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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number 0-22510
CLINTRIALS RESEARCH INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406017
(State of incorporation) (I.R.S. Employee Identification Number)
11000 Weston Parkway 27513
Cary, North Carolina (Zip Code)
(Address of principal executive offices)
Company's telephone number, including area code: (919) 460-9005
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value Nasdaq Stock Market
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 requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $54,417,323 as of February 14, 2000. The number of Shares of
Common Stock outstanding as of February 14, 2000 was 18,402,172.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11 and 12 in Part III of this Form 10-K are incorporated by
reference to the registrant's definitive proxy materials for its 2000 annual
meeting of stockholders.
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PART I
ITEM 1. BUSINESS
ClinTrials Research Inc. (the Company or ClinTrials) is a full service
global contract research organization (CRO) serving the pharmaceutical,
biotechnology and medical device industries. The Company designs, monitors and
manages preclinical and clinical trials, provides clinical data management and
biostatistical services, and offers product registration services throughout the
United States, Canada and Europe. The Company's headquarters and U.S. clinical
operations are located near Research Triangle Park, North Carolina; additional
clinical facilities and offices are located in Maidenhead, U.K.; Glasgow,
Scotland; Brussels, Belgium; Paris, France; Melbourne, Australia; Tel Aviv,
Israel; Milan, Italy; Santiago, Chile; and Warsaw, Poland. The Company's
preclinical operations are located in Montreal, Canada. The Company's revenue is
generated from preclinical testing (approximately 48% of total net revenue
during 1999) and clinical testing (approximately 52% of total net revenue during
1999) of new pharmaceutical and biotechnology products.
RECENT DEVELOPMENTS
The Company recorded an asset impairment charge of $2,178,000 in the
fourth quarter of 1999 to write-off the purchase option costs included in other
assets on the balance sheet relating to MPI Research, a preclinical facility.
The option expires March 31, 2000 and it was determined that as of December 31,
1999, it was unlikely to be exercised. The Company is currently in the late
stages of negotiating an agreement that will geographically expand its
preclinical facilities and significantly increase its capacity in a manner that
better meets its strategic needs.
During 1999, the Company continued its recovery from the $37 million in
clinical contract cancellations that occurred in late 1996 and early 1997.
Although none of the cancellations were related to service or quality problems,
the decrease in backlog left the Company with surplus capacity and related
overhead.
The Company has addressed these issues with a new strategic vision to
be a full service drug development company, and has repositioned itself as a
high-end, value-added provider of full product development services by hiring
senior level management and people with extensive business and leadership roles
in large pharmaceutical companies. On February 1, 1998, Jerry R. Mitchell, M.D.,
Ph.D., became the Company's President and Chief Executive Officer, and on May
11, 1998, also became the Company's Chairman of the Board.
The Company's marketing focus is now very targeted and is concentrated
on technical and scientific face to face selling. In essence, the Company is now
using technical people to sell and promote the Company's overall medical and
scientific expertise. The majority of marketing and sales efforts are now on
those areas that currently contribute to achieving face to face encounters as
the Company has the expertise in house to sell on a scientist to scientist
basis. Industry trends support this strategy as sponsors are increasingly
outsourcing larger and more complex clinical trials, and those companies with
the know how, quality personnel and infrastructure will win the contracts. The
Company has put the people and infrastructure in place to compete for the higher
end business. The advantage is that with the higher end, more value-added
business, margins are generally higher and the work awarded tends to be more of
a program rather than a study renting a clinical monitoring force. Further, the
programs are typically larger and longer in duration and should help to smooth
out the cyclical nature of the pharmaceutical outsourcing business.
In May 1999, the Company closed its Nashville, Tennessee corporate
headquarters and consolidated its U.S. operations into its new Research Triangle
Park (RTP), North Carolina facility in order to increase the productivity,
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efficiency, economy and critical mass in performing clinical trials. As part of
this consolidation, the Company closed its data management facility in
Lexington, Kentucky and incurred a $6.4 million restructuring charge in 1998.
BACKGROUND
New pharmaceutical and biotechnology products must undergo extensive
testing and regulatory review to determine their relative safety and
effectiveness. Companies seeking approval for these products are responsible for
performing and analyzing the results of preclinical and multi-phase clinical
trials. Preclinical trials typically last for up to three years and involve
animal testing and laboratory analyses to determine the basic biological
activity and safety of the drug. Upon successful completion of the preclinical
phase, the drug undergoes a series of clinical tests in humans, including
healthy volunteers as well as patients with the targeted disease. Clinical
trials are conducted over a period typically lasting five to seven years and
involve hundreds or thousands of human subjects.
Preclinical and clinical testing must comply with the requirements of
Good Laboratory Practice (GLP), Good Clinical Practice (GCP) and other standards
promulgated by the Food and Drug Administration (FDA) and other federal and
state governmental authorities. GLP regulations mandate standardized procedures
for controlling studies, recording and reporting data and retaining appropriate
records for preclinical testing. The Company's preclinical laboratory also
adheres to accreditation procedures on the humane care and treatment of animals.
GCP stipulates procedures designed to ensure the quality and integrity of data
obtained from clinical testing and to protect the rights and safety of clinical
subjects. The FDA pioneered the use of clinical trials in the regulation of new
drug development, and the agency's approval process has shaped much drug
regulation worldwide. In recent years, the FDA and corresponding regulatory
agencies of the major industrial countries (Canada, Japan and the European
Community (EC)) commenced discussions for the purpose of developing common
standards for both the conduct of preclinical and clinical studies and the
format and content of applications for new drug approvals. Data from
multi-national studies adhering to GCP are now generally acceptable to the FDA
and the governments within the EC.
In the United States, a drug sponsor must file an Investigational New
Drug (IND) application with the FDA before the commencement of human testing of
a drug. The IND includes preclinical testing results and sets forth the
sponsor's plans for conducting human clinical trials. The design of these plans,
also referred to as the study protocol, is critical to the success of the drug
development effort because the protocol must correctly anticipate the data and
results that the FDA will require before approving the drug. In the absence of
any comments from the FDA, human clinical trials may begin 30 days after the IND
is filed.
Clinical trials usually start on a small scale to assess safety and
then expand to larger trials to test efficacy. Trials are usually grouped into
four phases, with multiple trials generally conducted within each phase.
Phase I. Phase I trials are conducted on healthy volunteers,
typically 20 to 80 persons, to develop basic safety data relating to
toxicity, metabolism, absorption and other pharmacological actions.
These trials last an average of six months to one year.
Phase II. Phase II trials are conducted on a small number of
subjects, typically 100 to 400 patients, who suffer from the drug's
targeted disease or condition. Phase II trials offer the first evidence
of clinical efficacy, as well as additional safety data. These trials
last an average of two years.
Phase III. Phase III trials are conducted on a significantly
larger population of several hundred to several thousand patients, some
of whom suffer from the targeted disease or condition and some of whom
are healthy. Phase III trials are designed to measure efficacy on a
large scale as well as long-term side effects. These trials involve
numerous sites and generally last two to three years.
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Phase IV. As a condition of granting marketing approval, the
FDA may require that a sponsor continue to conduct additional clinical
trials, known as Phase IV trials, to monitor long-term risks and
benefits, study different dosage levels, or evaluate different safety
and efficacy parameters in target patient populations. With the
increasing importance of Phase IV trials has also come increased
complexity in the scope of the trials (i.e., the number of patients
tested) and the manner in which they are conducted (i.e., the number of
sites at which testing is performed). Phase IV trials generally last
one to four years.
Clinical trials often represent the most expensive and time-consuming
part of the overall drug development process. The information generated during
these trials is critical for gaining marketing approval from the FDA or other
regulatory agencies. After the successful completion of Phase III trials, the
sponsor of a new drug must submit a New Drug Application (NDA) to the FDA. The
NDA is a comprehensive filing that includes, among other things, the results of
all preclinical and clinical studies, information about the drug's composition
and the sponsor's plans for producing, packaging and labeling the drug. Most of
the clinical data contained in an NDA is generated during the Phase II and III
trials. The FDA's review of an NDA can last from several months to several
years, with the average review lasting two years. Drugs that successfully
complete this review may be marketed in the United States, subject to the
conditions imposed by the FDA in its approval. The FDA has been subject to
increasing pressure to allow drugs to reach the public more quickly. As a
result, in some instances the FDA has expedited the review process by granting
conditional approval of lifesaving drugs or those for conditions for which there
is no current treatment so that they can be marketed while Phase IV trials are
being conducted. In recent years, the FDA has encouraged the use of computer
assisted NDAs (CANDAs) in an effort to expedite the approval process.
INDUSTRY TRENDS
Preclinical and clinical trials were historically performed almost
exclusively by in-house personnel at the major pharmaceutical companies. In
recent years, pharmaceutical companies have begun to outsource clinical trials
management to CROs, which has resulted in significant growth in the CRO
industry. The Company believes worldwide research and development expenditures
by the pharmaceutical and biotechnology industries reached an estimated $50
billion in 1999, approximately $22 billion of which was spent on preclinical and
clinical trials, with approximately $4.8 billion being outsourced to CROs.
Research and development expenditures in 1999 for the major pharmaceutical
companies in the world increased approximately 14% from the previous year.
The contract research industry derives substantially all of its revenue
from the research and development (R&D) expenditures of pharmaceutical,
biotechnology and medical device companies. The Company believes that certain
industry trends have led pharmaceutical and biotechnology companies to increase
the use of CROs for preclinical and clinical trials. These trends include the
following:
Increasing Cost Containment Pressures. The increasing pressure to
control rising health care costs, and the penetration of managed health care and
health care reform have caused the following changes in the pharmaceutical
industry:
- Managed Care Organizations. Managed care organizations have
become major participants in the delivery of pharmaceuticals.
These organizations limit the selection of drugs from which
affiliated physicians may prescribe, thus increasing the
competition among pharmaceutical companies to develop more
effective products in a shorter time frame.
- Consolidation. As pharmaceutical companies seek to create
economies of scale, there have been several large mergers
within the pharmaceutical industry, and as a result of these
mergers, the pharmaceutical industry has experienced
large-scale employee lay-offs and other cutbacks.
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- Other Factors. Factors such as competition from generic drugs
following patent expiration, more stringent regulatory
requirements and the increasing complexity of clinical trials
have resulted in increasing market pressure on profit margins.
In response to these cost containment pressures, a number of United
States pharmaceutical companies have publicly committed to hold net effective
price increases generally in line with inflation. In the area of clinical
development, many pharmaceutical and biotechnology companies are seeking to
reduce the high fixed costs associated with peak-load staffing by reducing
internal clinical staff and relying on a combination of internal resources and
external resources such as CROs, thereby shifting fixed costs to variable costs.
Globalization of Clinical Research and Development. Due to the
increasing cost of new drug development, many projects that are not expected to
achieve sufficient annual worldwide revenue are abandoned. Pharmaceutical
companies are increasingly attempting to maximize returns from a given drug by
pursuing regulatory approvals in multiple countries simultaneously rather than
sequentially. A pharmaceutical company seeking approval in a country in which it
lacks experience or internal resources will frequently turn to a CRO for
assistance in interacting with regulators or in organizing and conducting
clinical trials. The Company believes that the globalization of clinical
research and development activities has increased the demand for CRO services.
Increasingly Complex and Stringent Regulation; Need for Technological
Capabilities. Increasingly complex and stringent regulatory requirements
throughout the world have increased the volume of data required for regulatory
filings and escalated the demand for data collection and analysis during the
drug development process. In recent years, the FDA and corresponding regulatory
agencies of Canada, Japan and the EC have commenced discussions to develop
common standards for preclinical and clinical studies and the format and content
of applications for new drug approvals. Further, the FDA encourages the use of
computer-assisted filings in an effort to expedite the approval process. As
regulatory requirements have become more complex, the pharmaceutical and
biotechnology industries are increasingly outsourcing to CROs to take advantage
of their data management expertise, technological capabilities and global
presence.
Escalating Research and Development Expenditures. Research and
development expenditures in 1999 for the major pharmaceutical companies in the
world (as measured by such expenditures) increased approximately 14% from the
previous year. Such expenditures have resulted from an increased emphasis on
developing effective products for the treatment of chronic disorders and life
threatening acute conditions such as infectious diseases. The cost of developing
therapies for chronic disorders, such as arthritis, Alzheimer's disease and
osteoporosis is higher because the treatments must be studied for a longer
period to demonstrate their effectiveness in curbing the chronic disorder and to
determine any possible long-term side effects.
Reducing Drug Development Time Requirements. Pharmaceutical and
biotechnology companies face increased pressure to bring new drugs to market in
the shortest possible time, thereby reducing costs, maintaining market share and
accelerating realization of revenue. Currently, total development of a new drug
takes approximately eight to twelve years, a significant portion of a drug's
twenty year period for protection under United States patent laws. Certain
clients of the Company have initiated plans to reduce this time to approximately
five to seven years. Pharmaceutical and biotechnology companies are attempting
to increase the speed of new product development, and thereby maximize the
period of marketing exclusivity and economic returns for their products, by
outsourcing development activities to CROs. The Company believes that CROs are
often able to perform the needed services with a higher level of expertise or
specialization, and more quickly, than a pharmaceutical or biotechnology company
could perform such services internally. In addition, some pharmaceutical and
biotechnology companies are beginning to contract with large full-service CROs
to conduct preclinical and all phases of clinical trials for new product
programs lasting several years, rather than separately contracting specific
phases of drug development to several different CROs. The Company believes this
approach may result in shorter overall development times. In anticipation of
this
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trend, the Company has established itself as a firm capable of taking a
pharmaceutical from its initial testing through its licensing for
commercialization.
New Drug Development Pressures. The Company believes that R&D
expenditures have increased as a result of the constant pressure to develop and
patent products, and to respond to the demand for products for an aging
population and for the treatment of chronic disorders and life-threatening
conditions. In response to this pressure, pharmaceutical and biotechnology
companies are outsourcing preclinical and clinical trials in order to use their
own resources to develop additional drugs.
Growth of Biotechnology Industry. The biotechnology industry and the
number of drugs produced by it, which require FDA approval, have grown
substantially over the past decade. Many biotechnology companies have chosen not
to expend resources to develop sufficient staff or expertise to conduct clinical
trials in-house, but rather have utilized providers such as CROs to perform
these services.
As the use of CROs increases, so do the demands placed upon CROs that
provide a broad range of services in multiple countries for larger clients. For
example, larger CROs generally remain competitive by sustaining internal growth
and by opening offices in additional countries in order to have a presence near
either a client or a large test site. Increasingly, large clients require CROs
to meet certain credit-worthiness standards. As a result of these factors, CROs
have experienced an increasing demand for working capital and strong balance
sheets in order to maintain their competitive standing within the industry.
BUSINESS STRATEGY
The outsourcing of preclinical and clinical trials for pharmaceutical,
biotechnology and medical device products increased in excess of 20% in 1999 as
compared to the prior year. This penetration rate exceeds the overall R&D growth
rate of approximately 14%. The CRO industry is highly fragmented with many
small, limited-service providers as well as in-house research departments,
universities and teaching hospitals, and other CROs, many of which have
substantially greater resources than the Company. However, the Company believes
it is well positioned to take advantage of the trend toward outsourcing as a
result of its demonstrated ability to provide a broad range of professional,
cost-effective preclinical and clinical research and development services
worldwide. The Company's strategy is comprised of the following elements:
Provide Comprehensive Preclinical and Clinical Research Services. The
Company offers a broad range of clinical research services and believes that its
knowledge and experience in all stages of clinical research enhance its
credibility with prospective clients. The Company has the capability to provide
a full range of preclinical and clinical services on a turnkey basis, which the
Company believes can be especially important to clients without significant
relevant regulatory expertise, such as biotechnology companies and international
pharmaceutical companies seeking to enter new geographic markets. To meet the
needs of specific clients, the Company offers its services separately or as an
integrated package. This allows a client to use the Company to design a
protocol, conduct a trial, analyze the results of one or more trials, prepare
and submit a new drug application or computer-assisted filing to the FDA, or for
any combination of these services. This approach enables the Company to respond
to clients' requirements with flexibility and also allows it to establish a
relationship with a new client with a particular service that may in turn lead
to larger, more comprehensive projects. In addition, the Company believes its
preclinical capabilities increase the prospect of being awarded contracts for
later stage testing after satisfactory completion of the preclinical tests.
Provide Drug Development Services. The Company attempts to establish
study protocols and expertise in a therapeutic area prior to the formal
announcement of a new product by a pharmaceutical or biotechnology company.
Manufacturers prefer to outsource to CROs that already have knowledge and have
developed testing models in the relevant area and that can therefore more
quickly begin the new drug application process. The Company has several
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senior managers with therapeutic expertise and IND application experience to
provide the necessary drug development expertise to biotechnology and
pharmaceutical customers. ClinTrials has demonstrated depth and high quality
performance in the following areas: anti-viral and other infectious diseases,
cardiology, central nervous system, gastroenterology, endocrinology, respiratory
and urology, osteoporosis evaluation, cardiovascular pharmacology, biomaterials
testing, bio-marker assays and infusion delivery. The Company is a leader in the
investigation of blood substitutes and protease inhibitors and in the conducting
of megatrials (trials involving more than 1,000 participants).
Provide International Presence. The Company provides clinical research
and development services to major United States and European pharmaceutical and
biotechnology companies. The Company conducts multi-national clinical trials
designed to pursue concurrent regulatory approvals in multiple countries. The
Company believes that this experience is a competitive advantage, as
pharmaceutical and biotechnology companies increasingly are pursuing regulatory
approvals simultaneously in multiple countries. The Company has a data
management facility in Glasgow, Scotland to provide more comprehensive services
to its United States clients doing business abroad and to better market its
services to existing and potential European clients. Since 1996, the Company
expanded its geographic reach by opening trials management offices in Australia,
France, Israel and Chile, and has delivered services in over 30 countries with
the most recent office opened in Warsaw, Poland in 1999.
Pursue Strategic Alliances. In these arrangements, the client agrees to
provide the Company with a preferred vendor status and is guaranteed adequate
staffing and competitive pricing over a multi-year period. The Company believes
this type of arrangement results in more predictable pricing to the client and
more efficient management of the Company's resources, and potentially increases
the amount of work outsourced to the Company by the strategic partner. Over the
past five years, the Company has entered into strategic alliances with ten
pharmaceutical companies. In addition, the Company's preclinical subsidiary has
preferred provider relationships, which, in contrast to strategic alliances, are
noncontractual, informal relationships in which the client makes the Company
among its first choices of testing service providers.
Invest in Information Systems Technology. The Company maintains a
commitment to investments in technology supporting increased productivity and
client communications with a focus on clinical and management information
systems. The Company continues to invest heavily in the information technology
infrastructures required to support the creation, maintenance, and statistical
analysis of clinical databases. A sustained focus on reducing client delivery
timelines while maintaining compliance with the dynamic regulated environment is
a key strategy. In 1996 information systems investments expanded the Company's
capacity to process data in a standard unified format and in 1998 continued
investments provided value added software which expedited the delivery process
for data and enabled integrated interpretation of multiple complex data sets.
Clinical systems in support of Data Management and Clinical Monitors have been
aligned with the business strategy to; i) allow Data Managers to develop the
majority of the edit checks for a study on their own, without a programmer, ii)
improve the efficiency of the query resolution/management process - one of the
most costly areas of clinical data processing. In addition we continue to
produce custom integrated voice response systems which allow investigators to
enroll patients into a trial, control drug utilization and distribution, and
have access to patient diary information through use of a touch tone telephone.
The Company has implemented a web-based reporting tool to distribute, in a
secure manner, clinical trial information and status to authorized users
(sponsors, investigative sites, etc.). The web-based data delivery system allows
authorized users ready access to study information. The Company information
systems have transitioned into the Year 2000 without problems.
Increase Client Base and Number of Contracts. ClinTrials' strategy is
to seek contracts with new clients and new contracts with existing clients in
different therapeutic areas and to cross-sell other services to existing
clients.
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Pursue Selected Acquisitions. The Company plans to pursue strategic
acquisitions of selected CROs or related businesses that provide one or more of
the following: complementary services, expanded geographic presence, new
therapeutic expertise or complementary client bases.
SERVICES
The Company's services and related products include drug development
services, preclinical and clinical trials management services, clinical data
management and biostatistical services, and product registration services. The
Company's services can be provided separately or as an integrated package.
Services from each of these categories can be utilized for the development and
execution of a turnkey NDA.
Drug Development Services. The Company employs several key employees
with therapeutic expertise, IND and NDA application experience and
pharmaceutical company experience who assist customers in the development
process of new medicines.
Preclinical Trials. The Company designs and conducts preclinical
research programs, based principally upon animal models, that generate the data
required to establish safe starting dosages and the potential efficacy of a
product in humans, and to determine organ toxicity and other potential risks of
human usage. Preclinical trial reports are submitted to regulatory authorities
in support of an application to initiate clinical testing in humans. The Company
also offers analytical laboratory services including assessment of product
concentration in suspensions, solutions, animal feed and plasma radiometric
determination in metabolite profiling of biological tissues, and radiopurity
assessment of dose solution.
Clinical Trials Management Services. The Company offers complete
services for the design, placement, performance and management of clinical trial
programs, a critical element in obtaining regulatory approval for drugs and
medical devices. The Company has performed services in connection with trials in
many therapeutic areas. The Company's multi-disciplinary clinical trials group
has the ability to examine a product's existing preclinical and clinical data
for the purposes of designing protocols for clinical trials in order to
ascertain evidence of the product's safety and efficacy.
The Company manages every aspect of trials in Phases I through IV,
including design of protocols, operations manuals, identification and
recruitment of trial investigators, initiation of sites, monitoring for strict
adherence to GCP, site visits to ensure compliance with protocol procedures and
proper collection of data, interpretation of trial results and report
preparation. Substantially all of the Company's current clinical projects
involve Phase II, III or IV clinical trials, which, in most cases, are
significantly larger and more complex than Phase I trials.
In the CRO industry, trials involving tests on over 1,000 patients over
a period of several years at multiple sites are becoming more routine. These
trials have resulted from the drug companies' emphasis on treating and curing
chronic disorders and the resulting need to thoroughly test large numbers of
patients for long-term side effects of new drugs. The Company is experienced in
managing such trials and actively markets its abilities in this area.
Clinical trials are monitored for strict adherence to GCP. Efficient
data collection, form design, detailed operations manuals and site visits by the
Company's clinical research associates (CRA) are employed to determine whether
clinical investigators and their staffs follow established protocols and
accurately record the findings of the trials.
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The Company assists clients with one or more of the following steps of
clinical trials:
- Study Protocol. The protocol defines the medical issues the
study seeks to examine and the statistical tests that will be
conducted. Accordingly, the protocol defines: (i) the
frequency and type of laboratory and clinical measures that
are to be tracked and analyzed; (ii) the number of patients
required to produce a statistically valid result; (iii) the
period of time over which they must be tracked; and (iv) the
frequency and dosage of drug administration.
- Case Report Forms. Once the study protocol has been finalized,
special forms for recording the desired information must be
developed. These forms are called Case Report Forms (CRFs).
The CRF may change at different stages of a trial. The CRF for
one patient in a given study may consist of as many as 100
pages or more.
- Site and Investigator Recruitment. The drug is administered to
patients by investigators, at hospitals, clinics or other
locations, referred to as sites. Potential investigators may
be identified by the drug sponsor or the CRO, which then
solicits the investigators' participation in the study.
Generally, the investigators contract directly with the
Company. The trial's success depends on the successful
identification and recruitment of investigators with proper
expertise and an adequate base of patients who satisfy the
requirements of the study protocol.
- Patient Enrollment. The investigators find and enroll patients
suitable for the study according to the study protocol.
Prospective patients are required to review information about
the drug and its possible side effects and sign an informed
consent to record their knowledge and acceptance of potential
side effects. Patients also undergo a medical examination to
determine whether they meet the requirements of the study
protocol. Patients then receive the drug and are examined by
the investigator as specified by the study protocol.
- Study Monitoring and Data Collection. As patients are examined
and tests are conducted in accordance with the study protocol,
data are recorded on CRFs and laboratory reports. The data are
collected from study sites by specially trained CRAs. CRAs
visit sites regularly to ensure that the CRFs are completed
correctly and that all data specified in the protocol are
collected. CRFs are reviewed for consistency and accuracy
before their data are entered into an electronic database for
purposes of medical and statistical analysis.
- Medical Affairs. Throughout the course of a clinical trial,
the Company may provide various medical research and services
including medical monitoring of clinical trials,
interpretation of clinical trial results and preparation of
clinical study reports.
- Report Writing. The results of statistical analysis of data
collected during the trial together with other clinical data
are included in a final report generated for inclusion in a
regulatory document.
Clinical Data Management and Biostatistical Services. The Company's
data management professionals assist in the design of protocols and CRFs, as
well as training manuals and training sessions for investigational staff, to
ensure that data are collected in an organized and consistent format. Databases
are designed according to the analytical specifications of the project and the
particular needs of the client. Prior to data entry, the Company's personnel
screen the data to detect errors, omissions and other deficiencies in completed
CRFs. The Company provides clients with data abstraction, data review and
coding, data entry, database verification and editing and problem data
resolution.
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The Company's biostatistics professionals provide biostatistical
consulting, database design, data analysis and statistical reporting. The
Company's biostatisticians provide clients with assistance in all phases of drug
development. These professionals develop and review protocols, design
appropriate analysis plans and design report formats to address the objectives
of the study protocol as well as the client's individual objectives. Working
with the programming staff, biostatisticians perform appropriate analyses and
produce tables, graphs, listings and other applicable displays of results
according to the analysis plan. Additionally, biostatisticians assist clients
before panel hearings at the FDA.
The Company believes that its data management and biostatistical
services capabilities can be utilized by a client more effectively when packaged
as part of its total clinical trials management services and used to monitor
Phases I through IV rather than just one phase. This packaging permits
technology transfer resulting in a faster and less costly clinical trial
process, as the data are collected and analyzed more rapidly and the decision to
move to the next phase can be made more quickly.
Product Registration Services. The Company provides comprehensive
product registration services throughout Europe and the United States. The
Company provides regulatory strategy formulation, document preparation, Good
Manufacturing Practice consultation and acts as liaison with the FDA and other
regulatory agencies. Although these services have not generated material revenue
to date, the Company offers these services in order to provide the full range of
services necessary to remain competitive in the CRO industry.
The Company works closely with clients to devise regulatory strategies
and comprehensive product development programs. The Company's regulatory affairs
experts review existing published literature, assess the scientific background
of a product, assess the competitive and regulatory environment, identify
deficiencies and define the steps necessary to obtain registration in the most
expeditious manner. Through this service, the Company helps its clients
determine the feasibility of developing a particular product or product line.
The Company's regulatory affairs professionals have experience in the
analysis, preparation and submission of FDA regulatory documents covering a wide
range of products, including drugs and over-the-counter products. The Company
also has experience with preparing regulatory documentation for submission to
European regulatory authorities.
CLIENTS AND MARKETING
The Company has served many of the leading pharmaceutical companies in
the United States and the EC. The Company's clients also include companies in
the biotechnology and medical device industries. For the year ended December 31,
1999, the Company recognized revenue on contracts with 174 clients. During 1999,
approximately 84% of the Company's net service revenue was derived from
pharmaceutical companies, 13% from biotechnology companies and 3% from medical
device companies. In 1998, such companies contributed 80%, 19% and 1% of net
service revenue, respectively.
The Company has had, and will continue to have, certain clients from
which at least 10% of the Company's overall revenue are generated over multiple
contracts. Such concentrations of business are not uncommon within the CRO
industry. During 1999, the Company generated approximately 12% of its net
service revenue from multiple unrelated contracts with a major pharmaceutical
company. No other client represented 10% or more of the Company's net revenue in
1999. The Company's contracts are entered into with numerous therapeutic areas
or divisions within each client and frequently involve different
decision-makers. Thus, there is a reduced likelihood that the Company would
simultaneously lose all contracts with any single client.
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<PAGE> 11
Marketing activities are conducted by the Company's business
development personnel based in each of the Company's locations. In response to
the highly technical nature of the Company's business, most business development
personnel have scientific backgrounds. Additionally, the Company conducts
selective advertising programs in trade journals and publications and, from time
to time, employs direct mailings of information to existing and potential
clients. The Company also attends and exhibits at selected trade shows in the
United States and Europe.
CONTRACTUAL ARRANGEMENTS
The Company generally is awarded contracts based, among other things,
upon its response to requests for proposal (RFP) received from pharmaceutical,
biotechnology and medical device companies. The contract may require the Company
to design a protocol, conduct the trial, analyze the results of one or more of
the trials, prepare and submit an IND, NDA or CANDA to the FDA, or perform any
combination of these services. After negotiating a letter of intent or
definitive contract for clinical studies, the Company, and in many cases the
client, will coordinate the selection of clinical investigators and conduct
pre-study site visits. The clinical investigators, in conjunction with the
Company, are then responsible for enrolling participants in the trial, which may
include persons with a given disorder or disease, healthy persons and persons
within defined populations. Informed consents, in accordance with FDA and
institutional regulations, are obtained from all participants. Change orders to
existing contracts are typically generated at the request of the client based on
the results of the trial to date and include changes in the scope of the trial
and in the services to be provided by the Company. The Company may record
additional revenue or reduce backlog as a result of change orders.
Most contracts are fixed priced multi-year contracts that require a
portion of the contract amount to be paid at or near the time the trial is
initiated. The Company generally bills its clients upon the completion of
negotiated performance requirements and, to a lesser extent, on a date certain
basis. The Company's contracts generally may be terminated with or without
cause. In the event of termination, the Company is typically entitled to all
sums owed for work performed though the notice of termination and all costs
associated with termination of the study. In addition, some of the Company's
contracts provide for an early termination fee, the amount of which usually
declines as the trial progresses. Termination or delay in the performance of a
contract occurs for various reasons, including, but not limited to, unexpected
or undesired results, inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug, adverse patient
reactions to the drug, or the client's decision to de-emphasize a particular
trial.
The Company's strategic alliance agreements, although larger in size
and covering several projects over multiple years, are generally the same as the
contracts described above.
BACKLOG
Backlog consists of anticipated net service revenue from letters of
intent and contracts that have not been completed. Once work under a letter of
intent or contract commences, net service revenue is recognized over the life of
the contract using the percentage-of-completion method of accounting. Since it
is common for clients to authorize projects and the Company to commence
providing services before a contract is signed, the Company believes reported
backlog should consist of anticipated net revenue from uncompleted projects
which have been authorized by a client, through a written contract or otherwise.
At December 31, 1999, 1998 and 1997, the Company's backlog was $98.9 million,
$105.1 million and $101.3 million, respectively. The Company believes that
backlog is not a consistent indicator of future results because backlog can be
affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years. Additionally, projects
may be terminated by the client or delayed by regulatory authorities for many
reasons, including unexpected test results. Moreover, the scope of a project can
change during the course of a study.
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<PAGE> 12
COMPETITION
The Company primarily competes with pharmaceutical companies' own
in-house research departments, other CROs, universities and teaching hospitals.
The CRO industry is still fragmented, with full-service CROs with global
capacities, several mid-size CROs and many small, limited-service providers. In
recent years, several large, full-service competitors have emerged, some of
which have substantially greater capital and other resources, are better known
and have more experienced personnel than the Company. The Company's largest
competitors include Quintiles Transnational Corp., Covance Inc., Parexel
International Corporation, Pharmaceutical Product Development, Inc. and Kendle
International, Inc. The recent trend toward industry consolidation is likely to
result in heightened competition among the larger CROs. The larger CROs are
increasingly required to have substantial amounts of working capital in order to
sustain internal growth and international expansion, and to meet the
credit-worthiness standards of their larger clients. The Company believes that
clients choose a CRO based on several factors, the most important of which is
the quality of the work performed for existing clients. Other important factors
include references from existing clients, trials management experience and
scientific knowledge related to specific therapeutic areas, the price for the
services performed, the ability to organize and manage large-scale trials on a
global basis, the ability to manage large and complex medical databases, and the
ability to hire and retain qualified investigators. The Company believes that it
competes favorably in these areas.
GOVERNMENT REGULATION
The clinical investigation of new pharmaceutical, biotechnology and
medical device products is highly regulated by governmental agencies. The
purpose of United States federal regulations is to ensure that only those
products that have been proven to be safe and effective are made available to
the public. The FDA has set forth regulations and guidelines that pertain to
applications to initiate trials of products, approval and conduct of studies,
report and record retention, informed consent, applications for the approval of
new products, and post-marketing requirements. Pursuant to FDA regulations, CROs
that assume obligations of a drug sponsor are required to comply with applicable
FDA regulations and are subject to regulatory action for failure to comply with
such regulations. In the United States, the historical trend has been in the
direction of increased regulation by the FDA. The Company believes that many
pharmaceutical, biotechnology and medical device companies do not have the staff
and/or the available expertise to comply with all of the regulations and
standards, and this has contributed and will continue to contribute to the
growth of the CRO industry.
The services provided by the Company are ultimately subject to FDA
regulation in the United States and comparable agencies in other countries,
although the level of applicable regulation in other countries is generally less
comprehensive than regulation present in the United States. The Company is
obligated to comply with FDA regulations governing such activities as selecting
qualified investigators, obtaining required forms from investigators, verifying
that patient informed consent is obtained, monitoring the validity and accuracy
of data, verifying drug/device accountability, and instructing investigators to
maintain records and reports. The Company must also maintain records for each
study for specified periods for inspection by the study sponsor and the FDA
during audits. If such audits document that the Company has failed to adequately
comply with Federal regulations and guidelines, it could have a material adverse
effect on the Company. In addition, the Company's failure to comply with
applicable regulations could possibly result in termination of ongoing research
or the disqualification of data, either of which could also have a material
adverse effect on the Company, including, without limitation, damage to the
Company's reputation.
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<PAGE> 13
POTENTIAL LIABILITY AND INSURANCE
The Company monitors the testing of new drugs on human volunteers
pursuant to study protocols in clinical trials. Clinical research involves a
risk of liability for personal injury or death to patients from adverse
reactions to the study drug, many of whom are seriously ill and are a great risk
of further illness or death as a result of factors other than their
participation in a trial. Additionally, although the Company's employees do not
have direct contact with the participants in a clinical trial, the Company, on
behalf of its clients, contracts with physicians who render professional
services, including the administration of the substance being tested, to such
persons. As a result, the Company could be held liable for bodily injury, death,
pain and suffering, loss of consortium, other personal injury claims and medical
expenses arising from a clinical trial.
The Company believes that the risk of liability to patients in clinical
trials is mitigated by various regulatory requirements, including the role of
institutional review boards (IRBs) and the need to obtain each patient's
informed consent. The FDA requires each human clinical trial to be reviewed and
approved by the IRB at each study site. An IRB is an independent committee that
includes both medical and non-medical personnel and is obligated to protect the
interests of patients enrolled in the trial. After the trial begins, the IRB
monitors the protocol and the measures designed to protect patients, such as the
requirement to obtain informed consent.
To reduce its potential liability, the Company seeks to obtain
indemnity provisions in its contracts with clients and, in some cases, with
investigators contracted by the Company on behalf of its clients. These
indemnities generally do not, however, protect the Company against certain of
its own actions such as those involving negligence or misconduct. Moreover,
these indemnities are contractual arrangements that are subject to negotiation
with individual clients, and the terms and scope of such indemnities vary from
client to client and from trial to trial. The Company also, in some
circumstances, indemnifies and holds harmless its clients and investigators
against liabilities incurred by such parties due to the actions or inactions of
the Company. Finally, since the financial performance of these indemnities is
not secured, the Company bears the risk that an indemnifying party may not have
the financial ability to fulfill its indemnification obligations. The Company
could be materially and adversely affected if it were required to pay damages or
incur defense costs in connection with a claim that is outside the scope of an
indemnity or where the indemnity, although applicable, is not performed in
accordance with its terms.
The Company, as a professional contract research organization, is held
to a high standard of work product and failure to adhere to such professional
standards could result in allegations by the client of an error or omission by
the Company. The Company maintains errors and omissions professional liability
insurance in amounts it believes to be sufficient. This insurance provides
coverage for the vicarious liability of the Company due to negligence of the
physicians who contract with the Company, as well as suits by clients of the
Company that allege a clinical trial was compromised due to an error or omission
by the Company. The Company also carries contingent products liability if for
any reason the manufacturer of a study drug allegedly causes bodily injury and
can not or will not indemnify the Company. There can be no assurance that the
Company's insurance coverage will be adequate, or that insurance coverage will
continue to be available on terms acceptable to the Company. Other than the
litigation described in Item 3. Legal Proceedings, the Company has not received
any claims resulting from vicarious professional liability or errors or
omissions in performing clinical trials.
INTELLECTUAL PROPERTY
The Company believes that factors such as its ability to attract and
retain highly-skilled professional and technical employees and its project
management skills and experience are significantly more important to its
performance than are any intellectual property rights developed by it. The
Company has developed, and continually develops and updates, certain computer
software related methodologies. The Company seeks to maintain its rights in the
software it develops through a combination of contract, copyright and trade
secret protection. While the
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<PAGE> 14
Company does not consider any of this software or methodology to be material to
the Company's business, the Company believes its software capabilities provide
important benefits to its clients.
EMPLOYEES
At December 31, 1999, the Company had 1,387 employees, of which 61 held
a Ph.D. or M.D. degree, 9 held D.V.M. degrees and 113 others held masters
degrees. Approximately 24% of the Company's employees are located in the United
States, 55% are located in Canada and the remaining 21% are located in Europe
and other international locations. The Company believes that its relations with
its employees are good.
The Company's performance depends on its ability to attract and retain
a qualified management, professional, scientific and technical staff.
Competition from both the Company's clients and competitors for skilled
personnel is high. While the Company has not experienced any significant
problems in attracting or retaining qualified staff to date, there can be no
assurance the Company will be able to avoid these problems in the future.
RISK FACTORS
Statements in this Annual Report on Form 10-K that are not descriptions
of historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to risks and
uncertainties. The following matters constitute cautionary statements
identifying important factors with respect to any such forward-looking
statements, including certain risks and uncertainties that could cause actual
results to differ materially from those reflected in any such forward-looking
statements.
Dependence on Growth of Research and Development Activities. The
Company is a global provider of preclinical and clinical research services to
pharmaceutical, biotechnology and medical device clients. As such, the Company's
ability to win new outsourced contracts from the pharmaceutical industry is
dependent upon the rate of research and development expenditure by that
industry. This in turn can be influenced by a variety of factors, including
mergers within the pharmaceutical industry, the availability of capital to the
biotechnology industry, and by the impact of government reimbursement rates for
medicare and medicaid programs. Consequently, the success of the company to grow
and win new outsourced contracts is highly dependent upon the ability of the
pharmaceutical and biotechnology industries to continue to spend on R&D at rates
close to or at historical levels.
Fluctuation in Quarterly Operating Results. The Company's quarterly
operating results have fluctuated as a result of factors such as delays
experienced in implementing or completing particular clinical trials,
termination of clinical trials and the costs associated with integrating
acquired operations. Since a high percentage of the Company's operating costs
are relatively fixed while revenue recognition is subject to fluctuation, minor
variations in the timing of contracts or the progress of trials may cause
significant variations in quarterly operating results. Results of one quarter
are not necessarily indicative of results for the next quarter.
Dependence on Certain Industries and Clients. The Company provides
services primarily to the pharmaceutical and biotechnology industries.
Accordingly, the Company's net service revenue is substantially dependent on
these industries' expenditures on research and development. Although these
expenditures are large, the number of potential CRO clients is relatively
limited and it is not uncommon for a CRO to derive over 10% of its revenue from
multiple contracts with a single client. The Company has in the past derived and
may in the future derive a significant portion of its net service revenue from a
relatively limited number of clients. The loss of any such client could
materially adversely affect the Company's results of operations. In 1999, one
client accounted for approximately 12% of the Company's net service revenue. No
other client accounted for more than 10% of the
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<PAGE> 15
Company's net service revenue during 1999. The Company's operations could be
materially and adversely affected by, among other factors, any economic downturn
in the pharmaceutical or biotechnology industries, any decrease in their
research and development expenditures, or a change in the governmental
regulations pursuant to which these industries operate. Furthermore, management
believes that the Company has benefited to date from the increasing tendency of
pharmaceutical and biotechnology companies to outsource the performance and
analysis of large clinical research projects to independent parties. Should this
tendency be reduced or halted entirely, the Company's operations would be
materially and adversely affected.
Loss of Clinical Research Contracts. Clients of the Company generally
have the right to terminate a contract at any time during a clinical trial,
potentially causing periods of excess capacity and reductions in net service
revenue and net income. Trials may be terminated for various reasons, including
unexpected or undesired results, inadequate patient enrollment or investigator
recruitment, production problems resulting in shortages of the drug, adverse
patient reactions to the drug or the client's decision to de-emphasize a
particular trial. The termination of any one trial would typically not have a
material adverse impact on the Company. The loss of a large trial or the
simultaneous loss of multiple trials, however, could result in unplanned periods
of excess capacity and adversely affect the Company's backlog, future revenue
and profitability. In most instances, if a contract is terminated, the Company
is entitled to receive revenue earned to date as well as, at times, a
termination fee. However, because the Company's contracts are predominately
fixed price contracts, the Company bears the risk of cost overruns.
Health Care Industry Reform. The health care industry is subject to
changing political, economic and regulatory influences that may affect the
pharmaceutical and biotechnology industries. In recent years, several
comprehensive health care reform proposals were introduced in the United States
Congress. The intent of the proposals was, generally, to expand health care
coverage for the uninsured and reduce the growth of total health care
expenditures. While none of the proposals were adopted, the United States
Congress may again address health care reform. In addition, foreign governments
may also undertake health care reforms in their respective countries.
Implementation of government health care reform may adversely affect research
and development expenditures by pharmaceutical and biotechnology companies,
which could decrease the business opportunities available to the Company. The
Company is unable to predict the likelihood of such or similar legislation being
enacted into law or the effect such legislation would have on the Company.
Exchange Rate Fluctuations. The Company is exposed to foreign currency
risk by virtue of its international operations. The Company conducts business
in several foreign countries. Approximately 69%, 55%, and 49% of the Company's
net revenue for the years ended December 31, 1999, 1998, and 1997,
respectively, were derived from the Company's operations outside the United
States. During 1999, the Company's preclinical operations in Canada generated
70% of the Company's non-U.S. revenue. Accordingly, exposure exists to
potentially adverse movement in foreign currency rates, especially the Canadian
dollar and British pound sterling. Canada and the United Kingdom have
traditionally had relatively stable currencies in recent years and it is
expected these conditions will persist over the next twelve months. However,
the Company continually monitors international events which could affect
currency values. Accordingly, from time to time, the Company uses foreign
exchange forward contracts to hedge the risk of changes in foreign currency
exchange rates associated with contracts in which the expenses for providing
services are incurred in the functional currency of the Company's foreign
subsidiary, but payments on contracts are made by the client in another
currency. The objective of these contracts is to reduce the effect of foreign
currency exchange rate fluctuations on the Company's foreign subsidiary's
operating results.
No Assurance of Successful Integration of Acquisitions. A significant
component of the Company's historical growth has come through acquisitions of
other CROs, and the Company's growth strategy includes possible additional
acquisitions. Any acquisitions which the Company may pursue will involve risks,
including the possible inability to integrate the operations and services of the
acquired business, the expenses incurred in connection with the acquisition, the
diversion of management's attention from other business concerns and the
potential loss of key
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<PAGE> 16
employees of the acquired business. Acquisitions of foreign companies also may
involve the additional risks of, among others, integration of foreign business
practices and overcoming language barriers. There can be no assurance that any
such acquisitions will not have a material adverse effect upon the Company's
results of operations, financial condition or business prospects.
Volatility of Stock Market Price. From time to time, there may be
significant volatility in the market price for the Company's Common Stock. If
revenues, earnings or new contract orders fail to meet expectations of the
investment community, then there could be an immediate and significant impact on
the trading price for the Company's Common Stock. Additionally, changes in
earnings estimated by analysts, general conditions in the economy, the financial
markets or the health care, pharmaceutical, biotechnology or CRO industries,
implementation of proposed healthcare reforms or other developments affecting
the Company could cause the market price of the Company's Common Stock to
fluctuate substantially. In recent years the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance.
ITEM 2. PROPERTIES
The Company both owns and leases its facilities. The Company's
corporate headquarters and U. S. operations are located near Research Triangle
Park, North Carolina; the preclinical operations are conducted near Montreal,
Quebec in Canada; international operations are located in Maidenhead, U.K.;
Glasgow, Scotland; Brussels, Belgium; Melbourne, Australia; Milan, Italy;
Santiago, Chile; Paris, France; Tel Aviv, Israel, and Warsaw, Poland. The
Company believes that the space owned and leased is adequate for the Company's
operations and that the leases generally reflect market rates in their
respective geographic areas. The expiration dates of the leases range from 2000
to 2013.
The Company utilizes both owned and leased laboratory and office space
in Montreal, Quebec to perform its preclinical services. The majority of the
Company's preclinical services are performed at a 200,000 square foot building
that is owned by the Company's Canadian subsidiary, BioResearch.
In 1998, the Company moved its Research Triangle Park clinical
operations into a newly constructed building in Cary, North Carolina. The
corporate headquarters relocated from Nashville, Tennessee to this location in
May 1999. The Company leases approximately 178,000 square feet in this building.
All of the Company's clinical operations facilities in Europe and other
international locations are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time subject to claims and suits arising in
the ordinary course of business. In the opinion of management, there are
currently no proceedings to which the Company is a party that will have a
material adverse effect upon its operations or financial condition.
In 1991, a customer commenced legal action against the predecessor of
the Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two clinical research studies. Judgment was rendered in
February 1997 by the Superior Court of Montreal against the Company's subsidiary
in the amount of approximately $557,000 plus interest to accrue from September
1991. The Company's preclinical subsidiary, now responsible for this action, has
reserves adequate to cover the current judgment amount. The Company's
preclinical subsidiary has appealed the amount of the judgment and the
subsidiary's insurance company has appealed the portion of the judgment, which
obligates the insurance company to pay the insurance claim related to this
litigation. The Company believes it is entitled, subject to certain limitations,
to indemnification from a former owner of the predecessor for
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a portion of this claim. In the opinion of management, the ultimate resolution
of such pending legal proceedings will not have a material effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market (Nasdaq)
under the symbol CCRO. On February 14, 2000, the last reported sale price for
the Common Stock on Nasdaq was $3.56. As of December 31, 1999, the Company had
approximately 222 holders of record of the Common Stock and the Company
estimates an additional 3,730 beneficial owners. The following table shows the
high and low sales prices for the Common Stock as reported by Nasdaq for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
2000
First Quarter (through February 14, 2000) $4.50 $3.06
1999
First Quarter $6.63 $3.41
Second Quarter 6.31 3.75
Third Quarter 6.88 4.75
Fourth Quarter 5.38 3.00
1998
First Quarter $8.50 $6.25
Second Quarter 7.25 4.03
Third Quarter 6.50 2.94
Fourth Quarter 4.75 2.34
</TABLE>
The Company has paid no dividends since inception and does not intend
to pay dividends in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
CLINTRIALS RESEARCH INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net service revenue $ 96,931 $ 89,691 $ 102,990 $ 94,719 $57,846
Operating costs and expenses:
Direct costs 58,317 62,936 69,279 56,510 34,850
Selling, general and administrative
expenses 36,034 38,823 37,982 25,852 15,209
Depreciation and amortization 6,155 5,738 5,485 3,916 2,287
Restructuring charge -- 6,364 1,650 -- --
Gain on Sale of Ovation (484) -- -- -- --
Nashville lease termination 845 -- -- --
Write-off of purchase option costs 2,178 -- -- -- --
--------- --------- --------- -------- -------
Income (loss) from operations (6,114) (24,170) (11,406) 8,441 5,500
Other income (expense) 417 812 1,204 972 665
--------- --------- --------- -------- -------
Income (loss) before income taxes (5,697) (23,358) (10,202) 9,413 6,165
Provision (benefit) for income taxes 1,348 (1,226) (3,806) 2,988 2,564
--------- --------- --------- -------- -------
Net income (loss) $ (7,045) $ (22,132) $ (6,396) $ 6,425 $ 3,601
========= ========= ========= ======== =======
Earnings (loss) per Share:
Basic $ (0.39) $ (1.22) $ (0.35) $ 0.42 $ 0.27
Diluted $ (0.39) $ (1.22) $ (0.35) $ 0.40 $ 0.26
Weighted average common shares
outstanding for computation of
earnings (loss) per Share:
Basic 18,116 18,207 18,156 15,447 13,497
Diluted 18,116 18,207 18,156 15,927 13,882
BALANCE SHEET DATA (END OF PERIOD)
Cash, cash equivalents, and held-to-
maturity securities $ 7,889 $ 10,867 $ 28,275 $ 38,134 $17,031
Working capital 16,311 17,226 44,641 51,925 16,867
Total assets 116,404 123,096 144,979 157,223 58,626
Long-term debt obligations 381 265 -- -- --
Stockholders' equity 85,168 89,556 115,778 125,020 30,951
</TABLE>
Note: The financial data presented above for the periods presented are not
strictly comparable due to the significant effect of the acquisition of
BioResearch on July 31, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements containing the words believes,
anticipates, intends, expects and words of similar import. Such statements
include statements concerning the Company's ability to obtain new business and
to accurately estimate the timing of recognition of revenue in the backlog due
to variability in size, scope and duration of projects, regulatory delays, study
results which lead to reductions or cancellations of projects, other decisions
totally within the control of its clients and its ability to immediately affect
the level of operating expenses, as well as statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations. Such statements are subject to various
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements because of a number of
factors, including those identified in this Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Risk Factors section
included in Part I, Item 1, and elsewhere in this report. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that such statements included in this
document will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
The forward-looking statements are made as of the date of this Annual Report and
the Company assumes no obligation to update such statements or to update the
reasons that actual results could differ from those projected in the
forward-looking statements.
OVERVIEW
The Company is a full-service contract research organization (CRO) serving the
pharmaceutical, biotechnology and medical device industries. The Company
designs, monitors and manages preclinical and clinical trials, provides clinical
data management and biostatistical services and offers product registration and
pharmacoeconomic services throughout the United States, Canada and Europe. The
Company generates substantially all of its revenue from the preclinical and
clinical testing of new pharmaceutical and biotechnology products.
The Company's contracts are typically fixed-price contracts that range in
duration from a few months to a few years. The contracts usually require a
portion of the contract amount to be paid at or near the time the trial is
initiated with the remaining contract amount paid in intervals based upon the
completion of certain negotiated performance requirements or milestones and, to
a lesser extent, on a date certain basis. The Company's contracts generally may
be terminated with or without cause. In the event of termination, the Company is
typically entitled to all sums owed for work performed through the notice of
termination and all costs associated with termination of the study. In addition,
at times some of the Company's contracts provide for an early termination fee,
the amount of which usually declines as the trial progresses. Termination or
delay in the performance of a contract may occur for various reasons, including,
but not limited to, unexpected or undesired results, inadequate patient
enrollment or investigator recruitment, production problems resulting in
shortages of the drug, adverse patient reactions to the drug, or the client's
decision to de-emphasize a particular trial.
Revenue for contracts is recorded in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1 Accounting
for Performance of Construction-Type and Certain Product-Type Contracts as costs
are incurred and includes estimated earned fees or profits calculated on the
basis of the relationship between costs incurred and total estimated costs
(cost-to-cost type of percentage-of-completion method of accounting).
Additionally, the Company may begin work on a project before a contract is
signed for customers with
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whom the Company has formed a strategic alliance or has a long-term
relationship. Revenue is recognized in the same manner as signed contracts based
upon terms verbally agreed with the customer. Revenue is affected by the mix of
trials conducted and the degree to which labor and facilities are utilized. The
Company recognizes revenue related to contract modifications when realization is
assured and the amounts can be reasonably determined. When estimated contract
costs indicate that a loss will be incurred on a contract, the entire loss is
provided for in such period. The Company routinely subcontracts with third party
investigators in connection with multi-site clinical trials and with other third
party service providers for laboratory analysis and other specialized services.
Subcontractor costs are passed through to clients and, in accordance with
industry practice, are included in gross service revenue. Subcontractor costs
are accrued on a straight-line basis over the investigator phase of the
contract. Subcontractor services may vary significantly from contract to
contract; therefore, changes in gross service revenue may not be indicative of
trends in revenue growth. Accordingly, the Company views net service revenue,
which consists of gross service revenue less subcontractor costs, as its primary
measure of revenue growth. The Company has had, and is expected to continue to
have, certain clients from which at least 10% of the Company's overall revenue
is generated over multiple contracts. Such concentrations of business are not
uncommon within the CRO industry.
Backlog consists of anticipated net service revenue from letters of intent and
contracts that have not been completed. Once work under a letter of intent or
contract commences, net service revenue is recognized over the life of the
contract using the percentage-of-completion method of accounting. Since it is
common for clients to authorize projects and the Company to commence providing
services before a contract is signed, the Company believes reported backlog
should consist of anticipated net revenue from uncompleted projects which have
been authorized by a client, through a written contract or otherwise. At
December 31, 1999, backlog was approximately $98.9 million, as compared to
approximately $105.1 million at December 31, 1998. The Company believes that
backlog is not a consistent indicator of future results because backlog can be
affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years. Additionally, projects
may be terminated by the client or delayed by regulatory authorities for many
reasons, including unexpected test results. Moreover, the scope of a project can
change during the course of a study.
The Company's core European operation consists of offices in Maidenhead, United
Kingdom and Brussels, Belgium. The Company expanded its ability to perform
global clinical trials by opening offices in Australia, Chile, France, and
Israel in 1996, Italy and Scotland in 1997, and Poland in 1999. The Company is
focused on generating new business while controlling its cost structure.
RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company recorded a $1.6 million restructuring charge for costs to be
incurred in reducing its workforce, primarily in Europe. At December 31, 1997,
the entire $1.6 million restructuring charge is included in accrued expenses as
no termination benefits had been paid. In the year ended December 31, 1998, the
Company paid the entire amount of $1.6 million in restructuring costs, primarily
in severance costs to 35 employees.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with lease commitments
following the Company's restructuring decision to consolidate facilities. The
1998 restructuring charge consists of the following (in thousands):
20
<PAGE> 21
<TABLE>
<CAPTION>
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 12/31/99
------ -----------
<S> <C> <C>
Write down of assets in connection with closure of Lexington facility $1,983 $ --
Lease costs associated with consolidation of facilities 1,976 --
Severance costs 2,132 --
Other 273 --
------ ------
$6,364 $ --
====== ======
</TABLE>
RESULTS OF OPERATIONS
The Company's operating segments consist of preclinical trials which are
performed by the Company's Canadian subsidiary and clinical trials which are
performed primarily in the United States and Europe. Summarized below (in
thousands) is the Company's net revenue and income (loss) from operations for
each reportable segment as defined by Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 131, Disclosures about Segments
of an Enterprise and Related Information. Other includes operations not directly
related to the segments and corporate expenses. See Segment Reporting note to
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net Revenue:
U.S. Clinical $ 30,108 $ 40,366 $ 52,273
Europe Clinical 19,914 11,128 13,777
-------- -------- ---------
Total Clinical 50,022 51,494 66,050
Canada Preclinical 46,909 38,197 36,940
-------- -------- ---------
Total Company $ 96,931 $ 89,691 $ 102,990
======== ======== =========
Segment profit (loss):
U.S. Clinical $ (8,859) $ (8,990) $ (1,773)
Europe Clinical 12 (9,520) (7,113)
-------- -------- ---------
Total Clinical (8,847) (18,510) (8,886)
Canada Preclinical 8,231 5,851 4,156
Other (5,498) (11,511) (6,676)
-------- -------- ---------
Total Company $ (6,114) $(24,170) $ (11,406)
======== ======== =========
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net loss for the year ended December 31, 1999 was $7.0 million, or $0.39 diluted
loss per share, compared to net loss in the same period of 1998 of $22.1 million
or $1.22 diluted loss per share. The decrease in the net loss was primarily
attributable to significantly improved results from operations in the Company's
Europe Clinical and Canada Preclinical segments, as well as lower corporate
costs in 1999 compared to 1998. Additionally, in 1998 the Company recorded a
$6.4 million restructuring charge (none in 1999). These improvements were
partially offset by the 1999 write-off of purchase option costs relating to MPI
Research of $2.2 million and Nashville lease termination costs of $0.8 million
to relocate the Company's headquarters to North Carolina in May 1999.
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<PAGE> 22
The U.S. Clinical segment reported a $10.3 million or 25.4% decline in net
revenues in 1999 compared to 1998 due to lower levels of backlog recognized in
the revenue stream in 1999. However, segment loss was slightly less in 1999
compared to 1998. Staffing levels of the direct labor workforce were lower
during 1999 than in 1998.
The Europe Clinical segment reported an $8.8 million or 79.0% increase in net
revenues during 1999 compared to 1998. New business orders were strong and
several significant contracts were completed in 1999. Segment profit totaled
$12,000 during 1999 compared to segment loss of $9.5 million in 1998. Improved
staffing levels and utilization of the direct labor workforce contributed to the
turnaround in 1999's results compared to 1998. Additionally, the new management
structure and related marketing and sales focus implemented during 1998 in
Europe contributed to the 1999 results.
The Canada Preclinical segment reported an $8.7 million or 23% increase in net
revenues in 1999 compared to 1998. Segment profit increased $2.4 million or 41%
in 1999 when compared to 1998. These increases were primarily due to continuing
high demand for specialty studies in the reproduction/infusion areas and an
increase in capacity to handle additional work. These are generally shorter-term
studies with shorter startup times, and thus yield higher margins because of the
higher level of special technology requirements.
Based on average exchange rates computed daily, the Canadian dollar and British
pound were minimally weaker in 1999 than in 1998 in relation to the U.S. dollar.
These changes did not significantly affect the Company's net revenues and did
not affect the Company's reported diluted loss per common share of $0.39.
Net service revenue increased $7.2 million or 8.1% to $96.9 million in 1999 from
$89.7 million in 1998. As discussed above, increases in the Europe Clinical and
Canada Preclinical segment revenues were partially offset by the decrease in
revenues in the U.S. Clinical segment.
Direct costs include compensation and benefits for billable employees as well as
other costs directly related to contracts. Direct costs decreased 7.3% to $58.3
million in 1999 from $62.9 million in 1998. Direct costs decreased as a
percentage of net service revenue to 60.2% from 70.2% due to improved staffing
levels and utilization of the direct labor workforce, primarily in the Europe
Clinical and Canada Preclinical segments. Direct costs are based on the mix of
contracts in progress and as a percentage of net revenue may fluctuate from
period to period dependent upon the mix of contracts in the backlog. In
addition, direct costs will fluctuate due to changes in labor and facility
utilization.
Selling, general and administrative costs decreased 7.2% to $36.0 million in
1999 from $38.8 million in 1998 primarily due to the termination of the
Company's Nashville lease and relocation of its Corporate office to North
Carolina in the second quarter of 1999 and a reduction in bad debt expense.
Furthermore, cost control measures in 1999 had the effect of reducing several
categories of selling, general and administrative expenses during 1999 compared
to 1998. Selling, general and administrative costs decreased as a percentage of
net service revenue to 37.2% from 43.3%. The decrease as a percentage of net
revenue is primarily attributable to higher levels of net revenue while costs
were reduced. Selling, general and administrative costs, which primarily
includes compensation for administrative employees and costs related to
facilities, information technology and marketing, are relatively fixed in the
near term, while revenue is subject to fluctuation due primarily to variations
in the timing of contracts or the progress of clinical trials (both delays and
accelerations).
Depreciation and amortization expense increased 7.3% to $6.2 million in 1999
compared to $5.7 million in 1998 as increased depreciation resulting from 1999
and 1998 capital expenditures was partially offset by a decrease in depreciation
and amortization for the closing of the Company's Nashville office in May 1999
and the Lexington facility in April 1998.
22
<PAGE> 23
On January 4, 1999, the Company sold its pharmacoeconomic subsidiary, Ovation,
back to the principals from whom the shares were originally purchased, as part
of the Company's ongoing consolidation of U.S. operations into its Research
Triangle Park, North Carolina (RTP) facility. Pharmacoeconomic services are now
performed out of the Company's RTP facility as the Company retains the right to
use the ClinTrials Ovation name. The Company received 213,000 shares of the
Company's stock in the sales transaction and recorded a gain on the sale of
$484,000.
The Company entered into an agreement to terminate the lease of its Nashville
office and accrued $845,000 in the first quarter of 1999 for costs related to
the termination of this lease. The termination of this lease relieves the
Company of approximately $11.0 million of future minimum lease payments. The
Company relocated its Corporate office to Research Triangle Park, North Carolina
in the second quarter of 1999.
The Company recorded a charge of $2,178,000 in the fourth quarter of 1999 to
write-off the purchase option costs included in other assets on the balance
sheet relating to MPI Research, a preclinical facility. The option expires March
31, 2000 and it was determined that as of December 31, 1999, it was unlikely to
be exercised. Accordingly, an asset impairment write-down was recognized in
1999. The Company is currently in the late stages of negotiating an agreement
that will geographically expand its preclinical facilities and significantly
increase its capacity in a manner that better meets its strategic needs.
Interest income, net of interest expense, was $0.4 million in 1999 compared to
$0.8 million in 1998 primarily due to lower cash balances available for
short-term investments.
The Company's provision for income taxes was $1.3 million for the year ended
December 31, 1999. This provision was primarily due to the Company's Canadian
operations. Future income taxes associated with the Company's U.S. operations
will be offset by available net operating loss carryforwards. Due to the
restrictions that accounting standards place on loss carryforwards, the Company
has recorded valuation allowances for the deferred tax assets related to the
Company's potential tax benefit of such loss carryforwards. For the year ended
December 31, 1998, the Company recognized an income tax benefit of $1.2 million.
A partial tax benefit was recognized because of the ability to obtain tax refund
due and fully realize the income tax benefit on the Company's available U.S.
income tax loss carrybacks.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net loss for the year ended December 31, 1998 was $22.1 million, or $1.22
diluted loss per share, compared to net loss in the same period of 1997 of $6.4
million or $0.35 diluted loss per share. The increase in the net loss is
primarily attributable to the 1998 restructuring charge of $6.4 million
(discussed above); the significant decrease in the Company's effective tax
benefit rate (discussed below); and the cancellations of clinical contracts,
aggregating approximately $37 million in backlog, which occurred in the fourth
quarter of 1996 and first quarter of 1997 along with an insufficient level of
new clinical orders.
The Canadian dollar was weaker in 1998 than in 1997 in relation to the U.S.
dollar, while the British pound was stronger in relation to the U.S. dollar.
Excluding the effect of the changes in the average exchange rates from 1997 to
1998, the Company's diluted loss per share would have been $1.19 as compared to
the $1.22 reported.
Net service revenue decreased 12.9% to $89.7 million in 1998 from $103.0 million
in 1997. This decrease resulted primarily from a level of new clinical orders
which was insufficient to cover prior period cancellations of clinical contracts
previously discussed, which resulted in a 22.0% decrease in clinical net
revenue. Net revenue from preclinical operations increased 3.4% primarily due to
the strength of new orders and backlog existing at the beginning of the year
which was partially offset by a weaker Canadian dollar in 1998. Excluding the
effect of the foreign currency translation, preclinical revenue increased 10.6%
in 1998 as compared to 1997.
23
<PAGE> 24
Direct costs include compensation and benefits for billable employees as well as
other costs directly related to contracts. Direct costs decreased 9.2% to $62.9
million in 1998 from $69.3 million in 1997. Direct costs increased as a
percentage of net service revenue to 70.2% from 67.3% due to unbillable
resources resulting from the previously discussed clinical project cancellations
and an insufficient level of new clinical orders to cover these cancellations.
Direct costs as a percentage of net service revenue for the Company's
preclinical operations improved to 55.4% as compared to 58.1% in the prior year.
Direct costs are based on the mix of contracts in progress and as a percentage
of net revenue may fluctuate from period to period dependent upon the mix of
contracts in the backlog. In addition, direct costs will fluctuate due to
changes in labor and facility utilization.
Selling, general and administrative costs increased 2.2% to $38.8 million in
1998 from $38.0 million in the same period in 1997 primarily due to the opening
of the Glasgow facility in November 1997, increases in lease costs and one-time
costs to move into the Company's new clinical research center in Research
Triangle Park, North Carolina which offset cost savings from the closing of the
Company's Lexington facility in April 1998, an increase in bad debt expense to
cover potential collection issues, and severance costs incurred to replace U.S.
and European clinical management personnel that was not included in
restructuring costs. Selling, general and administrative costs increased as a
percentage of net service revenue to 43.3% from 36.9%. The increase as a
percentage of net revenue is primarily attributable to lower levels of clinical
revenue resulting from project cancellations and an insufficient level of new
orders. Selling, general and administrative costs, which primarily includes
compensation for administrative employees and costs related to facilities,
information technology and marketing, are relatively fixed in the near term,
while revenue is subject to fluctuation due primarily to variations in the
timing of contracts or the progress of clinical trials (both delays and
accelerations).
Depreciation and amortization expense increased 4.6% to $5.7 million in 1998
compared to $5.5 million in 1997 as increased depreciation resulting from 1998
capital expenditures was partially offset by a decrease in depreciation and
amortization for the closing of the Company's Lexington facility in April 1998.
Interest income, net of interest expense, was $0.8 million in 1998 compared to
$1.2 million in 1997 primarily due to lower cash balances available for
short-term investments.
The Company's benefit for income taxes was $1.2 million in the 1998 as compared
to $3.8 million in 1997. The effective tax benefit rate in 1998 was 5.2%
compared to 37.3% in 1997. The effective tax benefit rate declined in 1998 as
the Company fully realized its available U.S. tax loss carrybacks in the second
quarter of 1998. Due to the restrictions that accounting standards place on
deferred tax assets associated with loss carryforwards, the Company recorded a
valuation allowance of $11.6 million in 1998 for its deferred tax assets related
to the Company's potential tax benefit of such loss carryforwards associated
with its operating loss in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and long-term
basis include the payment of salaries, office rent and travel expenses, as well
as capital expenditures. The Company has historically financed these
expenditures, as well as acquisitions, with cash flow from operations, issuances
of equity securities and borrowings under its lines of credit. The Company
utilizes its working capital to finance these expenditures pending receipt of
its receivables. Contract receipts from the Company's clients vary according to
the terms of each contract.
Prerequisites for billings are generally established by contractual provisions
that include predetermined date certain payment schedules (which may include
payment at or near the time the trial is initiated), the achievement of
negotiated performance requirements or milestones, or the submission of required
billing detail. Unbilled receivables arise from those contracts under which
services performed exceed billings which are rendered upon the achievement
24
<PAGE> 25
of certain negotiated performance requirements or on a date-certain basis.
Advance billings represent contractual billings for services not yet rendered.
As of December 31, 1999, the Company's advance billings were $8.3 million and
its accounts receivable of $31.1 million included $17.4 million of unbilled
receivables. The Company expects to bill and collect these unbilled receivables
within one year of revenue recognition. Cash receipts do not correspond to costs
incurred and revenue recognition (which is typically based on cost-to-cost type
of percentage of completion accounting) and therefore, the Company's cash flow
is influenced by the interaction of changes in receivables and advance billings.
The Company typically receives a low volume of large-dollar cash receipts. The
number of days sales outstanding in accounts receivable (which includes unbilled
receivables) was 111 days at December 31, 1999, compared to 115 days at December
31, 1998. The number of days sales outstanding in accounts receivable (which
includes unbilled receivables) net of advance billings was 82 days at December
31, 1999, compared to 75 days at December 31, 1998.
The Company had cash and cash equivalents of $7.9 million at December 31, 1999
as compared to $10.9 million at December 31, 1998.
During the year ended December 31, 1999, net cash provided by operating
activities totaled $1.7 million, primarily due to a decrease in income tax
receivables of $2.9 million, and an increase in net payables to investigators of
$2.9 million, which were partially offset by a loss before noncash items of $7.0
million and an increase in accounts receivable, net of advance billings of $5.1
million.
Cash used in investing activities of $5.5 million during the year ended December
31, 1999 consisted of capital expenditures of $5.1 million and costs associated
with an option to acquire MPI Research, LLC (MPI) of $0.4 million. Capital
expenditures have primarily been made for computer system additions and
upgrades, personal computer equipment and expenditures on facility improvements.
The Company has a $15.0 million domestic credit facility which has expansion
capabilities to $25.0 million provided the Company meets certain financial
requirements. Credit availability under the Company's domestic line of credit
and its foreign line of credit (the Credit Facilities) totals approximately
$18.5 million. There were no borrowings outstanding under the lines of credit at
December 31, 1999. Commitment availability at December 31, 1999 has been reduced
by issued letters of credit of approximately $744,000. The lines of credit are
collateralized by certain of the Company's assets and amounts outstanding would
bear interest at a fluctuating rate based either on the respective banks' prime
interest rate or the London Interbank Offered Rate (LIBOR), as elected by the
Company. Borrowings available under the lines of credit are subject to certain
financial and operating covenants. The Company's Canadian subsidiary has
approximately $464,000 of borrowings outstanding from the Canadian government
which bears no interest and is repayable in four annual installments beginning
in August 2000 and ending in 2003.
The Company expects to continue expanding its operations through internal growth
and strategic acquisitions. The Company expects such activities will be funded
from existing cash and cash equivalents, cash flow from operations, and
available borrowings under its Credit Facilities. Although pressure on cash
reserves is expected, the Company estimates that its sources of cash will be
sufficient to fund the Company's current operations, including planned capital
expenditures, over the next year. There may be acquisition or other growth
opportunities which require additional external financing, and the Company may
from time to time seek to obtain additional funds from public or private
issuances of equity or debt securities. There can be no assurances that such
financings will be available on terms acceptable to the Company.
25
<PAGE> 26
QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate as a result of factors
such as delays experienced in implementing or completing particular clinical
trials and termination of clinical trials, the costs associated with integrating
acquired operations, foreign currency exchange fluctuations, as well as the
costs associated with opening new offices. Since a high percentage of the
Company's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the timing of contracts or the progress of
clinical trials (both delays and accelerations) may cause significant variations
in quarterly operating results. Results of one quarter are not necessarily
indicative of results for the next quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) which was required to be
adopted in years beginning after June 15, 1999. In July 1999, SFAS No. 137 was
issued as Accounting for Derivative Investments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 which defers for one
year the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Accordingly, the Company plans to adopt
SFAS No. 133 effective January 1, 2001. From time to time, the Company uses
foreign exchange forward contracts to hedge the risk of changes in foreign
currency exchange rates associated with contracts in which the expenses for
providing services are incurred in the functional currency of the Company's
foreign subsidiary, but payments on contracts are made by the client in another
currency. The Company does not anticipate that the adoption of SFAS No. 133 will
have a significant effect on the financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, (SAB No. 101), "Revenue Recognition in Financial Statements." SAB
No. 101 summarizes certain of the SEC staff's views on applying generally
accepted accounting principles to revenue recognition. The Company will adopt
SAB No. 101 in the quarter ending March 31, 2000 and does not expect SAB No.
101 to have a material effect on its financial position or results of
operations.
YEAR 2000 ISSUE
The Company was engaged in a major effort to minimize the impact of the Year
2000 date change on its products, services, information systems, laboratories
and facilities. All systems were deemed Year 2000 compliant in September 1999.
The Company did not experience any Year 2000 problems subsequent to December 31,
1999.
Year 2000 project costs totaled $8.2 million. During the year ended December 31,
1999, the Company spent $2.3 million to purchase hardware and software and used
internal resources of $2.3 million (primarily salary costs) on its Year 2000
issues. During the year ended December 31, 1998, the Company spent $2.5 million
to purchase hardware and software and used internal resources of $1.1 million
(primarily salary costs) on its Year 2000 issues. Work projects were prioritized
to largely address Year 2000 readiness. As a result, most of these costs
represent costs that would have been incurred in any event. These amounts
covered costs of the Year 2000 readiness work for inventory, assessment,
remediation, testing and deployment including fees and charges of contractors
for outsourced work and consultants' fees. Costs for previously contemplated
updates and replacements of the Company's internal systems and information
systems infrastructure were included when such upgrades or replacements have
been accelerated.
FOREIGN CURRENCY
The Company is exposed to foreign currency risk by virtue of its international
operations. The Company conducts business in several foreign countries.
Approximately 69%, 55%, and 49% of the Company's net revenue for the years ended
December 31, 1999, 1998, and 1997, respectively, were derived from the Company's
operations outside the United States. During 1999, the Company's preclinical
operations in Canada generated 70% of the Company's
26
<PAGE> 27
non-U.S. revenue. Accordingly, exposure exists to potentially adverse movement
in foreign currency rates, especially the Canadian dollar and British pound
sterling. Canada and the United Kingdom have traditionally had relatively stable
currencies in recent years and it is expected these conditions will persist over
the next twelve months. However, the Company continually monitors international
events which could affect currency values. Accordingly, from time to time, the
Company uses foreign exchange forward contracts to hedge the risk of changes in
foreign currency exchange rates associated with contracts in which the expenses
for providing services are incurred in the functional currency of the Company's
foreign subsidiary, but payments on contracts are made by the client in another
currency. The objective of these contracts is to reduce the effect of foreign
currency exchange rate fluctuations on the Company's foreign subsidiary's
operating results.
Additionally, the Company's consolidated financial statements are denominated in
U.S. dollars and, accordingly, changes in the exchange rates between the
Company's subsidiaries' local currency and the U.S. dollar will affect the
translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results. Translation
adjustments are reported with accumulated other comprehensive income (loss) as a
separate component of stockholders' equity. Such adjustments may in the future
be material to the Company's financial statements.
INCOME TAXES
The Company's financial statements do not reflect U.S. or additional foreign
taxes on the possible distribution of undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Should the
Company determine the need to distribute these undistributed earnings of foreign
subsidiaries, it would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to various
countries.
The Company's provision for income taxes was $1.3 million for the year ended
December 31, 1999. This provision was primarily due to the Company's Canadian
operations. Future income taxes associated with the Company's U.S. operations
will be offset by available net operating loss carryforwards. Due to the
restrictions that accounting standards place on loss carryforwards, the Company
has recorded valuation allowances for the deferred tax assets related to the
Company's potential tax benefit of such loss carryforwards. For the year ended
December 31, 1998, the Company recognized an income tax benefit of $1.2 million.
A partial tax benefit was recognized because of the ability to obtain tax refund
due and fully realize the income tax benefit on the Company's available U.S.
income tax loss carrybacks.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the EMU) introduced a
new currency, the Euro, on January 1, 1999. The new currency is in response to
the EMU's policy of economic convergence to harmonize trade policy, eliminate
business costs associated with currency exchange and to promote the free flow of
capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as their local
currency, initially available for currency trading on currency exchanges and non
cash (banking) transactions. The existing local currencies, or legacy
currencies, are planned to remain legal tender through January 1, 2002.
Beginning on January 1, 2002, Euro-denominated bills and coins are planned to be
issued for cash transactions. For a period of nine months from this date, both
legacy currencies and the Euro are planned to be legal tender. On or before July
1, 2002, the participating countries are planning to withdraw all legacy
currency and use the Euro exclusively.
27
<PAGE> 28
The introduction of the Euro may have potential implications for the Company's
existing operations. Currently, Belgium, France and Italy are the only
participating countries in the EMU in which the Company has operations. While
one cannot predict such events, many authorities expect non-participating
European Union countries, such as the United Kingdom, to eventually join the
EMU. The Company does not currently expect to experience any operational
disruptions or to incur any costs as a result of the introduction of the Euro
that would materially affect the Company's liquidity or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a global provider of preclinical and clinical research services
to pharmaceutical, biotechnology and medical device clients. As such, the
Company's ability to win new outsourced contracts from the pharmaceutical
industry is dependent upon the rate of research and development expenditure by
that industry. This in turn can be influenced by a variety of factors, including
mergers within the pharmaceutical industry, the availability of capital to the
biotechnology industry, and by the impact of government reimbursement rates for
medicare and medicaid programs. Consequently, the success of the company to grow
and win new outsourced contracts is highly dependent upon the ability of the
pharmaceutical and biotechnology industries to continue to spend on R&D at rates
close to or at historical levels.
The Company is exposed to foreign currency risk by virtue of its international
operations. The Company conducts business in several foreign countries.
Approximately 69%, 55%, and 49% of the Company's net revenue for the years ended
December 31, 1999, 1998, and 1997, were derived from the Company's operations
outside the United States. During 1999, the Company's preclinical operations in
Canada generated 70% of the Company's non-U.S. revenue. Accordingly, exposure
exists to potentially adverse movement in foreign currency rates, especially the
Canadian dollar and British pound sterling. Canada and the United Kingdom have
traditionally had relatively stable currencies in recent years and it is
expected these conditions will persist over the next twelve months. However, the
Company continually monitors international events which could affect currency
values. Accordingly, from time to time, the Company uses foreign exchange
forward contracts to hedge the risk of changes in foreign currency exchange
rates associated with contracts in which the expenses for providing services are
incurred in the functional currency of the Company's foreign subsidiary, but
payments on contracts are made by the client in another currency. The objective
of these contracts is to reduce the effect of foreign currency exchange rate
fluctuations on the Company's foreign subsidiary's operating results.
Additionally, the Company's consolidated financial statements are denominated in
U.S. dollars and, accordingly, changes in the exchange rates between the
Company's subsidiaries' local currency and the U.S. dollar will affect the
translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results. Translation
adjustments are reported with accumulated other comprehensive income (loss) as a
separate component of stockholders' equity. Such adjustments may in the future
be material to the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information for this item is set forth herein on pages F-1 through
F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 annual meeting of
stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 annual meeting of
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 30, 1998, the Company entered into an option agreement (the MPI
Option) with MPI Research, LLC (MPI) and its shareholders, Jerry R. Mitchell,
M.D., Ph.D. and William U. Parfet, who each owned 50% of MPI. Dr. Mitchell is
the President, Chief Executive Officer and Chairman of the Board of Directors of
the Company and Mr. Parfet was the Company's Director of Business Planning and
Analysis until April 1999. Pursuant to the MPI Option, the Company paid
$1,500,000 in cash in exchange for an exclusive option to purchase all of the
outstanding stock of MPI at its fair market value at any time on or prior to
March 31, 2000. The shareholders of MPI have the right to cancel the MPI Option
at any time after March 31, 1999, by returning the $1,500,000 cash without
interest, provided they give the Company written notice of their intent to
cancel the option and the Company does not exercise the option within twenty
business days of receipt of such notice.
The Company recorded an asset impairment charge of $2,178,000 in the fourth
quarter of 1999 to write-off the purchase option costs included in other assets
on the balance sheet relating to MPI Research. The option expires March 31, 2000
and it was determined that as of December 31, 1999, it was unlikely to be
exercised. The Company is currently in the late stages of negotiating an
agreement that will geographically expand its preclinical facilities and
significantly increase its capacity in a manner that better meets its strategic
needs.
29
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule
1. The consolidated financial statements of the Company filed as
part of this Report are listed in the attached Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1.
2. Reference is hereby made to pages F-1 and F-21 of this report
for the financial statement schedule required by Regulation
S-X.
3. The exhibits filed as part of this Report are listed in Item
14c below.
(b) Reports on Form 8-K. None.
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 -- Restated Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
3.2 -- Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement No. 33-69586 on Form S-1)
4.1 -- Restated Certificate of Incorporation, as amended, of the
Registrant (see Exhibit 3.1)
4.2 -- Restated Bylaws of the Registrant (see Exhibit 3.2)
4.3 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993)
10.1 -- Executive Compensation Plans and Arrangements (a) Form of
Employment Agreement between the Company and certain of its
officers (incorporated by reference to Exhibit 10.1 (a) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997); (b) Employment Agreement between the
Company and Michael F. Ankcorn (incorporated by reference to
Exhibit 10.1(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996); (c) Form of Employment
Agreement between the Company and its President, Chief
Executive Officer and Chairman of the Board (incorporated by
reference to Exhibit 10.1(c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997); (d) Form of
Employment Agreement between the Company and S. Colin Neill
(incorporated by reference to Exhibit 10.1 (d) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998); (e) Form of Amendment to Employment
Agreement between the Company and Jerry R. Mitchell, M.D.,
Ph.D.; (f) Form of Amendment to Employment Agreement between
the Company and Paul J. Ottaviano; (g) Form of Amendment to
Employment Agreement between the Company and S. Colin Neill
10.2 -- Form of Indemnification Agreement between the Registrant
and each of its directors (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement No.
33-69586 on Form S-1)
10.3 -- 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement No. 33-69586 on Form S-1)
10.4 -- Amendment No. 4 to 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10- K for the year ended December 31, 1994)
10.5 -- Profit Sharing 401(k) Plan (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement No.
33-69586 on Form S-1)
10.6 -- Lease Agreements for the Registrant's Research Triangle
Park, North Carolina office space (incorporated by reference
to Exhibit 10.11 to the Company's Registration Statement No.
33-69586 on Form S-1)
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C>
10.6.1 -- Sublease Agreement dated June 3, 1994 for additional space
in Research Triangle Park, North Carolina (incorporated by
reference to Exhibit 10.8.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994)
10.7 -- Lease Agreement for the Registrant's Lexington, Kentucky
office space (incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement No. 33-69586 on Form S-1)
10.8 -- Lease Contract for the Registrant's Brussels, Belgium
office space (incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement No. 33-69586 on Form S-1)
10.9 -- Agreement for Lease for the Registrant's Maidenhead,
England office space (incorporated by reference to Exhibit
10.14 to the Company's Registration Statement No. 33-69586 on
Form S-1)
10.10 -- (a) Second Amended and Restated Loan and Security Agreement
dated December 8, 1993 by and between NationsBank of
Tennessee, N.A., the Registrant and its subsidiaries
(incorporated by reference to Exhibit 10.11 to the Company'
Annual Report on Form 10-K for the year ended December 31,
1993) (b) Loan and Security Agreement dated March 27, 1998 by
and between NationsBank of Tennessee, N.A., the Registrant and
its subsidiaries (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report for the period ended March 31,
1998)
10.11 -- Lease Agreement dated December 19, 1995 for the Company's
headquarters space in Nashville, Tennessee (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995)
10.12 -- Asset Purchase Agreement among Bio-Research Laboratories
Ltd., certain shareholders thereof, and the Company
(incorporated by reference to the Company's Current Report on
Form 8-K filed on June 19, 1996)
10.13 -- Lease dated September 30, 1996 for new offices (commencing
in 1998) in Cary, North Carolina (incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996)
10.14 -- Option Agreement to purchase MPI Research, LLC dated
January 30, 1998 between the Company and Jerry R. Mitchell,
M.D., Ph.D. and William U. Parfet (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997)
10.15 -- 1998 Nonqualified Stock Option Plan for Directors
(incorporated by reference to Exhibit A to the Company's Proxy
Statement for the annual meeting of stockholders held on May
11, 1998 as filed with the SEC on April 10, 1998)
10.16 -- Amendment No. 6 to 1989 Stock Option Plan of ClinTrials
Research Inc. (incorporated by reference to Exhibit B to the
Company's Proxy Statement for the annual meeting of
stockholders held on May 11, 1998 as filed with the SEC on
April 10, 1998)
10.17 -- 1999 Long-Term Incentive Compensation Plan of ClinTrials
Research Inc. (incorporated by reference to Exhibit A to the
Company's Proxy Statement for the annual meeting of
stockholders held on June 22, 1999 as filed with the SEC on
May 26, 1999)
21 -- List of Subsidiaries of the Registrant
23 -- Consent of Ernst & Young LLP
27 -- Financial Data Schedule for the year ended December 31,
1999 (for SEC use only)
</TABLE>
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLINTRIALS RESEARCH INC.
By: /s/ JERRY R. MITCHELL February 25, 2000
Jerry R. Mitchell, M.D., Ph.D.
President and Chief Executive Officer, Chairman of the Board
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.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ S. COLIN NEILL Senior Vice President and February 25, 2000
S. Colin Neill Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ EDWARD G. NELSON Director February 25, 2000
Edward G. Nelson
/s/ RICHARD J. ESKIND Director February 25, 2000
Richard J. Eskind
/s/ IRWIN B. ESKIND Director February 25, 2000
Irwin B. Eskind, M.D.
/s/ ROSCOE R. ROBINSON Director February 25, 2000
Roscoe R. Robinson, M.D.
</TABLE>
32
<PAGE> 33
CLINTRIALS RESEARCH INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Financial Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-20
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-21
</TABLE>
F-1
<PAGE> 34
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of ClinTrials Research Inc.
We have audited the accompanying consolidated balance sheets of ClinTrials
Research Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ClinTrials
Research Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 1, 2000, except for Note 4,
as to which the date is February 16, 2000
F-2
<PAGE> 35
CLINTRIALS RESEARCH INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,889 $ 10,867
Accounts receivable, net of allowance for doubtful
accounts of $1,420 in 1999 and $2,548 in 1998 31,084 30,179
Advance payments to investigators -- 492
Income taxes receivable 1,454 3,614
Other current assets 1,757 1,938
--------- ---------
Total current assets 42,184 47,090
Property, plant and equipment:
Land, buildings and leasehold improvements 22,995 20,324
Equipment 32,725 30,500
Furniture and fixtures 4,946 4,570
--------- ---------
60,666 55,394
Less accumulated depreciation 21,161 15,620
--------- ---------
39,505 39,774
Excess of purchase price over net assets acquired 34,304 33,655
Other assets 411 2,577
--------- ---------
$ 116,404 $ 123,096
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,095 $ 7,332
Advance billings 8,338 12,562
Payables to investigators 4,683 1,806
Accrued expenses 7,469 7,714
Income taxes payable 1,174 361
Current maturities of long-term debt 114 89
--------- ---------
Total current liabilities 25,873 29,864
Deferred income taxes 4,982 3,411
Long-term debt 381 265
Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value--1,000,000
shares authorized; no shares issued or outstanding -- --
Common Stock, $.01 par value--50,000,000
shares authorized; issued and outstanding
18,402,172 and 18,230,172 shares in 1999 and 1998,
respectively 184 182
Additional paid-in capital 126,651 127,329
Accumulated deficit (38,490) (31,445)
Accumulated other comprehensive loss (3,177) (6,510)
--------- ---------
Total stockholders' equity 85,168 89,556
--------- ---------
$ 116,404 $ 123,096
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
CLINTRIALS RESEARCH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Service revenue $ 113,892 $ 109,254 $ 125,687
Less subcontractor costs 16,961 19,563 22,697
--------- --------- ---------
Net service revenue 96,931 89,691 102,990
Operating costs and expenses:
Direct costs 58,317 62,936 69,279
Selling, general and administrative expenses 36,034 38,823 37,982
Depreciation and amortization 6,155 5,738 5,485
Restructuring charge -- 6,364 1,650
Gain on sale of Ovation (484) -- --
Nashville lease termination costs 845 -- --
Write-off of purchase option costs 2,178 -- --
--------- --------- ---------
Income (loss) from operations (6,114) (24,170) (11,406)
Other income (expense):
Interest income 442 841 1,232
Interest expense (25) (29) (28)
--------- --------- ---------
Income (loss) before income taxes (5,697) (23,358) (10,202)
Provision (benefit) for income taxes 1,348 (1,226) (3,806)
--------- --------- ---------
Net income (loss) $ (7,045) $ (22,132) $ (6,396)
========= ========= =========
Earnings (loss) per share:
Basic $ (0.39) $ (1.22) $ (0.35)
Diluted $ (0.39) $ (1.22) $ (0.35)
Number of shares and common stock equivalents
used in computing earnings (loss)
per share:
Basic 18,116 18,207 18,156
Diluted 18,116 18,207 18,156
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
CLINTRIALS RESEARCH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,045) $(22,132) $ (6,396)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property,
plant and equipment 5,891 5,333 4,999
Amortization of other assets 1,242 1,277 1,326
Provision for doubtful accounts 146 2,159 351
Deferred income taxes 1,571 2,820 (58)
Gain on sale of Ovation (484) -- --
Write-off of purchase option costs 2,178 -- --
Loss on disposal/write-down of fixed assets 204 142 322
Write down of assets associated with closing
of Lexington facility -- 1,983 --
Other 2 29 7
Changes in operating assets and liabilities:
Accounts receivable (746) 672 832
Advance billings (4,338) 2,325 (4,329)
Payables to investigators 2,877 528 (58)
Accounts payable and accrued expenses (3,587) 893 3,470
Advance payments to investigators 492 447 (390)
Income taxes 2,869 (269) (2,724)
Other assets and liabilities 393 403 141
-------- -------- --------
Net cash provided by (used in) operating
activities 1,665 (3,390) (2,507)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (5,071) (12,227) (6,962)
Costs associated with option to acquire MPI (456) (1,722) --
-------- -------- --------
Net cash used in investing activities (5,527) (13,949) (6,962)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 118 382 --
Proceeds from exercise of common stock options 167 140 381
-------- -------- --------
Net cash provided by financing activities 285 522 381
Effect of foreign currency exchange rate changes
on cash 599 (591) (771)
-------- -------- --------
Decrease in cash and cash equivalents (2,978) (17,408) (9,859)
Cash and cash equivalents at beginning of year 10,867 28,275 38,134
-------- -------- --------
Cash and cash equivalents at end of year $ 7,889 $ 10,867 $ 28,275
======== ======== ========
Supplemental cash flow information:
Interest paid $ 23 $ 38 $ 16
======== ======== ========
Income tax receipts $ (2,956) $ (2,601) $ (1,024)
======== ======== ========
Equipment purchased included in accounts payable $ 616 $ 1,518 $ 611
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 38
CLINTRIALS RESEARCH INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------ Paid-In Accumulated Comprehensive
Total Shares Amount Capital Deficit Income (Loss)
--------- ---------- ------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 125,020 18,114,258 $ 181 $ 126,773 $ (2,917) $ 983
Exercises of stock options 381 67,507 1 380
Comprehensive income (loss):
Foreign currency translation
adjustments (3,234) (3,234)
Net loss (6,396) (6,396)
---------
Comprehensive income (loss) (9,630)
---------
Other 7 7
--------- ---------- ----- --------- -------- -------
Balance at December 31, 1997 115,778 18,181,765 182 127,160 (9,313) (2,251)
Exercises of stock options 140 48,407 -- 140
Comprehensive income (loss):
Foreign currency translation
adjustments (4,259) (4,259)
Net loss (22,132) (22,132)
---------
Comprehensive income (loss) (26,391)
---------
Other 29 29
--------- ---------- ----- --------- -------- -------
Balance at December 31, 1998 89,556 18,230,172 182 127,329 (31,445) (6,510)
Sale of Ovation (838) (213,000) (2) (836)
Exercises of stock options 167 385,000 4 163
Comprehensive income (loss):
Foreign currency translation
adjustments 3,333 3,333
Net loss (7,045) (7,045)
---------
Comprehensive income (loss) (3,712)
---------
Other (5) (5)
--------- ---------- ----- --------- -------- -------
Balance at December 31, 1999 $ 85,168 18,402,172 $ 184 $ 126,651 $(38,490) $(3,177)
========= ========== ===== ========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 39
CLINTRIALS RESEARCH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997)
1. ORGANIZATION
ClinTrials Research Inc. (the Company) is a full service contract research
organization serving the pharmaceutical, biotechnology and medical device
industries. The Company designs, monitors and manages preclinical and clinical
trials, provides data management and biostatistical services, and offers product
registration and pharmacoeconomic services throughout the United States, Canada
and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of ClinTrials
Research Inc. and its subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
ACCOUNTING ESTIMATES
Judgment and estimation is exercised by management in certain areas of the
preparation of the financial statements including revenue recognition, reserves
for self-insurance risks and the allowance for uncollectible accounts.
Management believes that such estimates are fairly stated; however, actual
results could differ from amounts estimated.
FOREIGN CURRENCIES
Assets and liabilities of the Company's subsidiaries located outside of the
United States that operate in a local currency environment are translated to
United States dollars at year-end foreign currency exchange rates. Income and
expense items are translated at the average rates of exchange prevailing during
the year. Translation adjustments are accumulated in a separate component of
stockholders' equity entitled accumulated other comprehensive loss. Transaction
gains and losses are included in the determination of net income.
CASH, CASH EQUIVALENTS AND HELD-TO-MATURITY SECURITIES
For the purpose of the statement of cash flows, cash and cash equivalents
include demand deposits and money market accounts held with a financial
institution. The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION
Many of the Company's contracts are fixed-price contracts over one year in
duration. Revenue for such contracts is recorded in accordance with the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
81-1 Accounting for Performance of Construction-Type and Certain Production-Type
Contracts as costs are incurred and includes estimated earned fees or profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost type of percentage-of-completion method of
accounting). Additionally, the Company may begin work on a project before a
contract is signed for customers with whom the Company has formed a strategic
alliance or has a long-term relationship. Revenue is recognized in the same
manner as signed
F-7
<PAGE> 40
contracts based upon terms orally agreed with the customer. The Company also has
contracts ranging in duration from 28 days to one year. Revenue is recognized on
these contracts in accordance with contract terms as services are provided. The
Company recognizes revenue related to contract modifications when realization is
assured and the amounts can be reasonably determined. When estimated contract
costs indicate that a loss will be incurred on a contract, the entire loss is
provided for in such period.
The Company routinely subcontracts with third party investigators in connection
with multi-site clinical trials and with other third party service providers for
laboratory analysis and other specialized services. Subcontractor costs are
passed through to clients and, in accordance with industry practice, are
included in gross service revenue. Subcontractor costs are accrued on a
straight-line basis over the investigator phase of the contract. Investigator
payments are made based on predetermined contractual arrangements, which may
differ from the accrual of the expense. Payments to investigators in excess of
the accrued expense represent advance payments to investigators and accrued
expenses in excess of payments represent payables to investigators.
UNBILLED RECEIVABLES AND ADVANCE BILLINGS
Prerequisites for billings are generally established by contractual provisions
that include predetermined date certain payment schedules (which may include
payment at or near the time the trial is initiated), the achievement of
negotiated performance requirements or milestones, or the submission of required
billing detail. Unbilled receivables arise from those contracts under which
billings are rendered upon the achievement of certain negotiated performance
requirements or on a date-certain basis and services rendered exceed billings.
The Company expects to bill and collect these unbilled receivables within one
year of revenue recognition. Advance billings represent contractual billings for
services not yet rendered.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to credit risk
include accounts receivable. Concentrations of credit risk on accounts
receivable is limited due to the large number of clients. Additionally, the
Company maintains allowances for potential credit losses and credit losses
incurred have not exceeded management's expectations. The Company's exposure to
credit loss in the event that payment is not received for revenue recognized
equals the outstanding accounts receivable and unbilled services balance.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the respective properties, which approximate 5 to 40 years.
INCOME TAXES
Income taxes are accounted for under the liability method in accordance with
Financial Accounting Standards Board (the FASB) Statement of Financial
Accounting Standards(SFAS) No. 109, Accounting for Income Taxes. Deferred tax
assets, net of valuation allowance, and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-8
<PAGE> 41
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
The excess of the purchase price over net assets acquired is being amortized
over periods of 20 to 40 years using the straight-line method. The carrying
value of the excess of purchase price over net assets acquired is reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that the excess of purchase price over net assets acquired will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the excess of purchase price over net assets acquired is reduced by the
estimated shortfall of cash flows on a discounted basis. Accumulated
amortization of the excess of purchase price over fair value of assets acquired
was approximately $6,323,000, and $4,929,000 at December 31, 1999 and 1998,
respectively.
FOREIGN CURRENCY HEDGING
Foreign exchange forward contracts are legal agreements between two parties to
purchase and sell foreign currency for a specified price, with delivery and
settlement in the future. From time to time the Company uses foreign exchange
contracts to hedge the risk of changes in foreign currency exchange rates
associated with contracts in which the expenses for providing services are
incurred in the functional currency of the Company's foreign subsidiary, but
payments on contracts are made by the client in another currency. The Company
recognizes changes in value in income only when contracts are settled. At
December 31, 1998, the Company's Canadian subsidiary had outstanding contracts
to sell $800,000 United States dollars per month through May 1999 at an average
exchange rate of 1.44 Canadian dollars per United States dollar. No contracts
have been entered into since May 1999.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with FASB SFAS No. 128,
Earnings per Share (SFAS No. 128). SFAS No. 128 requires presentation of both
Basic Earnings per Share (Basic EPS) and Diluted Earnings per Share (Diluted
EPS). Basic EPS is based on the weighted average number of shares of common
stock outstanding during the year while Diluted EPS also includes the dilutive
effect of common stock equivalents. Diluted loss per share for the years ended
December 31, 1999, 1998 and 1997 does not include common stock equivalents
(stock options) of 390,000, 430,000 and 391,000, respectively, as their effect
would be anti-dilutive. The Company's stock is currently traded in the Nasdaq
Stock Market and sale information is included on the Nasdaq National Market
Issues System under the symbol CCRO.
COMPREHENSIVE INCOME (LOSS)
The Company adopted FASB SFAS No. 130, Reporting Comprehensive Income (SFAS No.
130) on January 1, 1998. SFAS No. 130 established new rules for reporting and
displaying comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net income (loss) or stockholders'
equity. SFAS No. 130 requires the Company to include foreign currency
translation adjustments, which were previously reported by the Company as a
separate component of stockholders' equity, in other comprehensive income or
loss. Accumulated other comprehensive income (loss) consists entirely of
accumulated foreign currency translation adjustments and is a separate component
of stockholders' equity under SFAS No. 130. Prior period amounts have been
reclassified to conform to the requirements of SFAS No. 130.
STOCK-BASED COMPENSATION
The Company accounts for employee stock awards using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense is
recognized because the exercise price of the Company's stock options was equal
to the
F-9
<PAGE> 42
market price of the underlying stock on the date of grant. The Company has
adopted the provisions of SFAS No. 123, "Accounting for Stock-based
Compensation," for disclosure only.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform to
current period presentation. Such reclassifications had no material effect on
the financial position and results of operations as previously reported.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) which was required to be
adopted in years beginning after June 15, 1999. In July 1999, SFAS No. 137 was
issued as Accounting for Derivative Investments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 which defers for one
year the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Accordingly, the Company plans to adopt
SFAS No. 133 effective January 1, 2001. The Company's Canadian subsidiary enters
into foreign exchange forward contracts to hedge its United States dollar
denominated contracts in backlog. The Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on the financial
position or the results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, (SAB No. 101), "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC staff's views on
applying generally accepted accounting principles to revenue recognition. The
Company will adopt SAB No. 101 in the quarter ending March 31, 2000 and does
not expect SAB No. 101 to have a material effect on its financial position or
results of operations.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade:
Billed $ 17,449 $ 19,412
Unbilled 14,489 12,609
Allowance for doubtful accounts (1,420) (2,548)
-------- --------
30,518 29,473
Other 566 706
-------- --------
$ 31,084 $ 30,179
======== ========
</TABLE>
4. CREDIT FACILITIES AND DEBT
On February 16, 2000, the Company received approval from its bank to extend its
$15.0 million domestic credit facility through September 2001. The extension
provides for expansion capabilities to $25.0 million provided the Company meets
certain financial requirements. Credit availability under the Company's domestic
line of credit and foreign line of credit totals approximately $18.5 million.
The lines are collateralized by certain of the Company's assets and bear
interest at a fluctuating rate based either on the respective banks' prime
interest rate or the London Interbank Offered Rate (LIBOR), as elected by the
Company. On December 31, 1999 and 1998, there were no borrowings outstanding
under the Company's lines of credit. Commitment availability at December 31,
1999 has been reduced by issued letters of credit of approximately $744,000.
Borrowings available under the lines of credit are subject to certain financial
and operating covenants.
F-10
<PAGE> 43
The Company's Canadian subsidiary has outstanding borrowings of approximately
$464,000 from the Canadian government. This borrowing bears no interest and is
repayable in four equal annual installments beginning August 2000 and ending in
2003.
5. OPERATING LEASES
The Company leases office space and office equipment under various operating
leases. Minimum rental commitments payable in future years under operating
leases having an initial or remaining noncancelable terms of one year or more at
December 31 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 5,513
2001 5,073
2002 4,658
2003 4,003
2004 3,875
Thereafter 34,504
-------
Total minimum rentals 57,626
Less minimum rentals due under
noncancellable subleases 386
-------
$57,240
=======
</TABLE>
Rent expense is comprised of the following for the years ended December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Minimum rentals $5,796 $6,765 $5,611
Less sublease rentals 314 410 27
------ ------ ------
$5,482 $6,355 $5,584
====== ====== ======
</TABLE>
6. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Advance billings and receivables $ 3,994 $ 3,340
Accrued expenses 682 402
Research and development credit carryforward 1,343 1,669
Undeducted research and development expenditures 2,008 1,179
Federal and state net operating losses 12,495 8,678
Other 193 227
-------- --------
Total deferred tax assets 20,715 15,495
Valuation allowance for deferred tax assets (17,452) (11,624)
-------- --------
Net deferred tax assets 3,263 3,871
Deferred tax liabilities:
Depreciation and amortization (7,834) (6,871)
-------- --------
Net deferred tax liabilities $ (4,571) $ (3,000)
======== ========
</TABLE>
F-11
<PAGE> 44
The balance sheet classification of the net deferred tax assets (liabilities) is
as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current deferred tax assets $ 6,212 $ 5,638
Net noncurrent deferred tax assets (liabilities) 6,669 2,986
-------- --------
12,881 8,624
Valuation allowance for deferred tax assets (17,452) (11,624)
-------- --------
Net deferred tax liabilities $ (4,571) $ (3,000)
======== ========
</TABLE>
For financial reporting purposes, income (loss) before income taxes for the
years ended December 31 includes the following components (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States $(14,181) $(20,308) $ (7,745)
Foreign 8,484 (3,050) (2,457)
-------- -------- --------
$ (5,697) $(23,358) $(10,202)
======== ======== ========
</TABLE>
The Company's Canadian subsidiary qualifies for federal and Quebec Scientific
Research and Development deductions and tax credits. Expenditures on certain
capital assets are fully deductible or may be carried forward indefinitely until
utilized. The tax credits are equal to 20% of certain capital and current
expenditures. The tax credits are accounted for using the flow through method,
in which the credits are recognized as a reduction of income taxes in the year
the credit arises.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $16.6 million at December 31, 1999. Provision has not been made
for U.S. or additional foreign taxes on undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various countries. It
is not practicable to estimate the amount of deferred tax liability on foreign
undistributed earnings which are intended to be permanently reinvested.
Significant components of the provision (benefit) for income taxes for the years
ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Foreign $ (223) $ (269) $(1,261)
Federal -- (3,777) (2,517)
State and local -- -- 30
Deferred:
Foreign 1,571 819 --
Federal -- 1,468 253
State -- 533 (311)
------- ------- -------
Provision (benefit) for income taxes $ 1,348 $(1,226) $(3,806)
======= ======= =======
</TABLE>
F-12
<PAGE> 45
The Company's consolidated effective tax rate differed from the federal
statutory rate for the years ended December 31 as set forth below (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate $(1,937) $(7,942) $(3,469)
State and local income taxes
net of federal benefit (228) 352 (185)
Research and development
tax credits (991) (2,703) (2,532)
Amortization of excess of
purchase price over net assets
acquired and other intangible
assets 137 484 242
Difference between foreign income taxed
at U.S. Federal Statutory rates
and foreign income tax expense (196) (351) 2,279
Tax-exempt investment income -- -- (156)
Increase in federal valuation allowance 5,828 9,611 --
Stock option exercise (601) -- --
Other (664) (677) 15
------- ------- -------
$ 1,348 $(1,226) $(3,806)
======= ======= =======
</TABLE>
A valuation allowance has been established for the amount of United States
deferred tax assets primarily related to the Company's potential tax benefit
associated with loss carryforwards. At December 31, 1999, the Company had
approximately $31 million of federal net operating loss carryforwards which
begin to expire in 2018.
7. STOCK OPTION PLANS AND WARRANTS
1999 Long-Term Incentive Compensation Plan
In April 1999, the Board of Directors approved adoption of the Company's 1999
Long-Term Incentive Compensation Plan (1999 Plan). The 1999 Plan was approved by
the Company's stockholders on June 22, 1999 to replace the Company's 1989 Stock
Option Plan. The 1989 Stock Option Plan expired in December 1999 and could not
be extended due to restrictions imposed by the Internal Revenue Code of 1986, as
amended, (the Code).
The purpose of the 1999 Plan is to provide an opportunity for certain persons
performing services to the Company, including officers, key employees and
directors of the Company and its subsidiaries to acquire shares of Common Stock,
and be rewarded for achieving certain performance goals. Through the 1999 Plan,
the Company seeks to continue to attract and retain qualified personnel, and to
further align the interests of its key personnel with the success of the Company
and its stockholders.
The 1999 Plan provides for the grant of stock options which may be either
incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended, or non-qualified stock options, stock
appreciation rights, restricted stock, performance shares or performance units.
F-13
<PAGE> 46
The number of shares which may be issued under the 1999 Plan total 1,500,000 in
the aggregate. Options under the 1999 Plan expire ten years from the date of
grant and vest at dates ranging from the issuance date to four years. As of
December 31, 1999 the Company has not granted any options under the 1999 Plan.
1989 Stock Option Plan
The Company's 1989 Stock Option Plan, as amended, provided for the grant of
options to purchase shares of Common Stock to directors, officers and other key
persons. On May 11, 1998, the stockholders approved an amendment to the 1989
Stock Option Plan to increase the options available to 2,625,000. The 1989 Stock
Option Plan expired in December 1999 and could not be extended due to
restrictions imposed by the Code.
Information with respect to the 1989 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE PRICE
--------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 1,589,196 1,336,579 1,133,290 $ 4.29 $ 5.86 $ 9.90
Granted 943,150 906,975 826,377 $ 5.13 $ 4.55 $ 8.36
Exercised (385,000) (48,407) (67,507) $ 0.44 $ 3.01 $ 5.87
Cancelled (400,695) (605,951) (555,581) $ 4.43 $ 6.29 $ 17.83
--------- --------- ---------
Outstanding at December 31 1,746,651 1,589,196 1,336,579 $ 4.87 $ 4.29 $ 5.86
========= ========= =========
Option price range at
December 31 $2.75 to $12.92 $.35 to $12.92 $.35 to $12.92
Options exercisable
at December 31 503,533 613,900 634,214 $ 5.96 $ 3.27 $ 3.04
</TABLE>
There were no shares available for grant at December 31, 1999 since the plan
expired as discussed above. At December 31, 1998 and 1997 there were 588,067 and
289,091 shares, respectively, available for grant. The weighted-average fair
value of options granted during 1999 and 1998 was $3.31 and $2.04, respectively.
The weighted-average remaining contractual life of all options outstanding at
December 31, 1999 is 5.1 years.
On February 6, 1998, the Company's board of directors approved the adoption of
the Company's 1998 Non Qualified Stock Option Plan for Directors (the 1998
Director Option Plan). The 1998 Director Option Plan was approved by the
Company's shareholders on May 11, 1998. The 1998 Director Option Plan is a
formula plan under which options to acquire 10,000 shares of the Company's
common stock are to be initially granted to each director of the Company who is
not an employee and does not beneficially own more than 2.5% of the Company's
outstanding stock upon the date of initial election to the board of directors.
Directors are automatically eligible to receive annual grants of options to
acquire 1,000 shares of the Company's common stock.
F-14
<PAGE> 47
Information with respect to the 1998 Director Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE PRICE
--------------
1999 1998 1999 1998
------- ------ -------- --------
<S> <C> <C> <C> <C>
Options outstanding at January 1 18,000 0 $ 2.95 $ 0.00
Granted 7,000 18,000 $ 5.38 $ 2.95
Exercised 0 0 $ 0.00 $ 0.00
Cancelled (6,000) 0 $ 2.95 $ 0.00
------ ------
Outstanding at December 31 19,000 18,000 $ 3.84 $ 2.95
====== ======
Option price range at
December 31 $2.81 to $5.88 $2.81 to $3.63
Options exercisable at December 31 19,000 18,000 $ 3.84 $ 2.95
</TABLE>
On April 18, 1997, the Company repriced options to purchase 403,000 shares with
exercise prices between $12.67 and $28.50 with options to purchase 362,595
shares at an exercise price of $8.38 (which exceeded the closing market price on
April 18, 1997 of $7.63). This repricing excluded options held by the Company's
top two executives (its President/Chief Executive Officer and Executive Vice
President - Worldwide Operations). Additionally, on September 4, 1998, the
Company repriced 250,000 stock options held by Jerry R. Mitchell, M.D., Ph.D.,
the Company's President, Chief Executive Officer and Chairman of the Board at an
exercise price of $3.25 which were originally granted at an exercise price of
$7.00 on February 1, 1998.
On January 30, 1998, the Company granted four separate warrants to purchase
75,000 shares (300,000 shares in the aggregate) of common stock of the Company
to both Jerry R. Mitchell, M.D., Ph.D. and William U. Parfet at exercise prices
of $7.00, $9.00, $11.00 and $13.00 per share. Each 75,000 share warrant vests
ratably over a period of four years. Each warrant expires on January 30, 2004.
On September 4, 1998, the Company repriced all 600,000 warrants at an exercise
price of $3.25. In April 1999, the company cancelled three of the four warrants
issued to Mr. Parfet totaling 225,000 shares in the aggregate.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively; risk-free interest rates of
5.43%, 5.10%, and 6.10%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of .74, .72 and .59; and
a weighted-average expected life of the option of five years.
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.
F-15
<PAGE> 48
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 fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows for the years ended December 31 (in thousands, except
for earnings (loss) per share information):
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Net income (loss) $(7,045) $(22,132) $(6,396)
Pro forma compensation expense from stock
options, net of taxes 1,903 2,057 1,561
------- -------- -------
Pro forma net income (loss) $(8,948) $(24,189) $(7,957)
======= ======== =======
Pro forma earnings (loss) per share:
Basic EPS $ (0.49) $ (1.33) $ (0.44)
Diluted EPS $ (0.49) $ (1.33) $ (0.44)
</TABLE>
8. EMPLOYEE BENEFITS
The Company provides defined contribution plans for substantially all of its
employees. Participation is generally subject to the employee's age and length
of employment with the Company. The Company's contributions to the plans are
generally based on employee contributions and may also include additional
discretionary contributions.
The Company's expense for its contributions to the plans was approximately
$1,507,000 and $1,639,000 and $1,976,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
9. SEGMENT REPORTING
The Company is a full-service contract research organization (CRO) serving the
pharmaceutical, biotechnology and medical device industries. These research
services comprise two reportable operating segments - Clinical and Preclinical.
Clinical services consist of designing, monitoring, and managing trials of new
pharmaceutical and biotechnology products on humans, and providing clinical data
management, biostatistical, product registration, and pharmacoeconomic services.
Clinical service activities and revenues are performed and earned primarily in
the United States and Europe. The Company's European operations are
headquartered in Maidenhead, U.K. with its primary satellite offices in
Brussels, Belgium and Glasgow, Scotland. The operating results of the Company in
the individual European countries are immaterial and therefore European
operations as a whole are disclosed below. Preclinical services are comprised of
designing and conducting trials of new pharmaceutical and biotechnology products
based primarily upon animal models to produce data required to assess and
evaluate efficacy in and potential risks to humans. Preclinical services are
performed in Montreal, Quebec, Canada. Activity which is not included in the
Clinical or Preclinical segments is shown as Other which includes operations not
directly related to the business segments, corporate expenses and restructuring
charges.
F-16
<PAGE> 49
Financial data by segment for 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
U.S. EUROPE TOTAL CANADA
CLINICAL CLINICAL CLINICAL PRECLINICAL OTHER TOTALS
-------- -------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
- ----------------------------
Net revenues from external customers $ 30,108 $ 19,914 $ 50,022 $46,909 $ -- $ 96,931
Depreciation and amortization 2,928 1,014 3,942 2,183 30 6,155
Segment profit (loss) (8,859) 12 (8,847) 8,231 (5,498) (6,114)
Segment assets 18,024 15,374 33,398 78,195 4,811 116,404
Long-lived assets 12,289 2,910 15,199 58,610 -- 73,809
Expenditures for long-lived assets 854 690 1,544 3,527 456 5,527
Year Ended December 31, 1998
- ----------------------------
Net revenues from external customers $ 40,366 $ 11,128 $ 51,494 $38,197 $ -- $ 89,691
Depreciation and amortization 2,824 1,136 3,960 1,748 30 5,738
Segment profit (loss) (8,990) (9,520) (18,510) 5,851 (11,511) (24,170)
Segment assets 33,148 10,018 43,166 70,419 9,511 123,096
Long-lived assets 14,663 3,522 18,185 55,688 1,722 75,595
Expenditures for long-lived assets 5,487 972 6,459 5,768 1,722 13,949
Year Ended December 31, 1997
- ----------------------------
Net revenues from external customers $ 52,273 $ 13,777 $ 66,050 $36,940 $ -- $ 102,990
Depreciation and amortization 2,938 867 3,805 1,651 29 5,485
Segment profit (loss) (1,773) (7,113) (8,886) 4,156 (6,676) (11,406)
Segment assets 37,971 11,379 49,350 76,711 18,918 144,979
Long-lived assets 14,137 3,695 17,832 55,999 -- 73,831
Expenditures for long-lived assets 2,822 1,684 4,506 2,456 -- 6,962
</TABLE>
In 1999 Segment profit (loss) for Other includes a write-off of purchase option
costs of $2.2 million, Nashville lease termination costs of $845,000, and a gain
on the sale of Ovation of $484,000. Segment profit (loss) for Other includes a
restructuring charge of $6.4 million in 1998 and $1.6 million in 1997.
Net revenue generated under multiple contracts by clients who accounted for more
than 10% of the Company's consolidated net revenue for the years ended December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Client A
U.S. Clinical 8% 16% 6%
Europe Clinical 13% 9% 5%
Total Clinical 21% 25% 11%
Canada Preclinical 4% 2% 3%
Total Company 12% 15% 8%
Client B
U.S. Clinical -- 1% 15%
Europe Clinical -- 1% 3%
Total Clinical -- 2% 18%
Canada Preclinical 6% 7% 5%
Total Company 3% 4% 13%
</TABLE>
F-17
<PAGE> 50
10. CONTINGENCIES
In 1991, a customer commenced legal action against the predecessor of the
Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two clinical research studies. Judgment was rendered in
February 1997 by the Superior Court of Montreal against the Company's
preclinical subsidiary in the amount of approximately $557,000 plus interest to
accrue from September 1991. The Company's preclinical subsidiary, now
responsible for this action, has reserves adequate to cover the current judgment
amount. The Company's preclinical subsidiary has appealed the amount of the
judgment and the subsidiary's insurance company has appealed the portion of the
judgment which obligates the insurance company to pay the insurance claim
related to this litigation. The Company believes it is entitled, subject to
certain limitations, to indemnification from a former owner of the predecessor
for a portion of this claim. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position or results of operations.
11. OPTION TO AQUIRE MPI
On January 30, 1998, the Company entered into an option agreement (the MPI
Option) with MPI Research, LLC (MPI) and its shareholders, Jerry R. Mitchell,
M.D., Ph.D. and William U. Parfet, who each owned 50% of MPI. Dr. Mitchell is
the President, Chief Executive Officer and Chairman of the Board of Directors of
the Company and Mr. Parfet was the Company's Director of Business Planning and
Analysis until April 1999. Pursuant to the MPI Option, the Company paid
$1,500,000 in cash in exchange for an exclusive option to purchase all of the
outstanding stock of MPI at its fair market value at any time on or prior to
March 31, 2000. The shareholders of MPI have the right to cancel the Option at
any time after March 31, 1999, by returning the $1,500,000 cash without
interest, provided they give the Company written notice of their intent to
cancel the option and the Company does not exercise the option within twenty
business days of receipt of such notice.
The Company recorded an asset impairment charge of $2,178,000 in the fourth
quarter of 1999 to write-off the purchase option costs included in other assets
on the balance sheet relating to MPI Research. The Company is currently in the
late stages of negotiating an agreement that will geographically expand its
preclinical facilities and significantly increase its capacity in a manner that
better meets its strategic needs. The option expires March 31, 2000 and it was
determined that as of December 31, 1999, it was unlikely to be exercised.
12. SALE OF OVATION
On January 4, 1999, the Company sold its pharmacoeconomic subsidiary, Ovation,
back to the principals from whom the shares were originally purchased, as part
of the Company's ongoing consolidation of U.S. operations into its Research
Triangle Park, North Carolina (RTP) facility. Pharmacoeconomic services are now
performed out of the Company's RTP facility as the Company retains the right to
use the ClinTrials Ovation name. The Company received 213,000 shares of the
Company's stock in the sales transaction and recorded a gain on the sale of
$484,000.
13. NASHVILLE LEASE TERMINATION COSTS
The Company entered into an agreement to terminate the lease of its Nashville
office and accrued $845,000 in the first quarter of 1999 for costs related to
the termination of this lease. The termination of this lease relieved the
Company of approximately $11.0 million of future minimum lease payments. The
Company relocated its Corporate office to Research Triangle Park, North Carolina
in the second quarter of 1999.
F-18
<PAGE> 51
14. RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company accrued $1.6 million at December 31, 1997, for restructuring
costs to be incurred in 1998 in reducing its administrative workforce, primarily
in Europe. In the year ended December 31, 1998, the Company paid the entire
amount of $1.6 million in restructuring costs, primarily in severance costs to
35 employees.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with lease commitments
following the Company's restructuring decision to consolidate facilities. The
1998 restructuring charge consists of the following (in thousands):
<TABLE>
<CAPTION>
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 12/31/99
------ -----------
<S> <C> <C>
Write down of assets in connection with closure of
Lexington facility $1,983 $ --
Lease costs associated with consolidation of
facilities 1,976 --
Severance costs 2,132 --
Other 273 --
------ ------
$6,364 $ --
====== ======
</TABLE>
F-19
<PAGE> 52
CLINTRIALS RESEARCH INC.
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 FIRST SECOND THIRD FOURTH(1)
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 23,703 $ 25,214 $ 23,717 $ 24,297
Income (loss) before income taxes $ (2,702) $ 271 $ (403) $ (2,863)
Net income (loss) $ (2,941) $ 153 $ (959) $ (3,298)
Income (loss) per share:
Basic $ (.16) $ .01 $ (.05) $ (0.18)
Diluted $ (.16) $ .01 $ (.05) $ (0.18)
Number of shares and dilutive
common stock equivalents used
in computing income (loss) per share:
Basic 18,024 18,017 18,120 18,300
Diluted 18,024 18,678 18,120 18,300
Market prices of common stock:
High $ 6.63 $ 6.31 $ 6.88 $ 5.38
Low $ 3.41 $ 3.75 $ 4.75 $ 3.00
</TABLE>
<TABLE>
<CAPTION>
1998 FIRST SECOND(2) THIRD FOURTH
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 23,648 $ 22,888 $ 21,001 $ 22,154
Loss before income taxes $ (3,633) $(10,549) $ (4,135) $ (5,041)
Net loss $ (2,240) $(10,476) $ (4,253) $ (5,163)
Loss per share:
Basic $ (0.12) $ (0.58) $ (0.23) $ (0.28)
Diluted $ (0.12) $ (0.58) $ (0.23) $ (0.28)
Number of shares and dilutive
common stock equivalents used
in computing loss per share:
Basic 18,185 18,195 18,219 18,230
Diluted 18,185 18,195 18,219 18,230
Market prices of common stock:
High $ 8.50 $ 7.25 $ 6.50 $ 4.75
Low $ 6.25 $ 4.03 $ 2.94 $ 2.34
</TABLE>
Notes: (1) The fourth quarter of 1999 includes a $2,178 charge to
write-off the purchase option costs relating to MPI Research.
(2) The second quarter of 1998 includes a $6,364 restructuring
charge in connection with the closing of the Company's
Lexington facility, involuntary termination costs and costs
associated with leases.
F-20
<PAGE> 53
CLINTRIALS RESEARCH INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FYE 12/31/99
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
---------
BALANCE CHARGED
AT CHARGED TO BALANCE
BEGINNING TO OTHER AT
OF COST ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION PERIOD & EXPENSE DESCRIBE DESCRIBE PERIOD
----------- ------ --------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Deducted from asset accounts
Allowance for Doubtful Accounts $2,548 $ 146 $0 $1,274(A) $1,420
------ ------ -- ------ ------
Total $2,548 $ 146 $0 $1,274 $1,420
====== ====== == ====== ======
Year Ended December 31, 1998:
Deducted from asset accounts
Allowance for Doubtful Accounts $ 883 $2,159 $0 $ 494(A) $2,548
------ ------ -- ------ ------
Total $ 883 $2,159 $0 $ 494 $2,548
====== ====== == ====== ======
Year Ended December 31, 1997:
Deducted from asset accounts
Allowance for Doubtful Accounts $ 744 $ 351 $0 $ 212(A) $ 883
------ ------ -- ------ ------
Total $ 744 $ 351 $0 $ 212 $ 883
====== ====== == ====== ======
</TABLE>
(A) - Uncollectible accounts written off
F-21
<PAGE> 1
EXHIBIT 10.1.E
AMENDMENT TO EMPLOYMENT AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") amends that
certain EMPLOYMENT AGREEMENT by and between CLINTRIALS RESEARCH INC., a Delaware
corporation ("Company"), and JERRY MITCHELL ("Executive") dated as of January
30, 1998 (the "Employment Agreement") and is entered into between Company and
Executive this ____ day of _____________, 2000.
WHEREAS, the parties wish to amend the Employment Agreement as set
forth below;
IT IS, ACCORDINGLY, AGREED AS FOLLOWS:
1. Section 4(c) of the Employment Agreement is amended by adding the
following to the end of the paragraph:
Notwithstanding the foregoing, the Company Stock
Option and any other Company stock options Executive
may hold shall vest fully upon a Change of Control
(as such term is defined in Section 8(c) hereof) and
shall remain exercisable for the remainder of the
stated term of such stock option(s), regardless of
whether the Executive continues to be employed by the
Company.
2. The portion of the first paragraph of Section 7(c) of the Employment
Agreement labeled "(i)" is amended to read in its entirety as follows:
(i) one and one-half (1 1/2) times the Executive's
highest Base Salary during the 12-month period prior
to his termination of employment and
3. Section 7(c)(C)(x) of the Employment Agreement is amended to read in
its entirety as follows:
(x) the end of the 18-month period following his termination
of employment; and
4. Section 8(a) of the Employment Agreement is amended by adding the
following to the end of the paragraph:
In addition, if Executive is terminated as a result
of a Change of Control, Executive shall be entitled to the
amounts and benefits he
<PAGE> 2
would receive for a termination without Cause under Section
7(c). Termination shall be deemed to be a result of a Change
of Control (i) if such termination occurs within twelve (12)
months following the Change of Control; or (ii) if any change
in the Executive's title, reporting relationship,
responsibilities or authority as in effect immediately prior
to any Change of Control is made within twelve (12) months of
such Change of Control and which adversely affects to a
material degree his role in the management of the Company; or
(iii) if any reduction in the Executive's salary paid to him
by the Company as in effect immediately prior to any Change of
Control or, if such salary has been subsequently increased at
any time or from time to time; any reduction in such increased
salary; or (iv) if any termination of the Executive's employee
benefit programs, including, but not limited to, any stock
option plan, investment plan, savings plan, incentive
compensation plan or life insurance, medical plans or
disability plans provided by the Company to the Executive and
in which the Executive is participating or under which the
Company is covered, all as in effect immediately prior to any
Change of Control; or (v) if there is any requirement by the
Company that the Executive's position and principal office be
based and located more than twenty (20) miles outside the
boundaries of the principal office of the Executive
immediately prior to the Change of Control; or (vi) if any
failure or refusal of the Company to renew this Employment
Agreement under Section 3 after any Change of Control shall
have occurred.
5. In all other respects the Employment Agreement is hereby ratified
and affirmed.
CLINTRIALS RESEARCH INC.
By:
-------------------------------------
Title:
-----------------------------------
EXECUTIVE
-----------------------------------------
JERRY MITCHELL
2
<PAGE> 1
EXHIBIT 10.1.F
AMENDMENT TO EMPLOYMENT AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") amends that
certain EMPLOYMENT AGREEMENT by and between CLINTRIALS RESEARCH INC., a Delaware
corporation ("Employer"), and PAUL J. OTTAVIANO ("Employee") dated as of January
1, 1998 (the "Employment Agreement") and is entered into between Employer and
Employee this ____ day of _____________, 2000.
WHEREAS, the parties wish to amend the Employment Agreement as set
forth below;
IT IS, ACCORDINGLY, AGREED AS FOLLOWS:
1. Section 2 of the Employment Agreement is amended to read in its
entirety as follows:
2. Term. The term of this Agreement shall be for a
period commencing on January 1, 1998 and ending December 31,
1998, except that the provisions of Section 8 and 9 will
survive the expiration or earlier termination of this
Agreement. This Agreement shall be automatically renewed for
additional and successive one (1) year periods unless either
party provides ninety (90) days notice prior to any
anniversary date of its intent not to renew this Agreement
(the initial term and any and all renewal terms each being a
"Period of Employment"). Employee will continue to be paid
full pay and benefits during this ninety (90) day period. In
the event Employer elects not to renew this Agreement upon any
such anniversary date, Employee will be entitled to receive a
severance payment in an amount equal to Employee's base
monthly compensation (not including incentive compensation) at
the time of non-renewal multiplied by eighteen (18), payable
in a lump sum, and all unvested stock options shall become
fully vested and shall remain exercisable for the remainder of
the stated term of such stock options, regardless of whether
the Employee continues to be employed by the Employer.
2. Section 7c. of the Employment Agreement is amended to read in its
entirety as follows:
c. Termination by Employer for Other Than Cause.
Employer may terminate the employment of Employee at any time
upon written notice to the Employee. In such event, Employee
shall be paid the amount of any unpaid salary earned by the
Employee up to and including the date of such Termination by
Employer, an amount equal to Employee's then current monthly
base salary multiplied by eighteen (18), payable in a lump sum
and any unpaid vacation pay earned by him up to and including
the date of such
<PAGE> 2
Termination by Employer. Also for an eighteen (18) month
period from effective date of Termination by Employer,
Employer shall continue to make the employer contributions
necessary to maintain the Employee's coverage pursuant to all
benefit plans provided to the Employee by the Employer
immediately prior to such Termination by Employer; and
Employer shall deduct from payments payable to the Employee
pursuant to this Section the amount of any employee
contributions necessary to maintain such coverage, and
Employee shall continue to be bound by the provisions of
Sections 8 and 9 hereof and all unvested stock options shall
become fully vested and shall remain exercisable for the
remainder of the stated term of such stock options, regardless
of whether the Employee continues to be employed by the
Employer.
3. Section 7f. of the Employment Agreement is amended to read in its
entirety as follows:
f. Failure to Renew. If Employer gives Employee
notice as provided in Section 2 of its election not to renew
this Agreement, Employee's employment shall terminate upon the
anniversary date. In such event, Employee shall be paid the
amount of any unpaid salary earned by the Employee up to and
including the date of such Failure to Renew by Employer, an
amount equal to Employee's then current monthly base salary
multiplied by eighteen (18) in a lump sum and any unpaid
vacation pay earned by him up to and including the date of
such Termination by Employer. Also for an eighteen (18) month
period from the effective date of termination by Employer,
Employer shall continue to make the employer contributions
necessary to maintain the Employee's coverage pursuant to all
benefit plans provided to the Employee by the Employer
immediately prior to such Failure to Renew by Employer, and
Employer shall deduct from any payments payable to the
Employee pursuant to this Section the amount of any employee
contributions necessary to maintain such coverage, and
Employee shall continue to be bound by the provisions of
Sections 8 and 9 hereof, and all unvested stock options shall
become fully vested and shall remain exercisable for the
remainder of the stated term of such stock options, regardless
of whether the Employee continues to be employed by the
Employer.
4. The first paragraph of Section 7g. of the Employment Agreement is
amended to read in its entirety as follows:
2
<PAGE> 3
g. Change in Control. In the event there is a "Change
in Control" of the ownership of the Employer, and the
Employee's employment with the Employer is terminated as a
result of such Change in Control, or if the Employee resigns
within ninety (90) days following a Change in Control, in
either case the Employee shall be entitled to receive as a
severance payment following such termination or resignation an
amount equal to Employee's base monthly compensation (not
including incentive compensation) at the time of termination
or resignation multiplied by eighteen (18), payable in a lump
sum. In addition, any earned but unpaid base salary, incentive
compensation and any unpaid vacation pay earned by him up to
and including the date of such termination as a result of
Change in Control or resignation will be paid. Also, for the
eighteen (18) month period following the termination or
resignation date, the Employee will continue to receive the
Employer contributions necessary to maintain the Employee's
coverage pursuant to all benefit plans provided to the
Employee by the Employer immediately prior to such termination
as a result of Change in Control or resignation. Employer
shall deduct from any payments payable to the Employee
pursuant to this Section the amount of any employee
contributions necessary to maintain such coverage. Further,
any stock options granted to the Employee will be fully vested
upon a Change in Control, whether or not the Employee is
terminated or resigns, notwithstanding any previously stated
vesting restrictions, and shall remain exercisable for the
remainder of the stated term of such stock options, regardless
of whether the Employee continues to be employed by the
Employer. In the event of the termination of employment of the
Employee by the Employer without "cause" or resignation as a
result of or within ninety (90) days following a Change in
Control, if the Employee is required, pursuant to Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"),
to pay (through withholding or otherwise) an excise tax on
"excess parachute payments" (as defined in Section 280G of the
Code), the Employer shall pay the Employee the amount
necessary to place the Employee in the same after-tax
financial position that he would have been in if he had not
incurred any excise tax liability under Section 4999 of the
Code.
3
<PAGE> 4
5. In all other respects the Employment Agreement is hereby ratified
and affirmed.
EMPLOYER:
CLINTRIALS RESEARCH INC.
By:
-------------------------------------
Title:
-----------------------------------
EMPLOYEE:
-----------------------------------------
PAUL J. OTTAVIANO
4
<PAGE> 1
EXHIBIT 10.1.G
AMENDMENT TO EMPLOYMENT AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") amends that
certain EMPLOYMENT AGREEMENT by and between CLINTRIALS RESEARCH INC., a Delaware
corporation ("Company"), and S. COLIN NEILL ("Executive") dated as of October
22, 1998 (the "Employment Agreement") and is entered into between Company and
Executive this ____ day of _____________, 2000.
WHEREAS, the parties wish to amend the Employment Agreement as set
forth below;
IT IS, ACCORDINGLY, AGREED AS FOLLOWS:
1. The last sentence of Section 2(c) of the Employment Agreement is
amended to read as follows:
Further, any stock options granted to the Executive will be
fully vested upon a Change of Control, whether or not the
Executive is terminated, notwithstanding any previously stated
vesting restrictions, and will remain exercisable for the
remainder of the stated term of such stock option(s),
regardless of whether the Executive continues to be employed
by the Company.
2. The following is added after the last sentence of Section 2(c) of
the Employment Agreement:
For purposes of this Agreement, "Change of Control" shall mean
(i) the acquisition of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act")) of
greater than 50% of the then outstanding voting securities of
the Company entitled to vote generally in the election of
directors (the "Voting Securities") by any individual, entity
or group (within the meaning of Section 13(d)(3) of the
Exchange Act and the rules and regulations thereunder), other
than by the Company, an employee benefit plan (or related
trust) sponsored or maintained by the Company; (ii) a sale of
all or substantially all of the assets of the Company; (iii) a
sale or other transfer of assets of the Company, in one or a
series of transactions, representing more than 50% of the
total fair market value of the Company's assets immediately
prior to the transaction (or the first transaction, if there
are a series of transactions); (iv) any merger,
<PAGE> 2
consolidation, reorganization, recapitalization or other
corporate transaction with respect to the Company, unless the
holders of the Voting Securities immediately prior to such
transaction own more than 50% of the voting securities of the
entity resulting from such transaction or the entity which
controls such resulting entity (in substantially the same
percentages as they held prior to such transaction); or (v)
the date, following the expiration of any period of twelve
consecutive months that individuals, who at the beginning of
such period constituted the Board (together with any new
directors whose election by such Board or whose nomination for
election by the shareholders of the Company was approved by a
vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such
period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a
majority of the Board then in office.
3. The first paragraph of Section 5(c) of the Employment Agreement is
amended to read as follows:
(c) Termination Without "Cause" or for "Good Reason"
(as such term is defined below). If the Company should
terminate the Executive's employment for any reason (including
a termination as a result of a Change of Control) other than
for Cause, or in the event the Executive terminates employment
for Good Reason or Company gives notice of its intent not to
renew this Agreement under Section 1(b), the Company shall pay
the Executive, in a lump sum within ten (10) days following
his termination of employment, an amount equal to the
Executive's then current monthly Base Salary times eighteen
(18). The Executive shall also be entitled to:
4. The portion of Section 5(c)(ii) of the Employment Agreement labeled
"(1)" is amended to read as follows:
(1) the end of the 18-month period following his termination
of employment; and
2
<PAGE> 3
5. The second Section 5(c) of the Employment Agreement ("Termination
Without Good Reason") is renumbered as Section 5(d).
6. The following is added as Section 5(e) of the Employment Agreement:
(e) If the Executive resigns from employment for any
reason, other than Retirement or Disability, during the 90-day
period following a Change of Control, such resignation shall
be deemed to be a termination by the Executive for Good Reason
for purposes of Section 5(c).
In the event of the termination of
employment of the Executive by the Company without Cause or by
the Executive for Good Reason or resignation following a
Change of Control, if the Executive is required, pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), to pay (through withholding or otherwise) an
excise tax on "excess parachute payments" (as defined in
Section 280G of the Code), the Company shall pay the Executive
the amount necessary to place the Executive in the same
after-tax financial position that he would have been in if he
had not incurred any excise tax liability under Section 4999
of the Code.
7. The following is added as Section 5(f) of the Employment Agreement:
(f) Termination shall be deemed to be a result of a
Change of Control (i) if such termination occurs within twelve
(12) months following the Change of Control; or (ii) if any
change in the Executive's title, reporting relationship,
responsibilities or authority as in effect immediately prior
to any Change of Control is made within twelve (12) months of
such Change of Control and which adversely affects to a
material degree his role in the management of the Company; or
(iii) if any reduction in the Executive's salary paid to him
by the Company as in effect immediately prior to any Change of
Control or, if such salary has been subsequently increased at
any time or from time to time; any reduction in such increased
salary; or (iv) if any termination of the Executive's employee
benefit programs, including, but not limited to, any stock
option plan, investment plan, savings plan, incentive
compensation plan or life insurance, medical plans or
disability plans provided by the Company to the Executive and
in which the Executive is participating or under which the
Executive is covered, all as in effect immediately prior to
any Change of Control; or (v) if there is any requirement by
the Company that the
3
<PAGE> 4
Executive's position and principal office be based and located
more than twenty (20) miles outside the boundaries of the
principal office of the Executive immediately prior to the
Change of Control; or (vi) if any failure or refusal of the
Company to renew this Employment Agreement under Section 1(b)
after any Change of Control shall have occurred.
8. In all other respects the Employment Agreement is hereby ratified
and affirmed.
CLINTRIALS RESEARCH INC.
By:
-------------------------------------
Title:
-----------------------------------
EXECUTIVE
-----------------------------------------
S. COLIN NEILL
4
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
ClinTrials Research North Carolina Inc.
ClinTrials Research Kentucky Inc.
ClinTrials Research Ltd. (located in UK)
ClinTrials Research SARL (located in France)
ClinTrials BioResearch Ltd. (located in Canada)
ClinTrials Research Israel Ltd.
ClinTrials Research Latin America, SA (located in Chile)
ClinTrials Research Australia Pty. Ltd.
ClinTrials Research Italy Srl
ClinTrials Research Sp z. o. o (located in Poland)
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File No. 33-82416 and 333-08365) both pertaining to the 1989 Stock
Option Plan of ClinTrials Research Inc., and the Registration Statement on Form
S-8 (File No. 333-92569) pertaining to the 1999 Long-Term Incentive Compensation
Plan of ClinTrials Research Inc. of our report dated February 1, 2000, except
for Note 4, as to which the date is February 16, 2000, with respect to the
consolidated financial statements and the schedule of ClinTrials Research Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
February 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CLINTRIALS RESEARCH INC. FOR THE YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,889
<SECURITIES> 0
<RECEIVABLES> 32,504
<ALLOWANCES> (1,420)
<INVENTORY> 0
<CURRENT-ASSETS> 42,184
<PP&E> 60,666
<DEPRECIATION> 21,161
<TOTAL-ASSETS> 116,404
<CURRENT-LIABILITIES> 25,873
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 84,984
<TOTAL-LIABILITY-AND-EQUITY> 116,404
<SALES> 0
<TOTAL-REVENUES> 96,931
<CGS> 0
<TOTAL-COSTS> 58,317
<OTHER-EXPENSES> 44,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> (5,697)
<INCOME-TAX> 1,348
<INCOME-CONTINUING> (7,045)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,045)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
