefits plans
made available to the Company's executives and/or employees. Mr. Hugill's
employment with the Company may be terminated with or without cause or upon his
death or disability. Additionally, under this agreement, Mr. Hugill is entitled
to terminate his employment for "good reason". "Good reason" for such
termination will exist if at any time, except in strict compliance with the
terms of the agreement, Mr. Hugill's duties, responsibilities or title are
materially reduced or Mr. Hugill is involuntarily removed from any position
previously held. If Mr. Hugill terminates his employment with the Company for
good reason, he will be entitled to receive his base salary for a period of six
months following the date of such termination. If Mr. Hugill's employment with
the Company is terminated in connection with the sale of the Company, he will be
entitled to continue to receive his base salary for one year following the
date of such termination. If his employment is terminated without cause, he will
be entitled to receive his base salary for a period of one year subsequent to
the date of termination. If Mr. Hugill terminates his employment with the
Company without good reason, or if he is terminated by the Company for "cause,"
he will be entitled to receive his base salary through the date of termination.
For purposes of Mr. Hugill's agreement, "cause" is defined as a determination by
the Board of Directors that the employee was engaged in (i) a felony involving
moral turpitude or a felony in connection with his employment, (ii) fraud,
(iii) use or possession of illegal drugs on the Company's premises or reporting
to work under the influence of same or (iv) conduct, in or out of the workplace,
which may reasonably be determined to have an adverse effect on the reputation
or business of the Company. Mr. Hugill also agreed to certain noncompetition and
nondisclosure provisions which continue for a period of six to fifteen months
following a termination of Mr. Hugill's employment with the Company.
Terry C. Black. In 1994, the Company entered into an employment agreement
with Mr. Black providing for an initial term of four years. This agreement will
automatically renew for successive one-year periods thereafter unless certain
prior notice requirements are satisfied. The base salary initially provided for
in this agreement was $85,000 per year, to be reviewed at least annually by the
Compensation Committee. Bonuses may be paid to Mr. Black at the discretion of
the Compensation Committee. The agreement also provides Mr. Black with the right
to participate in all benefits plans made available to the Company's executives
and/or employees. Mr. Black's employment with the Company may be terminated with
or without cause or upon his death or disability. Additionally, Mr. Black is
entitled to terminate his employment for "good reason". If Mr. Black terminates
his employment with the Company for good reason, he will be entitled to receive
his base salary for a period of one year following the date of such termination.
If Mr. Black's employment with the Company is terminated in connection with the
sale of the Company, he will be
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entitled to continue to receive his base salary for one year following the date
of such termination. If his employment is terminated without cause, he will be
entitled to receive his base salary for a period of one year subsequent to the
date of termination. If Mr. Black terminates his employment with the Company
without good reason, or if he is terminated by the Company for "cause," he will
be entitled to receive his base salary through the date of termination. For
purposes of Mr. Black's agreement, "cause" is defined as a determination by the
Board of Directors that the employee was engaged in (i) fraud, (ii) breach of
the material provisions of the employment agreement or (iii) a willful failure
to perform his duties as required under this agreement. Chassaigne Mr. Black
also agreed to certain noncompetition and nondisclosure provisions which
continue, under certain conditions for a period up to two years following a
termination of Mr. Black's employment with the Company.
Patrick G. Chassaigne. In 1997, the Company entered into an employment
agreement with Mr. Chassaigne providing for an initial term of three years. This
agreement will automatically renew for successive one-year periods thereafter
unless certain prior notice requirements are satisfied. The base salary provided
for in this agreement is $150,000 per year. The base salary provided for in this
agreement may be changed from time to time as determined by the Compensation
Committee and so long as evidenced by a written memorandum executed by the
parties. The agreement also provides Mr. Chassaigne with the right to
participate in all benefits plans made available to the Company's executives
and/or employees. Mr. Chassaigne's employment with the Company may be terminated
with or without cause, upon his death or disability or with "sufficient reason".
Additionally, under this agreement, Mr. Chassaigne is entitled to terminate his
employment for "good reason". "Good reason" for such termination will exist if
at any time, except in strict compliance with the terms of the agreement, Mr.
Chassaigne's duties, responsibilities or title are significantly reduced or the
Board fails to elect Mr. Chassaigne as an officer of the Company or of DataTRAK,
Inc., or is involuntarily removed from any such position. If Mr. Chassaigne
terminates his employment with the Company for good reason, he will be entitled
to receive his base salary for a period of one year following the date of such
termination. If Mr. Chassaigne's employment with the Company is terminated in
connection with the sale of the Company, he will be entitled to continue to
receive his base salary for one year following the date of such termination. If
his employment is terminated without cause, he will be entitled to receive his
base salary for a period of two years subsequent to the date of termination. If
Mr. Chassaigne terminates his employment with the Company without good reason,
or if he is terminated by the Company for "cause," he will be entitled to
receive his base salary through the date of termination. For purposes of Mr.
Chassaigne's agreement, "cause" is defined as a determination by the Board of
Directors that the employee was engaged in (i) fraud, (ii) breach of the
material provisions of the employment agreement or (iii) a willful failure to
perform his duties as required under this agreement. If Mr. Chassaigne is
terminated by the Company with "sufficient reason," he will be entitled to
receive his base salary for a period of one year subsequent to the date of
termination. If Mr. Chassaigne is terminated by the Company without "sufficient
reason," he will be entitled to receive his base salary for a period of two
years subsequent to the date of termination. "Sufficient reason" shall mean a
good faith determination by the Company's Chief Executive Officer that the
employee failed to (i) adequately perform his duties as an officer of the
Company, (ii) exercise a level of judgment and skill in the management of the
Company comparable to other similarly situated executives, following 60 days
notice from the Chief Executive Officer of dissatisfaction with the employee's
performance or (iii) achieve the business objectives mutually agreed upon by the
parties. Mr. Chassaigne also agreed to certain noncompetition and nondisclosure
provisions which, under certain conditions, continue for a period of up to
fifteen months following a termination of Mr. Chassaigne's employment with the
Company.
Gregory A. Folz. In 1998, the Company entered into an employment agreement
with Mr. Folz providing for an initial term of one year, and thereafter
automatically renewed for successive one-year periods unless otherwise
terminated in accordance with the agreement. The base salary provided for in
this agreement is $130,000 per year. The agreement also provides Mr. Folz with
the right to participate in all benefits plans made available to the Company's
executives and/or employees. Mr. Folz's employment with the Company may be
terminated with or without cause or upon his death or disability. Additionally,
under this agreement, Mr. Folz is entitled to terminate his
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employment for "good reason". "Good reason" for such termination will exist if
at any time, except in strict compliance with the terms of the agreement,
(i) Mr. Folz's duties, responsibilities or title are materially reduced,
(ii) Mr.Folz's base salary is reduced or (iii) Mr. Folz is required by the
Company to relocate his business offices to a new city. If Mr. Folz terminates
his employment with the Company for good reason, he will be entitled to receive
his base salary for a period of one year following the date of such termination.
If Mr. Folz's employment with the Company is terminated in connection with the
sale of the Company, he will be entitled to continue to receive his base salary
for one year following the date of such termination. If his employment is
terminated without cause, he will be entitled to receive his base salary for a
period of one year subsequent to the date of termination. If Mr. Folz terminates
his employment with the Company without good reason, or if he is terminated by
the Company for "cause," he will be entitled to receive his base salary through
the date of termination. For purposes of Mr. Folz's agreement, "cause" is
defined as (i) failure to complete satisfactorily the Company's routine
pre-employment background check, (ii) conviction of a felony involving moral
turpitude or a felony in connection with his employment, (iii) fraud, (iv) use
or possession of illegal drugs on the Company's premises or reporting to work
under the influence of same, or (v) engaging in conduct, in or out of the
workplace, which may be reasonably determined to have an adverse effect on the
reputation or business of the Company. Mr. Folz also agreed to certain
noncompetition and nondisclosure provisions which continue for a period of one
year following a termination of Mr. Folz's employment with the Company.
Philip A. Stark. In 1997, the Company entered into an employment agreement
with Mr. Stark providing for an initial term of four years, and thereafter
automatically renewed for successive one-year terms unless otherwise terminated
in accordance with the agreement. The base salary provided for in this agreement
for the first year of employment was $116,000, with the base salary increasing
to $132,000 for each year thereafter. On the first anniversary of the agreement,
Mr. Stark was entitled to a bonus of $16,000. The agreement also provided
Mr. Stark with the right to participate in all benefits plans made available to
the Company's executives and/or employees. Mr. Stark's employment with the
Company could have been terminated with or without cause, upon his death or
disability or with "sufficient reason." Additionally, under his agreement,
Mr. Stark was entitled to terminate his employment for "good reason".
"Good reason" for such termination would have existed if at any time the Company
committed a material breach of the agreement, failed to employ Mr. Stark as a
management executive or failed to vest Mr. Stark with the powers and authority
customarily associated with executives of the Company. If Mr. Stark had
terminated his employment with the Company for good reason, he would have been
entitled to continue to receive his base salary for a period of one year
following the date of such termination. If Mr. Stark's employment had been
terminated in connection with the sale of the Company, he would have been
entitled to receive a payment equal to three times his then current base salary,
and all of his previously unvested stock options would become vested prior to
such sale. If Mr. Stark's employment had been terminated without cause or
sufficient reason, he would have been entitled to receive his base salary for a
period of two years following the date of such termination, and all of his
unvested options would have become fully vested. If Mr. Stark had terminated his
employment without good reason, or if he had been terminated by the Company with
sufficient reason or for "cause," he would have been entitled to receive
his base salary through the date of termination. For purposes of Mr. Stark's
agreement, "cause" was defined as a determination that the employee engaged in
(i) fraud, (ii) breach of the material provisions of the agreement or (iii) a
willful failure to perform his duties as required under the agreement.
"Sufficient reason" was defined as a good faith determination that the employee
failed to (i) adequately perform his duties as an officer of the Company or
(ii) exercise a level of judgment and skill in the management of the Company
comparable to other similarly situated executives, following 60 days notice from
the Chief Executive Officer of dissatisfaction with the employee's performance
or (iii) achieve the business objectives mutually agreed upon by the parties.
Mr. Stark also agreed to certain non-competition provisions which continue for a
period of two years following the termination of his employment with the
Company.
In connection with the Company's 1998 corporate reorganization,
Mr. Stark's employment with the Company was terminated on May 4, 1998. Pursuant
to Mr. Stark's employment agreement, Mr. Stark
35
38
was entitled to receive $255,342 upon his termination. In 1998, $126,402 of the
$255,342 was paid to Mr. Stark and the remainder will be paid to him in 1999.
Compensation Committee Interlocks and Insider Participation
The Company has engaged in various private transactions with the members of
its Compensation Committee or entities with which they are affiliated. The
Company believes that these transactions have been on terms no less favorable to
the Company than could have been obtained from unaffiliated third parties.
The Company engaged in various private equity financing transactions with
Mr. Harris, Dr. Stote and other shareholders in 1992, 1993 and 1994. Since these
arrangements were the result of arm's length negotiation among the Company and
these shareholders prior to their acquisition of an interest in the Company, the
Company believes that the arrangements are on terms no less favorable to it than
could have been obtained from unaffiliated third parties. As a result of various
financing transactions, the Company is a party to a registration rights
agreement with Dr. Stote and Mr. Harris. Under the terms of this agreement, the
holders of an aggregate of 1,990,332 Common Shares (the "Registrable Shares")
have the right to demand, no more than once every six months, registration under
the Securities Act of 1933, as amended, of the Common Shares having a market
value of at least $5,000,000 (in the case of a registration on Form S-1) or
$1,000,000 (in the case of a registration on Form S-2 or S-3). Such demand right
may be exercised by the holders of at least 40% of the Registrable Shares. The
holders of Registrable Shares may exercise their right to demand registration of
the Registrable Shares on Form S-1 up to two times at the Company's expense, and
any demand registrations on Form S-2 or S-3 an unlimited number of times at the
Company's expense. Although the holders of Registrable Shares have the right to
demand additional registrations on Form S-1, they will be required to pay their
share of the expenses associated with such registrations. The agreement also
provides the holders of an aggregate of 497,116 Common Shares (the "Related
Shares") with the limited right to participate, at their own expense, in a
registration statement demanded by the holders of Registrable Shares. In
addition, under certain conditions, the holders of Registrable Shares and
Related Shares have the limited right to include some or all of such shares in
any registration statement filed by the Company with respect to the sale of
Common Shares.
Compensation Committee Report on Executive Compensation
General. The Compensation Committee administers the Company's stock option
plans, including the selection of optionees and the timing of option grants, and
reviews and monitors key employee compensation and benefits policies and
administers the Company's management compensation plans. The current members of
the Compensation Committee are Messrs. Flaherty and Harris and Dr. Stote, all of
whom are non-employee Directors.
Set forth below is a discussion of the Company's compensation philosophy,
together with a discussion of the factors considered by the Committee in
determining the compensation of the Company's President and Chief Executive
Officer and the executive officers named in the Executive Compensation tables
above.
Compensation Philosophy. The Company's compensation philosophy is that
compensation paid to executive officers and other management personnel should
consist of four elements: (1) salary, (2) annual incentive bonus, (3) stock
options and (4) welfare, retirement and other benefits. The compensation package
is designed to attract and retain top quality management employees. In the
opinion of the Committee, it reflects competitive conditions of peer group
companies. To some extent, elements of compensation are designed to vary as
Company performance varies. In general, the elements of compensation that most
typically have a significant relationship to Company performance are awards
under its stock option and bonus plans. The Committee's decisions concerning
compensation make use of independent surveys of executive compensation of
similarly situated companies.
36
39
The Company has entered into employment agreements with all of its
executive officers. In general, the Committee believes that employment
agreements are a useful tool in attracting and retaining qualified executives.
Set forth below is a discussion of the various components of the
compensation arrangements provided to the executive officers, as well as a
discussion of the compensation arrangements provided to the Company's President
and Chief Executive Officer.
1998 Compensation Decisions
Base Salary and Benefits. Salaries of executive officers are subject
to minimum levels set by the terms of each executive's employment
arrangement with the Company. The primary factor in setting salary levels
pursuant to these arrangements was the Company's desire to provide
compensation in amounts sufficient to induce these individuals to either
join or continue with the Company. Salary levels for executive officers
reflect the Committee's judgments on appropriate salaries in light of the
duties and responsibilities inherent in the executives' respective
positions. The particular qualifications of an individual holding the
position and his or her level of experience, as well as information
concerning compensation paid by other companies in the industry, are
considered in establishing salary levels. The Committee's assessment of the
individual's performance and contribution to the Company's performance are
the primary criteria influencing decisions regarding salary. For those
executives who joined the Company during the year, the primary factor in
setting salary levels was the Company's desire to provide compensation in
amounts sufficient to induce these individuals to join the Company.
Stock Options. The Company uses stock options as a long-term incentive
program for executive officers. Stock options are used because they
directly relate the amounts earned by the executive officers to the amount
of appreciation realized by the Company's shareholders over comparable
periods. Stock options also provide executive officers with the opportunity
to acquire and build a meaningful ownership interest in the Company. The
Committee considers stock option awards throughout the year. In determining
the number of options awarded to an individual executive officer, the
Committee generally establishes a level of award based upon the position of
the individual and his or her level of responsibility and upon
recommendations made by the Company's President and Chief Executive
Officer. The Committee's decisions concerning individual option awards are
based on its judgment concerning the appropriate amount of long-term
compensation that should be paid to the executive in question. The Company
did not award any such stock options during the 1998 fiscal year.
Bonuses. Pursuant to the terms of its employment agreements with the
executive officers of the Company, the Company may pay additional
compensation in the form of discretionary bonuses. In general, the bonus
structure is open-ended and the bonus amount in any given year is
determined by the Committee. Bonuses may be provided either in the form of
cash, Common shares or a combination of the two, as the Committee
determines. The Company did not pay bonuses to its executive officers with
respect to performance during the 1998 fiscal year. However, in 1999, the
Compensation Committee has determined that, upon consummation of the
Proposed Sale pursuant to the terms described in the Agreement, Mr. Hugill
will be paid a cash bonus of $20,000.
President and Chief Executive Officer Compensation. Dr. Green's employment
contract with the Company contemplates compensation in two broad areas: (i) a
base salary and (ii) stock options under a long-term compensation plan. His
employment agreement provided for a base salary of $180,000 for 1997 and 1998.
When the Company failed to meet certain objectives with regard to financial
performance during 1997, Dr. Green elected to defer a portion of his 1997
salary. As a result, Dr. Green was paid $160,984 in salary for 1997. Dr. Green
was paid his full salary of $180,000 in 1998.
37
40
In November 1996, the Compensation Committee evaluated Dr. Green's role in
managing and finalizing the Company's initial public offering of Common Shares
in 1996. The Committee also evaluated his role in bringing about the Company's
most financially successful year since its formation. In January 1997, based on
this evaluation, Dr. Green was awarded options to purchase 25,000 Common Shares
at an exercise price of $10.75 per share. These options vest over four years,
and expire in ten years.
THE COMPENSATION COMMITTEE
Robert E. Flaherty
Seth B. Harris
Dr. Robert M. Stote
Performance Chart
The following line graph compares the percentage change in the cumulative
total shareholder return on the Company's Common Shares against the cumulative
total return of The Nasdaq Stock Market -- U.S. Index and the Nasdaq Health
Services Index for the period commencing June 11, 1996 (the initial trading date
for the Common Shares) and ending December 31, 1998. The graph assumes that the
value of the investment in Common Shares and each index was $100 on June 11,
1996, and that all dividends, if any, were reinvested.
Collaborative Clinical Nasdaq Stock Nasdaq
Rese arch, Inc. Market (U.S.) Health Services
---------------------- ------------- ---------------
06/11/96 100.00 100.00 100.00
12/96 80.00 104.00 83.00
12/97 38.00 127.00 85.00
12/98 30.00 179.00 73.00
- -------------
* $100 invested on 6/11/96 in stock or on 5/31/96 in index -- including
reinvestment of dividends. Fiscal year ending December 31.
38
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of February 26, 1999, the beneficial
ownership of the Company's Common Shares of (i) each person who is known to the
Company to own beneficially more than 5% of the Company's outstanding Common
Shares, (ii) each Director of the Company, (iii) each of the Named Executive
Officers and (iv) all Directors and executive officers as a group. Unless
otherwise indicated, all information with respect to beneficial ownership has
been furnished by the respective Director or executive officer, as the case may
be.
Common Shares
Beneficially Owned(1)
-----------------------
Name and Address of Beneficial Owner Number Percent
- ------------------------------------ -------- -------
Dr. Jeffrey A. Green (2) 405,146 6.6%
Timothy G. Biro (3) 1,700 *
Seth B. Harris (4) 82,534 1.3%
Terry C. Black 35,000 *
Patrick G. Chassaigne 10,000 *
Gregory A. Folz 15,050 *
Herbert L. Hugill (5) 62,500 1.0%
Philip A. Stark (6) 13,500 *
Dr. Robert M. Stote 33,974 *
Dr. Alan G. Walton (7) 612,252 9.5%
Dr. Roger G. Stoll 1,500 *
Dr. Mark J. Ratain 31,500 *
Robert E. Flaherty 1,500 *
Axiom Venture Partners Limited Partnership 577,586 9.0%
City Place II
185 Asylum Street
Hartford, Connecticut 06103
Brantley Venture Partners II, L.P. 746,052 11.6%
20600 Chagrin Boulevard, Suite 1150
Cleveland, Ohio 44122
Oxford BioScience Funds (7) (8) 612,252 9.5%
315 Post Road West
Westport, Connecticut 06880
Wellington Management Company (9) 448,500 7.0%
75 State Street
Boston, Massachusetts 02109
State of Wisconsin Investment Board 370,000 5.8%
P.O. Box 7842
Madison, Wisconsin 53707
Heartland Advisors, Incorporated 1,261,400 19.6%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
All directors and executive officers as a group (13 persons) 1,441,828 22.4%
- -------------
Less than one percent
(1) The number of Common Shares deemed outstanding includes (i) 6,430,872
Common Shares outstanding as of February 26, 1999 and (ii) with respect to
each of the following individuals and group the following number of Common
Shares, which may be purchased pursuant to option exercises within 60 days
after February 20, 1999: Dr. Green
39
42
(31,250 shares); Mr. Biro (3,000 shares); Mr. Harris (29,500 shares); Dr. Stote
(29,500 shares); Mr. Hugill (12,500 shares); Dr. Walton (4,500 shares);
Dr. Ratain (31,500 shares); Mr. Flaherty (1,500 shares); Dr. Stoll
(1,500 shares); Mr. Black (30,000 shares); Mr. Chassaigne (10,000 shares);
Mr. Folz (5,050 shares); Brantley Venture Partners II, L.P. ("Brantley")
(5,166 shares); Oxford BioScience Management Partners ("OBM") (3,167 shares);
all directors and executive officers as a group (249,967 shares). For purposes
of the Company's stock option plans, the closing of the Proposed Sale will
qualify as change in control. Pursuant to the terms of the Company's stock
option plans, all options outstanding upon the occurrence of a change in control
will become immediately vested and exercisable. If the Agreement is approved and
the proposed amendment to the 1996 Outside Directors Stock Option Plan is
adopted, each of the following individuals and group may purchase an additional
number of Common Shares indicated as follows: Dr. Green (18,750 shares);
Mr. Biro (10,000 shares); Mr. Harris (10,000 shares); Dr. Stote (10,000 shares);
Mr. Hugill (37,500 shares); Dr. Walton (10,000 shares); Dr. Ratain
(10,000 shares); Mr. Flaherty (10,000 shares); Dr. Stoll (10,000 shares);
Mr. Black (10,000 shares); Mr. Chassaigne (20,000 shares); Mr. Folz
(5,050 shares); all directors and executive officers as a group
(180,800 shares).
(2) Includes 150,000 Common Shares held by Dr. Green's wife, as to which he
disclaims beneficial ownership.
(3) Includes 200 Common Shares held by Mr. Biro's wife.
(4) Includes 400 Common Shares held by Mr. Harris' wife and 44,634 shares held
in trust for Mr. Harris.
(5) Includes 50,000 shares held in trust for Mr. Hugill.
(6) Mr. Stark's employment with the Company was terminated on May 4, 1998. The
amount of shares beneficially owned by Mr. Stark was obtained from a report
filed with the Commission, dated March 3, 1998, pursuant to the requirements
of Section 16(a) of the Exchange Act.
(7) Includes 408,690 and 82,517 Common Shares owned by Oxford BioScience
Partners, L.P. ("Oxford") and Oxford BioScience Partners (Adjunct), L.P.
("Oxford Adjunct"), respectively, of which OBP Management, L.P. ("OBP") is
the general partner, and 113,378 Common Shares owned by Oxford BioScience
Partners (Bermuda) Limited Partnership ("Oxford Bermuda"), of which OBP
Management (Bermuda) Limited Partnership ("OBP Bermuda") is the general
partner. OBP may be deemed to be the beneficial owner of shares owned by
Oxford Bermuda. Also includes 3,167 and 4,500 Common Shares issuable upon
exercise of options owned by OBM and Dr. Walton, respectively, that are
currently exercisable. Dr. Walton, a Director of the Company, is a general
partner of OBP, OBP Bermuda and OBM and may be deemed to be a beneficial
owner of the shares held by such entities.
(8) The information provided herein with respect to the beneficial ownership of
the Company's Common Shares by the Oxford BioScience Funds was obtained
solely from a Schedule 13G filed with the Securities and Exchange Commission
(the "Commission") on February 12, 1999 by the Oxford BioScience Funds.
(9) The Common Shares listed are held by Wellington Management Company in its
capacity as investment advisor. Various persons other than Wellington
Management Company have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the shares
held. The interests of one such account, Global Health Care Opportunity,
relates to more than 5% of the outstanding Common Shares. The information
provided herein with respect to Wellington Management Company's beneficial
ownership of the Company's Common Shares was obtained solely from a Schedule
13G filed with the Commission on January 24, 1999 by Wellington Management
Company.
40
43
(10) The information provided herein with respect to the beneficial ownership
of the Company's Common Shares by the State of Wisconsin Investment Board
was obtained solely from a Schedule 13G filed with the Commission on
January 16, 1999 by the State of Wisconsin Investment Board.
(11) The Common Shares listed are held by Heartland Advisors, Incorporated in
its capacity as investment advisor. Various persons other than Heartland
Advisors, Incorporated have the right to receive or the power to direct
the receipt of dividends from, or the proceeds from the sale of, the
shares held. The interests of one such account, Heartland Value Fund, a
series of Heartland Group, Incorporated, a registered investment company,
relates to more than 5% of the outstanding Common Shares. The information
provided herein with respect to Heartland Advisors, Incorporated's
beneficial ownership of the Company's Common Shares was obtained solely
from the Schedule 13G filed with the Commission on January 13, 1999 by
Heartland Advisors, Incorporated.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with various financing transactions, the Company entered into
certain agreements with certain of its Directors, executive officers and
shareholders who beneficially own more than five percent of the Company's Common
Shares. Since these arrangements were the result of arm's length negotiation
among the Company and these shareholders prior to their acquisition of an
interest in the Company, the Company believes that the agreements are on terms
no less favorable to it than could have been obtained from unaffiliated third
parties. Relationships between the Company and those investors who are
affiliated with members of the Compensation Committee of the Board of Directors
are described under "Executive Compensation -- Compensation Committee Interlocks
and Insider Participation."
As a result of various financing transactions, the Company is a party to a
registration rights agreement with Brantley, Oxford, Oxford Bermuda, Oxford
Adjunct, Axiom Venture Partners Limited Partnership, Drs. Green, Kasmer,
Stigelman and Stote and Mr. Harris, each of whom is either a Director, executive
officer or beneficial owner of greater than 5% or more of the Company's Common
Shares. Under the terms of this agreement, the holders of an aggregate of
1,990,332 Common Shares (the "Registrable Shares") have the right to demand, no
more than once every six months, registration under the Securities Act of 1993,
as amended, of Common Shares having a market value of at least $5,000,000 (in
the case of a registration on Form S-1) or $1,000,000 (in the case of a
registration on FormS-2 or S-3). Such demand right may be exercised by the
holders of at least 40%of the Registrable Shares. The holders of Registrable
Shares may exercise their right to demand registration of the Registrable Shares
on Form S-1 up to two times at the Company's expense, and any demand
registrations on Form S-2 or S-3 an unlimited number of times at the Company's
expense. Although the holders of Registrable Shares have the right to demand
additional registrations on FormS-1, they will be required to pay their share of
the expenses associated with such registrations. The agreement also provides the
holders of an aggregate of 497,116 Common Shares (the "Related Shares"), with
the limited right to participate, at their own expense, in a registration
statement demanded by the holders of Registrable Shares. In addition, under
certain conditions, the holders of Registrable Shares and Related Shares have
the limited right to include some or all of such shares in any registration
statement filed by the Company with respect to the sale of its Common Shares.
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
41
44
All financial statement schedules for the Company and its subsidiaries have
been included in the consolidated financial statements or the related footnotes,
or they are either inapplicable or not required.
(a)(3) Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the period
covered by this Annual Report on Form 10-K other than the following:
Current Report on Form 8-K dated December 21, 1998, reporting under Item 5
the Company's execution of an agreement to sell the assets of its Clinical
Business.
42
45
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 25, 1999
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
--------- -----
/Jeffrey A. Green President and Chief Executive Officer
- -------------------
Jeffrey A. Green and Director (Principal Executive Officer)
/s/ Terry C. Black Vice President of Finance, Chief
- --------------------
Terry C. Black Financial Officer and Treasurer
(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/ Roger G. Stoll Director
- ---------------------
Roger G. Stoll
/s/ Herbert L. Hugill Director
- -----------------------
Herbert L. Hugill
/s/ Robert E. Flaherty Director
- ------------------------
Robert E. Flaherty
Director
- --------------------
Mark J. Ratain
/s/ Alan G. Walton Director
- --------------------
Alan G. Walton
Date: March 25, 1999
43
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Collaborative Clinical Research, Inc. and Subsidiaries
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1998 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
47
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, 1997
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. 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, 1997 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
February 5, 1999
F-2
48
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==============================================================================
December 31,
------------------------------
1997 1998
---- ----
Assets
Current assets
Cash and cash equivalents $ 6,381,512 $ 4,072,586
Short-term investments 27,231,976 22,620,667
Accounts receivable, net 4,497,255 2,731,567
Taxes receivable 197,990 101,892
Notes receivable - officer 165,000 -----
Prepaid expenses 517,510 264,460
------------ ------------
Total current assets 38,991,243 29,791,172
Property and equipment
Equipment 2,050,715 3,608,429
Leasehold improvements 341,427 355,907
------------ ------------
2,392,142 3,964,336
Less accumulated depreciation 831,291 1,571,070
------------ ------------
1,560,851 2,393,266
Goodwill, less accumulated amortization of
$714,000 and $206,000 as of December 31,
1997 and 1998, respectively 7,727,014 1,335,193
Other assets 41,530 20,168
------------ ------------
7,768,544 1,355,361
============ ============
Total assets $ 48,320,638 $ 33,539,799
============ ============
Labilities and Shareholders' Equity
Current liabilities
Accounts payable $ 779,542 $ 1,012,454
Accrued expenses 4,338,686 3,664,577
Deferred revenue 852,132 625,068
------------ ------------
Total current liabilities 5,970,360 5,302,099
Shareholders' equity
Foreign currency translation ----- (44,041)
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
6,412,872 and 6,422,872 shares as of
December 31, 1997 and 1998, respectively 49,697,057 49,704,742
Accumulated deficit (7,346,779) (21,423,001)
------------ ------------
Total shareholders' equity 42,350,278 28,237,700
------------ ------------
Total liabilities and shareholders' equity $ 48,320,638 $ 33,539,799
============ ============
See accompanying notes.
F-3
49
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
For the Year Ended December 31,
--------------------------------------------------------------------------
1996 1997 1998
---- ---- ----
Revenue $25,715,004 $17,327,232 $13,226,078
Direct costs 17,976,472 12,637,223 10,511,024
-------------------- -------------------- -----------------
Gross profit 7,738,532 4,690,009 2,715,054
Selling, general and administrative expenses 6,140,400 10,009,638 8,968,913
Impairment charge ----- ----- 6,056,019
Special items ----- 2,994,597 1,998,187
Depreciation and amortization 606,061 1,014,548 1,155,110
-------------------- -------------------- -----------------
Income (loss) from operations 992,071 (9,328,774) (15,463,175)
Other income (expense):
Interest income 1,146,111 1,936,389 1,679,260
Interest expense (93,330) ----- -----
Other expense ----- ----- (212,307)
Loss from joint venture (15,042) (47,788) -----
-------------------- --------------------- -----------------
Income (loss) before income taxes 2,029,810 (7,440,173) (13,996,222)
Income tax expense (benefit) 383,200 (57,570) 80,000
-------------------- --------------------- -----------------
Net income (loss) $ 1,646,610 $ (7,382,603) $ (14,076,222)
==================== ===================== =================
Net income (loss) per share:
Basic:
Net income (loss) per share $ 0.36 $ (1.16) $ (2.19)
==================== ===================== =================
Weighted average shares outstanding 4,625,924 6,384,469 6,421,820
==================== ===================== =================
Diluted:
Net income (loss) per share $ 0.33 $ (1.16) $ (2.19)
==================== ===================== =================
Weighted average shares outstanding 5,052,494 6,384,469 6,421,820
==================== ===================== =================
See accompanying notes.
F-4
50
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===============================================================================
Series A Series B Series C
Preferred Shares Preferred Shares Preferred Shares
-------------------------- ------------------------ -------------------------
Number Number Number
Of Shares Par Value Of Shares Par Value Of Shares Par Value
------------ ------------ --------- ----------- ----------- ----------
Balance at January 1, 1996 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 ----- ----- ----- ----- ----- -----
Exercise of Common Share Options
Stock compensation
Comprehensive loss:
Foreign currency translation
Net (loss)
Comprehensive loss
-------- --------- ------- -------- ---------- --------
Balance at December 31, 1998 ----- $ ---- ----- $ ----- ----- $ -----
======== ========= ======= ======== ========== ========
Additional Common Shares Retained
------------------------- Earnings Currency
Paid-In Number Stated (Accumulated Translation
Capital of Shares Amount Deficit) Adjustments Total
------------ ----------- ------------ ------------- ----------- ------------
Balance at January 1, 1996 $ 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
Exercise of Common Share Options 10,000 2,100 2,100
Stock compensation 5,585 5,585
Comprehensive loss:
Foreign currency translation (44,041) (44,041)
Net loss (14,076,222) (14,076,222)
------------ -------- -----------
Comprehensive loss (14,076,222) (44,041) (14,120,263)
------------ ---------- ----------- ------------ -------- ----------
Balance at December 31, 1998 $ ----- 6,422,872 $49,704,742 $(21,423,001) $(44,041) $28,237,700
============ ========== =========== ============ ======== ===========
See accompanying notes
F-5
51
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
For the Year Ended December 31,
-------------------------------------------
1996 1997 1998
---- ---- ----
Operating Activities
Net income (loss) $ 1,646,610 $ (7,382,603) $(14,076,222)
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Equity loss in HRI 15,042 47,788 ---
Depreciation and
amortization 606,061 1,014,548 1,155,110
Accretion of discount
on investments (919,723) (1,078,577) (1,469,481)
Other 29,069 14,356 8,624
Impairment charge --- --- 6,056,019
Special items --- 2,994,597 1,998,187
Changes in operating
assets and liabilities:
Accounts and taxes
receivable (2,534,642) 3,725,294 1,861,785
Prepaid expenses 78,629 143,782 253,050
Other assets (91,972) 85,062 13,560
Accounts payable and
accrued expenses (1,056,152) (188,122) (2,445,660)
Deferred revenue (199,964) (80,328) (227,064)
------------- ------------- -------------
Net cash used in operating
activities (2,427,042) (704,203) (6,872,092)
Investing Activities
Purchases of property and
equipment (932,953) (1,422,979) (1,646,430)
Purchases of businesses
(net of cash acquired) (7,278,038) (21,370) ---
Maturities of short-term
investments 25,749,178 50,519,484 71,870,122
Purchases of short-term
investments (52,148,794) (47,499,147) (65,789,332)
Investment in HRI (27,225) (5,470) 7,802
------------- ------------- -------------
Net cash provided by
(used in) investing
activities (34,637,832) 1,570,518 4,442,162
Financing Activities
Borrowings on line of
credit 1,271,111 --- ---
Payments on line of
credit (2,402,520) --- ---
(Issuance) repayment of
notes receivable - officer --- (165,000) 165,000
Proceeds from issuance of
shares 42,548,818 170,737 2,100
------------- ------------- -------------
Net cash provided by
financing activities 41,417,409 5,737 167,100
Effect of exchange rate on cash --- --- (46,096)
------------- ------------- -------------
Increase (decrease) in cash
and cash equivalents 4,352,535 872,052 (2,308,926)
Cash and cash equivalents at
beginning of year 1,156,925 5,509,460 6,381,512
------------- ------------- -------------
Cash and cash equivalents at
end of year $ 5,509,460 $ 6,381,512 $ 4,072,586
============= ============= =============
Cash paid during the year for
interest $ 93,330 $ --- $ ---
============= ============= =============
Net cash paid during the year
for income taxes $ --- $ 397,012 $ 51,341
============= ============= =============
See accompanying notes.
F-6
52
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
1. Accounting Policies
Description of Business
Collaborative Clinical Research, Inc. (the "Company") is a multi-specialty
Site Management Organization managing a network of non-owned affiliated and
owned clinical research sites. The Company's customers are primarily
pharmaceutical and biotechnology companies and, in selected cases, contract
research organizations. The Company's Clinical Business provides Phase I
through IV clinical research services, and over the counter product services.
The Company's wholly owned subsidiary, DataTRAK, Inc. ("DataTRAK"), provides
technology and other services to assist in the timely completion of clinical
trials.
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
Clinical Business - 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.
DataTRAK - DataTRAK contracts provide a fixed price for each component or
service to be delivered. Services provided by DataTRAK that are in addition to
those provided for in its contracts are billed on a fee for service basis for
services completed. Revenue and related direct costs of revenue are recognized
as services are performed under the percentage of completion method utilizing
units of delivery. The termination of a contract will not result in a material
adjustment to the revenue or costs previously recognized. DataTRAK is also a
seller and licenser of software. Generally, revenue is recognized upon delivery
of sold software. Licensing revenue is recognized ratably over the life of the
license. To date DataTRAK has not recognized any revenue from software sales.
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):
Year ended December 31,
---------------------------------------
Customer 1996 1997 1998
-------- ---- ---- ----
A $5,754 $* $*
B 7,925 * *
C * 1,779 *
D * 2,184 *
E * * 1,865
F * * 1,664
- ---------------
* Less than 10% of revenue.
F-7
53
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
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
somewhat 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 are 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.
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 $126,600 and $53,100 at December 31, 1997
and 1998, 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 other
political subdivisions, and U.S. corporate obligations 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. Depreciation
expense was $320,000, $590,000 and $820,000 for 1996, 1997 and 1998,
respectively.
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.
Stock Based Compensation
The Company accounts for stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25").
F-8
54
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
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.
Impairment of Long-Lived Assets
The Company evaluates impairment of long-lived assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). As such, the carrying values
of long-lived assets are evaluated if circumstances indicate a possible
impairment in value. If undiscounted cash flows over the remaining amortization
period indicate that long-lived assets may not be recoverable, the carrying
value will be reduced by the estimated shortfall of cash flows on a discounted
basis. (See Note 2).
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 $170,000,
$300,000 and $340,000 for 1996, 1997 and 1998, respectively.
Software Development Costs
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional costs are capitalized in accordance
with Statement of Financial Accounting Standards No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Such
costs are amortized over the lesser of three years or the economic life of the
related product. The Company performs an annual review of the recoverability of
such capitalized software costs. At the time determination is made that
capitalized amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts are
written off.
Unamortized software and software development costs included in the
Company's balance sheet were zero and $780,000 at December 31, 1997 and 1998,
respectively. Amortization expense related to capitalized software costs was
zero in 1996 and 1997, and $280,000 in 1998.
F-9
55
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at current exchange rates. Revenue and expense
accounts of these operations are translated at average rates prevailing during
the period. These translation adjustments are accumulated in a separate
component of shareholders' equity. Foreign currency transaction gains and
losses are included in determining net income (loss) when realized.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"), which is
effective for years beginning after December 15, 1997. Statement No. 130
establishes standards for reporting and displaying comprehensive income and its
components in financial statements. The Company adopted Statement No. 130
effective January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement No. 131"), which is effective for years beginning after December 15,
1997. Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company has reported information for two segments (Clinical
Business and DataTRAK).
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year reporting presentation.
2. Impairment Charges and Special Items
Results of operations for 1997 included special items charges of $2,994,597
related to costs associated with exiting certain Company activities. Of this
total, $2,000,000 represented the Company's best estimate of its costs
associated with the termination of its technology alliance with IBM. Also, as a
result of the termination of the technology alliance, $737,916 of unamortized
software was written off. The remaining $256,681 was for the
disposal/abandonment of certain medical and computer equipment and the closing
of a leased facility, which occurred during the fourth quarter of 1997.
During 1998, the Company recorded total special items charges of
$1,998,187. The Company recorded a charge of $1,439,762 in the first quarter of
1998 to recognize costs associated with employee severance and other special
items including the March 24, 1998 termination of 29 employees pursuant to a
reorganization plan announced in March 1998 and expected to be completed before
the end of the second quarter of 1998. In June 1998, an additional special
items charge of $271,425 was recorded related to the closing of the Company's
United Kingdom operations (including the termination of two employees) and the
termination of a joint venture in the United Kingdom, and additional costs
incurred in connection with the termination of the IBM and DataTRAK alliance.
In September 1998, a special items charge of $287,000 was recorded associated
with the closure of two of the Company's owned Clinical Business sites,
including severance related costs for two employees at these locations.
F-10
56
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
Also during 1998, the Company recorded impairment charges of $6,056,019
related to the impairment of goodwill. Of this charge, $1,848,307 was related
to goodwill written off during the third quarter of 1998 related to the two
Clinical Business locations that were closed in September of 1998 due to their
poor operating performance and represented the remaining unamortized goodwill
allocated to these locations at the time of their purchase in 1996. The
remaining $4,207,712 was for goodwill associated with GFI.
GFI, a subsidiary, was acquired in January 1996 for $6.0 million with
substantially all of the purchase price being allocated to goodwill.
Subsequently, pursuant to SFAS 121, the Company evaluated the recoverability of
the long-lived assets including intangibles of its GFI subsidiary. GFI's
revenue continued to decline and its net losses continued to increase since its
acquisition. In addition, the two principals responsible for the development of
GFI, prior to its purchase by the Company, left the Company and a new management
team was put in place. In the third quarter of 1998, after new management's
efforts to effect a turn around were exhausted, and concurrent with the
Company's planning process, it was determined that the possibility of recovering
the recorded value of the long-lived GFI assets through a sale of GFI, exclusive
of a sale of the entire Clinical Business was remote. In addition, it was
determined that GFI's future undiscounted cash flows were below the carrying
value of GFI's long-lived assets. Accordingly, during the third quarter of 1998,
the Company adjusted the carrying value of GFI's long-lived assets to their
estimated fair value of approximately $1.6 million, resulting in a non-cash
charge of $4,207,712. The estimated fair value was based on the purchase price
allocated to GFI pursuant to an initial offer from The West Company,
Incorporated to purchase the Clinical Business.
F-11
57
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
Details of the impairment charges and special items, of which asset
write-offs and goodwill impairment represent non-cash charges, are as follows:
Special Items
------------------------------------------------------------------
Goodwill Asset Termination Other Exit
Impairment Write-offs Benefits Costs Total
------------ ------------------------------------------------------------------
1997 charges:
Termination of IBM and
DataTRAK alliance $ $ 737,916 $ ---- $ 2,000,000 $ 2,737,916
----
Exiting of other Company
activities ---- 156,681 ---- ---- 156,681
Closing of leased facility ---- ---- ---- 100,000 100,000
------------ ------------- -------------- ------------ -------------
Total 1997 charges $ ---- $ 894,597 $ ---- $ 2,100,000 $ 2,994,597
============ ============= ============== ============ =============
Reserve at December 31, 1997 ---- $ 2,100,000
1998 charges:
March 1998 corporate
reorganization $ ---- $ ---- $ 1,194,762 245,000 $ 1,439,762
June 1998:
Termination of IBM and
DataTRAK alliance ---- ---- ---- 126,425 126,425
Exiting of United Kingdom
activities ---- 27,023 18,000 99,977 145,000
------------ ------------- -------------- ------------ -------------
---- 27,023 18,000 226,402 271,425
September 1998:
Closure of two clinical sites 1,848,307 ---- 15,000 272,000 287,000
GFI goodwill impairment 4,207,712 ---- ---- ---- ----
------------ ------------- -------------- ------------ -------------
6,056,019 ---- 15,000 272,000 287,000
------------ ------------- -------------- ------------ -------------
Total 1998 charges $ 6,056,019 $ 27,023 1,227,762 743,402 $ 1,998,187
============ ============= =============
1998 payments:
Termination of IBM and
DataTRAK alliance ---- 2,080,300 $ 2,080,300
Closing of leased facility ---- 82,443 82,443
March 1998 corporate
reorganization 648,934 176,155 825,089
Exiting of United Kingdom
activities 18,000 50,202 68,202
Closure of two clinical sites 15,000 13,420 28,420
-------------- ------------ -------------
Total 1998 payments 681,934 2,402,520 $ 3,084,454
-------------- ------------ -------------
Reserve at December 31, 1998 (to
be paid in 1999) $ 545,828 $ 440,882
============== ============
F-12
58
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
3. Accounts Receivable
Accounts receivable consist of the following:
December 31,
-------------------------------------
1997 1998
---- ----
Trade accounts receivable:
Billed $ 3,527,078 $ 1,462,082
Unbilled 1,236,915 1,397,915
------------- ----------------
Total trade accounts receivable 4,763,993 2,859,997
Other 43,262 29,570
Allowance for doubtful accounts (310,000) (158,000)
------------- ----------------
$ 4,497,255 $ 2,731,567
============= ================
Movement of the allowance for doubtful accounts is as follows:
Year ended December 31,
-------------------------------------------------------------------
1996 1997 1998
---- ---- ----
Balance at beginning of year $ 89,000 $ 264,000 $ 310,000
Provision (credit) for uncollectible accounts 75,000 96,000 (55,000)
Acquisitions 100,000 ---- ----
Uncollectible accounts written off ---- (50,000) (97,000)
-------------------- ------------------- ------------------
Balance at end of year $ 264,000 $ 310,000 $ 158,000
==================== =================== ==================
The net credit for uncollectible accounts recognized in 1998 was primarily
due to favorable collection efforts in 1998 of disputed contracts, provided for
in the prior year.
4. Note Receivable - Officer
In September 1997, the Company loaned an officer of DataTRAK $165,000 as
part of a relocation package. The loan bore interest at the applicable federal
rate, adjusted on a monthly basis. The note, plus interest, was repaid in 1998.
5. Financing Arrangements
The Company has a line of credit agreement with a bank which provides for
borrowings up to $2.0 million that bears interest at rates not to exceed prime
(no amounts were outstanding at December 31, 1997 or 1998). The line of credit
agreement requires that the Company maintain investments of $2.0 million with
the bank. This line of credit is considered to be committed and is subject to
renewal at January 31, 2000.
F-13
59
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
6. Short-term Investments
The following is a summary of held-to-maturity securities:
December 31,
------------------------------------------------------------------------
1997 1998
---------------------------------- ---------------------------------
Amortized Amortized
Cost Cost Cost Cost
---- ---- ---- ----
U.S. Treasury securities and
obligations of U.S. government agencies $ 8,985,366 $ 9,132,615 $ 4,421,516 $ 4,440,507
Obligations of states and political
subdivisions --- --- 1,478,377 1,495,542
U.S. corporate obligations 17,728,082 18,099,361 16,428,993 16,684,618
----------- ----------- ----------- -----------
$26,713,448 $27,231,976 $22,328,886 $22,620,667
=========== =========== =========== ===========
7. Accrued Expenses
Accrued expenses consist of the following:
December 31,
---------------------------------------
1997 1998
---- ----
Contract services costs $1,409,442 $1,285,009
Special items (see Note 2) 2,100,000 986,710
Payroll and other employee costs 461,695 658,828
Other 367,549 734,030
---------- ----------
$4,338,686 $3,664,577
========== ==========
8. Income Taxes
Income tax expense (benefit) consists of the following:
Year ended December 31,
-----------------------------------------------------------------
1996 1997 1998
---- ---- ----
Current:
Federal $209,200 $(197,990) $ ----
State and local 185,700 140,420 80,000
-------- --------- -------
394,900 (57,570) 80,000
Deferred
Federal (10,000) ---- ----
State and local (1,700) ---- ----
-------- -------- -------
(11,700) ---- ----
-------- --------- -------
$383,200 $ (57,570) $80,000
======== ========= =======
F-14
60
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
A reconciliation of income taxes (benefit) at the United States Federal
statutory rate to the effective income tax rate is as follows:
Year ended December 31,
---------------------------------------------------
1996 1997 1998
Income taxes (benefit) at the United States statutory rate $ 706,800 $ (2,322,900) $ (4,328,400)
State and local income taxes 162,500 140,420 80,000
Net operating loss carryback (carryforward) (476,500) 197,990 ----
Change in valuation allowance ---- 2,396,000 4,336,000
Allowances and accruals (9,600) (469,080) (7,600)
------------- ------------- -------------
$ 383,200 $ (57,570) $ 80,000
============= ============= =============
At December 31, 1998 the Company had a net operating loss carryforward of
approximately $13.0 million which will expire in the year 2013. The significant
components of the Company's deferred tax assets (liabilities) are as follows:
December 31,
------------------------------
1997 1998
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,706,000 $ 4,492,000
Allowances and accruals 873,000 433,000
Depreciation and amortization (130,000) 1,860,000
------------ ------------
2,449,000 6,785,000
Valuation allowance (2,449,000) (6,785,000)
------------ ------------
Net deferred tax assets recorded $ --- $ ---
============ ============
9. Operating Leases
The Company leases certain office equipment and space. Rent expense
relating to these operating leases was approximately $580,000, $1,010,000 and
$1,060,000 in 1996, 1997 and 1998, respectively. Future minimum lease payments
for the Company under noncancelable operating leases as of December 31, 1998 are
as follows:
Year ending December 31, Amount
------------------------ ------
1999 $ 1,057,900
2000 1,004,300
2001 576,400
2002 211,800
2003 38,100
-----------
$ 2,888,500
===========
10. 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
F-15
61
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
the closing of the initial public offering, the Company issued 148,148 Common
Shares to the former shareholders of GFI and all of the Company's outstanding
series A, B and C Convertible Preferred Shares were automatically converted into
a total of 2,201,133 Common Shares. On July 11, 1996, an additional 400,000
Common Shares were sold at $13.50 per share to cover underwriting
over-allotments from the initial public offering.
Convertible Preferred Shares
The Series A 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, 1997 and 1998, the Company had 1,000,000 Serial Preferred
Shares, without par value, authorized, with none outstanding.
11. Share Option Plans
The Company has four share option plans. At December 31, 1998, the
Company had reserved 954,708 Common Shares for the exercise of Common Share
options. The weighted average contractual life of all options outstanding was
7.3 years as of December 31, 1998. The range of exercise prices for all options
outstanding at December 31, 1998 was $0.15 to $15.00.
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 $29,069 in 1996, $14,356 in 1997 and $5,585 in 1998. No
further compensation expense will be recorded related to these Common Share
options. 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. 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. All options granted under the 1992
Plan expire ten years after the grant date.
The Amended and Restated 1996 Outside Directors' Stock Option Plan, as
amended subject to shareholder approval, ("1996 Director Plan") was established
by the Company in February 1996. The 1996 Director Plan
F-16
62
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
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 six months 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.
The Company's share option activity and related information is summarized
below:
Year ended December 31,
-----------------------------------------------------------------------------------
1996 1997 1998
--------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------- --------------------------- -------------------------
Outstanding at
beginning of
period 487,499 $ 1.87 523,000 $ 3.66 564,775 $ 5.30
Granted 104,134 11.19 287,600 7.00 31,000 4.24
Exercised (22,633) 0.37 (102,458) 1.67 (10,000) 0.21
Canceled (46,000) 3.39 (143,367) 5.32 (141,125) 7.31
--------- --------- ----------
Outstanding at
end of period 523,000 3.66 564,775 5.30 444,650 4.69
--------- ------- --------- -------- ---------- -------
Exercisable at
end of period 219,450 $ 1.60 196,500 $ 2.54 274,800 $ 3.26
========= ======= ========= ======== ========== =======
On December 21, 1998, the Company entered into a definitive agreement,
subject to shareholder approval, to sell its Clinical Business to The West
Company, Incorporated. The sale of the Clinical Business will meet the
definition of a change of control as defined in each of the Company's share
option plans. Upon completion of the sale of the Clinical Business all 444,650
outstanding Common Share options will become fully vested, of which 150,283 of
these options have an exercise price less than the market value of the Company's
Common Shares on December 31, 1998.
The 1996 Director Plan was amended, subject to shareholder approval, to
provide for the granting of a maximum of 175,000 options, which will increase
the number of Common Shares reserved for the exercise of Common Share options to
1,079,708. The 1996 Director Plan was also amended, subject to shareholder
approval, to allow for a three year vesting period for certain options. In
1998, the Company's Board of Directors have approved the granting of a total of
70,000 Common Share options (excluded from the table above) at an exercise price
of $4.19 per share, subject to shareholder approval of the amendment to the 1996
Director Plan. Pursuant to APB 25, compensation expense may be incurred in
future periods related to these options, if the market value of the Company's
Common Shares is greater than the exercise price of the Common Share options,
upon approval of the amendment to the 1996 Director Plan.
F-17
63
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
12. Stock Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee and director stock options. As discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("Statement No. 123") 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.
Pro forma information regarding net income and earnings per share is
required by Statement No. 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 1996,
1997 and 1998, respectively: risk free interest rate of 5.0%, 6.0% and 5.5%, a
volatility factor of the expected market price of the Company's Common Shares of
0.53, 0.66 and 0.34, 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
1996, 1997 and 1998 was $6.66, $5.18, and $1.91, 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,
----------------------------------------------------
1996 1997 1998
---- ---- ----
Pro forma net income (loss) $1,439,032 $(7,798,678) $(14,485,188)
Pro forma basic income (loss) per share $ 0.32 $ (1.29) $ (2.48)
Pro forma diluted income (loss) per share $ 0.29 $ (1.29) $ (2.48)
13. 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. The Company did not make any matching or profit sharing
contributions in 1996, 1997 or 1998.
F-18
64
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
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. Segment Information
The Company operates in two principal business segments: Clinical Business
and DataTRAK. The Clinical Business provides Phase I through IV clinical
research services, and over the counter product services. DataTRAK provides
technology and other services to assist in the timely completion of clinical
trials. During 1996, the Company operated only in the Clinical Business
segment.
The Company evaluates performance and allocates resources based on profit
or loss from operations before other income and expense and income taxes. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies. There have been no
intersegment sales.
The Company's reportable segments are business units that offer different
services utilized in the performance of clinical trials. The reportable
segments are managed separately because they offer separate and distinct
services to customers in the clinical research industry.
F-19
65
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
Information on the Company's business segments is as follows:
Clinical Other
Year ended December 31, Business DataTRAK Corporate Total
- ----------------------- -------- -------- --------- -----
Revenue:
1996 $ 25,715,004 $ --- $ --- $ 25,715,004
1997 17,237,232 --- --- 17,237,232
1998 13,094,326 131,752 --- 13,226,078
Impairment charge:
1996 --- --- --- ---
1997 --- --- --- ---
1998 6,056,019 --- --- 6,056,019
Special items:
1996 --- --- --- ---
1997 256,681 2,737,916 --- 2,994,597
1998 1,244,973 161,195 592,019 1,998,187
Depreciation and amortization:
1996 606,061 --- --- 606,061
1997 817,718 72,295 124,535 1,014,548
1998 685,238 358,557 111,315 1,155,110
Income (loss) from operations:
1996 992,071 --- --- 992,071
1997 (1,906,944) (3,898,916) (3,522,914) (9,328,774)
1998 (9,837,447) (2,690,645) (2,935,083) (15,463,175)
Expenditures for long-lived assets:
1996 9,697,534 --- --- 9,697,534
1997 367,398 885,619 191,332 1,444,349
1998 240,505 1,353,736 52,189 1,646,430
Assets at December 31,
1997 13,382,302 92,596 34,845,740 48,320,638
1998 5,175,149 1,170,105 27,194,545 33,539,799
F-20
66
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
Enterprise-Wide Disclosures
Geographic Information
United United
Year ended December 31, States Kingdom Germany Total
- ---------------------- ------ ------- ------- -----
Revenue:
1996 $25,715,004 $ -- $ -- $25,715,004
1997 16,733,004 504,228 -- 17,237,232
1998 13,093,095 1,231 131,752 13,226,078
Assets at December 31,
1997 48,070,761 221,432 28,445 48,320,638
1998 33,247,934 42,507 249,358 33,539,799
Major Customers - During 1996, the Clinical Business recorded revenue of
approximately $5.8 million and $7.9 million from two separate customers. During
1997, the Clinical Business recorded revenue of approximately $1.8 million and
$2.2 million from two separate customers. During 1998, the Clinical Business
recorded revenue of approximately $1.9 million and $1.7 million from two
separate customers.
16. 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. 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-21
67
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
================================================================================
The following table sets forth the computation of basic
and diluted earnings per share.
Year Ended December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
Net income (loss) used in
the calculation of basic
and diluted earnings per
share $ 1,646,610 $ (7,382,603) $ (14,076,222)
============ ============== ==============
Denominator for basic net
income (loss) per share -
weighted average Common
Shares outstanding 4,625,924 6,384,469 6,421,820
Effect of dilutive Common
Share options and warrants 426,570 -- --
------------ -------------- --------------
Denominator for diluted net
income (loss) per share 5,052,494 6,384,469 6,421,820
============ ============== ==============
Basic net income (loss)
per share $ 0.36 $ (1.16) $ (2.19)
============ ============== ==============
Diluted net income (loss)
per share $ 0.33 $ (1.16) $ (2.19)
============ ============== ==============
Common Share options excluded
from the computation of
diluted net income (loss)
per share because they would
have an antidilutive effect
on net income (loss) per
share -- 564,775 444,650
============ ============== ==============
17. Sale of Clinical Business
On December 21, 1998, the Company entered into a definitive agreement,
subject to shareholder approval, to sell its Clinical Business to The West
Company, Incorporated for $15.0 million, less applicable transaction costs,
and adjustments for working capital and the collection of net accounts
receivable. Unaudited pro forma data for the year ended December 31, 1998 as
though the Company had completed this sale at the beginning of 1998 are set
forth below. The pro forma operating results are not necessarily indicative
of what would have occurred had the transaction taken place on January 1, 1998.
Year ended
December 31, 1998
-----------------
Pro forma revenue $ 131,752
Pro forma net loss (3,946,468)
Pro forma basic loss per share (0.61)
Pro forma diluted loss per share (0.61)
F-22
68
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For the Years Ended December 31, 1996, 1997 and 1998
============================================================================
18. Quarterly Data (Unaudited)
Selected quarterly data is as follows (in thousands):
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)
Year Ended December 31, 1998
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 2,364 $ 2,654 $ 3,690 $ 4,518
Gross profit 339 300 688 1,388
Loss from operations (4,028) (2,638) (8,113) (684)
Net loss (3,618) (2,216) (7,707) (535)
Net loss per share: basic (0.56) (0.35) (1.20) (0.08)
Net loss per share: diluted (0.56) (0.35) (1.20) (0.08)
During the fourth quarter of 1997, the Company recorded a special items
charge of $2,994,597 for costs associated with exiting certain Company
activities.
The Company recorded special items charges of $1,998,187 during of 1998.
The Company recorded a charge of $1,439,762 in the first quarter of 1998 to
recognize costs associated with employee severance and other special items. In
June 1998, a special items charge of $271,425 was recorded related to the
Company's exiting of United Kingdom and other activities. In September 1998, a
special items charge of $287,000 was recorded for costs associated with the
closure of two of the Company's clinical sites. During the third quarter of
1998, the Company recorded a $6,056,019 asset impairment charge related to
goodwill write-downs associated with GFI and the two closed Company owned
research sites.
F-23
69
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)
2.3 Asset Purchase Agreement, dated December 21, 1998 among Collaborative
Clinical Research, Inc., GFI Pharmaceutical Services, Inc., Collaborative
Holdings, Inc., DataTRAK, Inc. and The West Company, Incorporated (H)
3.1 Fifth Amended and Restated Articles of Incorporation (C)
3.2 Form of Certificate of Amendment to the Fifth Amended and Restated
Articles of Incorporation (H)
3.3 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 (I)
4.3 Second Amendment to the Credit Agreement between the Company and Key
Bank, dated February 5, 1999
4.4 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 Amendment No. 2 to the Amended and Restated 1996 Outside Directors' Stock
Option Plan* (H)
10.4 Amended and Restated 1992 Share Incentive Plan* (D)
10.5 Amended and Restated 1996 Key Employees' and Consultants
Stock Option Plan* (D)
10.6 Form of Affiliation Agreement by and among the Company and physicians (A)
10.7 Form of Affiliation Agreement by and among the Company and research institutions (A)
10.8 Form of Indemnification Agreement* (A)
10.9 Limited Liability Company Agreement, dated as of June 1, 1995, by and among the
Company and PMSI (A)
70
Exhibit Index
Exhibit No. Description Page
- ---------- ----------- ----
10.10 Employment Agreement between the Company and Richard J. Kasmer, dated
June 14, 1994* (A)
10.11 Participation Agreement between the Company and Richard J. Kasmer, dated
December 22, 1998*
10.12 Employment Agreement between the Company and Jeffrey A. Green, dated
July 1, 1994* (A)
10.13 Employment Agreement between the Company and William H. Stigelman, Jr.,
dated July 15, 1994* (A)
10.14 Participation Agreement between the Company and William H. Stigelman, Jr.,
dated December 22, 1998*
10.15 Employment Agreement between the Company and Terry C. Black,
dated July 20, 1994* (A)
10.16 Separation Agreement between the Company and Terry C. Black,
dated December 22, 1998*
10.17 Employment Agreement between the Company and Gregory A. Folz,
dated December 17, 1998* (E)
10.18 Employment Agreement between the Company and Patrick G. Chassaigne,
dated July 6, 1997* (F)
10.19 Employment Agreement between the Company and Herbert L. Hugill,
dated December 8, 1997* (I)
10.20 Collaborative Clinical Research, Inc. Retirement Savings Plan* (G)
10.21 Lease Agreement between St. Mary's Medical Center of Evansville, Inc. and GFI
Pharmaceutical Services, Inc., dated January 5, 1996 (A)
10.22 Supplemental Lease Agreement between St. Mary's Medical Center of Evansville, Inc.
and GFI Pharmaceutical Services, Inc., dated June 28, 1996 (C)
10.23 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
- ------------------------------------------------------------------------------------------------------
* Management compensatory plan or arrangement.
(A) Incorporated herein by reference to the appropriate exhibit to the Company's Registration
Statement on Form S-1 (Registration statement No. 333-2140).
E-2
71
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
(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).
(H) Incorporated herein by reference to the appropriate exhibit to the Company's Schedule 14A
dated March 17, 1999 (Commission File No. 000-20699)
(I) Incorporated herein by reference to the appropriate exhibit to the Company's Form 10-K for the
year ended December 31, 1997 (Commission file No. 000-20699).
E-3