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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
[X] For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
[ ] For the transition period from ____________to ____________
Commission file number 000-20699
COLLABORATIVE CLINICAL RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1685364
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
20600 Chagrin Boulevard, Cleveland, Ohio 44122
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (216) 491-9930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 27, 1998, the registrant had 6,422,372 Common Shares,
without par value, issued and outstanding. As of that date, the aggregate market
value of these shares, which together constitute all of the voting shares of the
registrant, held by non-affiliates was $23,017,320 (based upon the closing price
of $4.38 per Common Share on the NASDAQ Stock Market, Inc. on February 27,
1998). For purposes of this calculation, the registrant deems the 1,167,276
Common Shares beneficially held by all of its Directors and executive officers
to be the Common Shares held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in
connection with its Annual Meeting of Shareholders to be held on May 28, 1998
are incorporated by reference into Part III of this Form 10-K.
Except as otherwise stated, the information contained in this Form 10-K
is as of December 31, 1997.
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TABLE OF CONTENTS
Part I
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Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 4A. Executive Officers of the Company 11
Part II
Item 5. Market for Registrant's Common Shares and Related Shareholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of Operations and Financial
Condition 14
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 24
Part III
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25
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PART I
ITEM 1. BUSINESS
GENERAL
Collaborative Clinical Research, Inc. ("Collaborative" or the
"Company") is a multi-specialty Site Management Organization ("SMO") with an
international network comprised of over 540 clinical research sites ("Affiliated
Sites"). Each site is affiliated with the Company through a written agreement
which describes a cooperative relationship between the Company and the
Affiliated Site. The Network, with more than 3,700 clinical investigators,
provides rapid access to patients who can participate in clinical research
trials. Collaborative's customers ("Sponsors") for these trials are primarily
pharmaceutical and biotechnology companies and, to a lesser extent, contract
research organizations, ("CRO's").
The Company and its Affiliated Sites assist Sponsors in conducting the
clinical research necessary to obtain regulatory approval for new drugs. In
addition, Collaborative provides Sponsors with an innovative and timely means of
selecting clinical research sites and managing clinical trials as part of the
pharmaceutical product development process. Collaborative provides its
Affiliated Sites with sales and marketing, project budgeting and contract
negotiation services. The Company also owns three clinical research sites.
Throughout its history, the Company has been involved in over 400 clinical
trials providing services to approximately 120 Sponsors.
Founded in 1991 as an innovator of the SMO concept, Collaborative has
grown through a combination of internal expansion and strategic acquisition.
Collaborative acquired two companies in 1996, GFI Pharmaceutical Services, Inc.
("GFI") and WCE Clinical Evaluations ("WCE"). GFI conducts Phase I clinical
research at its 80 bed facility in Evansville, Indiana and Phase II through IV
clinical research at the Company's three owned clinical research sites. WCE's
services are directed primarily toward Over the Counter ("OTC") pharmaceutical
products, and include studies necessary to switch prescription drugs to OTC use,
label comprehension evaluations and consumer product testing.
In 1996, Collaborative formed a wholly owned subsidiary, DataTRAK, Inc.
("DataTRAK"). In January 1998, DataTRAK purchased the software now known as
DataTRAK EDC(TM). This software is the foundation of the DataTRAK(R) process.
DataTRAK will provide certain electronic data management services to Sponsors
through use of its Electronic Data Capture ("EDC") technology and Quality Review
Center ("QRC") process. Use of the DataTRAK(R) process offers Sponsors the
potential to increase the efficiency, accuracy and timeliness of collection and
management of clinical research data and access to patients through DataTRAK
certified sites. The research sites used in this service may be Affiliated Sites
of Collaborative or sites selected by the Sponsor. The DataTRAK EDC(TM) software
and its earlier versions have supported more than 30 clinical studies in
Europe encompassing over 500 clinical research sites and 3,000 patients.
In January 1998, the Company announced the termination of its
technology alliance agreement with ISSC, a unit of IBM Global Services. The
Company and IBM Global Services disagree on a number of issues concerning the
parties' financial responsibilities in connection with the termination of the
alliance, and have engaged in discussions concerning those matters. To date,
those discussions have not resulted in an acceptable resolution of these issues.
The Company does not believe that it has any continuing financial obligations to
IBM Global Services and, based on information known to date, does not believe
that additional expenditures associated with the termination of this alliance,
if any, will have a material adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
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CLINICAL RESEARCH INDUSTRY OVERVIEW
The clinical research industry is driven by regulatory requirements
that Sponsors adequately test new drugs and devices prior to marketing. The drug
development process has become more challenging, lengthy and expensive. In a
recent analysis covering three decades of pharmaceutical industry data, the
Tufts Center for the Study of Drug Development examined the time interval from
Investigational New Drug Application ("IND") to New Drug Application ("NDA")
approval. These approval times grew from 7.3 years in the period from 1963 to
1972, to 11.9 years from 1973 to 1982, and to 14.3 years from 1983 to 1992. The
estimated average cost of this process has also grown substantially.
Competitive and cost-containment pressures are forcing the
pharmaceutical and biotechnology industries to become more efficient in
developing new drugs. To improve returns on research and development
investments, pharmaceutical and biotechnology companies are expanding their
product pipelines and attempting to shorten the product development timeline.
In response to similar cost-containment pressures, many hospitals,
physicians, and other healthcare providers have added clinical research
capabilities as an additional revenue source. Clinical research allows
healthcare providers to extend their core competencies and capitalize on their
direct access to patients.
Industry Trends in Drug Development
Pipeline and Process Challenges
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Sponsors face many challenges in continuing to deliver an increasing
return on research and development expenditures. Lengthier drug development time
frames, increased drug development costs, margin pressures arising from emphasis
on cost-containment in healthcare, limited patent life, and competition from
generic drug companies, are forcing Sponsors to be as efficient and
cost-effective as possible in managing their clinical development processes.
One result of these challenges is that Sponsors are targeting
simultaneous regulatory approvals in many countries to accelerate global time to
market. A second result is that product pipelines are expanding as promising new
compounds come from advanced drug discovery efforts, high throughput screening
techniques, and the development of genomic libraries. These efforts have placed
more drugs into the clinical development process, and have increased pressure on
Sponsors to develop products faster to maintain growth and continue to achieve
acceptable returns on research and development expenditures.
Sponsors have attempted to create process efficiencies, control fixed
costs, and expand capacity by outsourcing certain clinical research activities.
The CROs are the most mature and established group used for outsourcing at this
time. The amount of clinical research that is outsourced varies by Sponsor,
however, the Company believes increases in outsourcing, including temporary
access to therapeutic focus and expertise to develop products across many
disease states, will continue.
Outsourcing
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Under traditional outsourcing in clinical research, the Sponsor
subcontracts various aspects of a preclinical or clinical development program to
a service provider. Such services typically include: protocol development, site
selection, site contracting, project management, monitoring, data management,
investigational drug packaging, regulatory consulting, NDA preparation, and
post-approval and marketing services.
The term outsourcing has not traditionally applied to the use of
clinical research sites, even though Sponsors generally do not own or operate
such sites. Clinical research contracts with investigator sites
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provide access to patients for a clinical trial. The Company provides access to
sites and patients, and believes that its services are viable to a Sponsor
regardless of whether a project is outsourced or managed internally by the
Sponsor.
Accelerating Clinical Development
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As drug development pipelines have grown, a substantially greater
number of compounds are scheduled for development today versus a few years ago.
Most Sponsors are facing critical strategic decisions to develop this influx of
new compounds efficiently. Outsourcing to service providers has increased
capacity to conduct these new clinical trials. However, outsourcing, per se,
does not appear to have accelerated the drug development process.
One of Collaborative's goals is to assist Sponsors in starting and
finishing their clinical trials on a more timely basis. The Company aims to
achieve this goal through its rapid activation of Affiliated Sites at the start
of a clinical trial, and by using the DataTRAK(R) process to expedite the data
collection and reporting process during a clinical trial.
BUSINESS STRATEGY
The Company's strategy is to help Sponsors accelerate the process of
obtaining regulatory approval for new drugs. Collaborative will implement this
strategy by providing rapid access to patients through a clinical research
network, and by automating the collection of clinical trial data through a
standardized technology platform.
Utilization of the Affiliated Site Network
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The Company's Network of Affiliated Sites provides a clinical research
model that responds to Sponsors' needs to bring new products to market faster.
The Network improves time-efficiency in the clinical research process primarily
in site identification and contracting. This provides Sponsors with the
opportunity to begin clinical research sooner, thereby shortening this phase of
the new drug development process.
Collaborative's network approach serves the independent research site
by delivering incremental clinical research revenue, by marketing the
capabilities of all Affiliated Sites and by negotiating one contract for all
Affiliated Sites participating in any one clinical trial. Affiliated Sites are
provided with a number of clinical research opportunities involving a wide
variety of therapeutic areas.
Expansion and Targeting of the Affiliated Site Network
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In targeting potential additions to the Affiliated Site Network, the
Company considers several factors, including clinical trial experience,
enrollment performance and overall work quality. In order to focus better on
projected drug development pipelines of Sponsors, Collaborative will refine its
Network into groups based on site-specific therapeutic specialties. Proficiency
in these identified specialty areas has become an additional consideration for
future site affiliations.
Development of the DataTRAK(R) Process
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DataTRAK is a service business that offers a process for electronic
data collection and clinical trial data management capabilities across a network
of sites. DataTRAK's objective is to improve the traditional process of
collecting clinical research and noninterventional health care data by providing
cleaner data faster than what is available in a paper environment. In order to
implement this strategy, the Company acquired the software technology now known
as DataTRAK EDC(TM) in January 1998. This
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software has been validated by several European Sponsors, and has been used in
over 30 clinical trials at 500 sites involving more than 3,000 patients.
Currently, clinical research associates ("CRAs") visit research sites
to review data manually entered on the case report form ("CRF") for accuracy and
integrity. During these physical visits, each CRF page is reviewed by the CRA.
These monitoring visits may last several days, and corrections to the CRFs are
frequently required before delivery to the Sponsor. Several weeks or even months
of data must be reviewed during each monitoring visit. At the completion of a
monitoring visit, the CRF pages are delivered to a central location where the
data is then entered into a database for statistical compilation. Using this
traditional method of data collection and quality control, the time duration
from patient visit to delivery of clean data to the Sponsor can range from six
to twelve months. Such delays are significant because errors or trends may not
be detected until long after the interaction between patient and investigator.
The Company believes the drug development process can be accelerated by
automating these procedures.
DataTRAK has two strategies. First is to place systems and software at
Collaborative's Network and Sponsor selected sites for long-term use in clinical
trials. Second is to provide any Sponsor, CRO, SMO or competing network the
opportunity to use the DataTRAK(R) process as a competitive advantage for their
clients. In this manner, the DataTRAK(R) process can develop into a standardized
electronic data capture platform for the clinical trial industry.
Clinical trial data will be collected on electronic CRFs across a
network of sites and routed across a secure communications environment to
DataTRAK's QRC. The QRC largely replaces traditional monitoring. Once the CRF
data has been reviewed to correct errors it is integrated directly into a
Sponsor's database in Sponsor specified formats.
THE AFFILIATED SITE NETWORK
Since 1991, the Company has developed a network of more than 540
Affiliated Sites and today provides Sponsors with rapid access to over 3,700
principal investigators in a wide variety of therapeutic areas. Affiliated Sites
range from group practices with individual investigators to integrated health
care delivery systems with hundreds of investigators, and include academic
medical centers, community hospitals, outpatient treatment centers, research
centers, managed care organizations and physician practice groups. Regardless of
its size, each member of the Network is considered a single Affiliated Site.
The Company's Network includes investigators experienced in infectious
disease and HIV/AIDS, orthopedics, cardiology, hematology/oncology, pulmonary,
endocrinology, gastroenterology/metabolism, and neurology, among other medical
specialties. Each Affiliated Site is a party to an affiliation agreement with
the Company, which defines the duties and responsibilities of each party. These
relationships produce expeditious access for Sponsors to qualified clinical
investigators and evaluable patients. Although Affiliated Sites remain free to
solicit and accept clinical research contracts directly from Sponsors, they are
prohibited from affiliating with another network. At the request of Sponsors,
the Company uses research sites outside of its Affiliated Site Network. For
example, Sponsors may request that the Company use research sites outside the
Affiliated Site Network in large, multi-site trials or to include trial
investigators of national standing in a particular therapeutic area or those
whom the Sponsor has worked with in the past. The Company regularly updates its
demographic database on each Affiliated Site.
SERVICES
The Company's core business is to provide site selection and project
management services for clinical trial programs in many therapeutic areas. The
Company also performs clinical research at its three owned sites. The Company
assists Sponsors in identifying and recruiting investigators, initiating
clinical trials at sites and managing clinical trials. On occasion, the Company
also provides other clinical trial
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services to meet specific Sponsor needs. The Company has managed trials which
range in size from single site trials involving fewer than ten patients to a 300
site trial involving 3,000 patients.
Site Selection Services
The Company identifies and recruits clinical research sites and
clinical investigators to participate in a clinical trial on behalf of a
Sponsor. A Sponsor may utilize certain site selection services, such as the
Company's abstract and survey to determine the specific interest of research
sites in a particular trial and anticipated evaluable patient population. The
Sponsor can use the results of the abstract and survey to determine the number
of sites required for a clinical trial and to predict whether the Company can
deliver the expected results.
Company-Owned Clinical Research Facilities
The Company's GFI subsidiary performs clinical research and provides
other clinical research services through its three research facilities for
conducting Phase II through Phase IV research (one facility also includes an 80
bed Phase I clinical research unit). Phase I clinical research is substantially
more specialized and limited than other phases of the research process because
hospital or clinic beds must be available for extended stays in a sequestered
environment.
Clinical Trial Management Services
The Company provides a variety of clinical trial management services,
whether clinical trials are performed at Affiliated Sites or owned research
facilities. These services include pre-study and research site activation
services, patient tracking services and clinical trial management. Additional
services include coordination of investigator meetings, the Institutional Review
Board ("IRB") approval process and other procedures that must be performed prior
to enrollment of patients into a study, and assistance in patient recruitment
and enrollment.
DataTRAK Services
DataTRAK will provide EDC services to Sponsors that will facilitate
rapid collection of clinical trial data. As a service provider, DataTRAK will
design electronic CRF's with validation routines and edit checks and train
appropriate investigative sites and Sponsors on the use of the electronic data
capture software and associated services. All clinical data collected from the
various sites for a given clinical trial will be reviewed for accuracy by
DataTRAK's QRC. DataTRAK will initiate a Site Certification Program, designed to
train sites on the DataTRAK(R) process.
OTC Services
The Company's WCE subsidiary provides contract research services on
pharmaceuticals, especially when being switched from prescription to OTC
products, and on medical devices, foods, and other products intended for broad
consumption. The contract research services provided by WCE include consultation
on and performance of studies necessary to switch prescription drugs to OTC
products, label comprehension evaluations, and consumer product testing.
CUSTOMERS AND MARKETING
Collaborative has served many leading pharmaceutical and biotechnology
companies and CRO's. Collaborative's business development strategy focuses on
marketing its clinical research expertise, as well as that of its Affiliated
Sites, its ability to gain timely access to patients with specific medical
conditions and its ability to rapidly and efficiently start up and manage
multi-site clinical research trials for Sponsors. Collaborative's sales staff
generally has scientific or pharmaceutical backgrounds and are located
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regionally throughout the United States. They are expected to provide Sponsors
with consultative selling support regarding Collaborative's capabilities and
services in the clinical research process. The Company concentrates a majority
of its marketing resources on direct selling to Sponsors. It also selectively
participates in scientific and medical meetings to promote its services and
occasionally uses direct mail and journal advertisements to build awareness of
its capabilities. DataTRAK markets its services through its United States and
European staff and through the Company's sales and marketing staff.
During each of the three years in the period ended December 31, 1997,
sales to companies in the pharmaceutical industry accounted for more than 69% of
the Company's revenue. During 1995 and 1996, respectively, sales to Merck & Co.,
Inc. accounted for approximately 76% and 22% of the Company's revenue. Also
during 1996, sales to Dey Laboratories accounted for 31% of the Company's total
revenue. Other customers in the pharmaceutical industry have from time to time
accounted for more than 10% of the Company's annual revenue. Bristol Myers
Squibb and Pharmacia & Upjohn each accounted for more than 10% of revenue during
1997. The extent to which the Company relies on sales to one customer varies
from period to period, depending upon the timing of new clinical research
contracts, the relationship between the Affiliated Sites' therapeutic expertise
and a Sponsor's specific therapeutic needs, the Company's ability to generate
new business, the timing and size of clinical trials, and other factors. Due to
the consolidation in the pharmaceutical industry and the Company's marketing
focus on the major pharmaceutical and biotechnology companies, management
expects continued concentration in its revenue in the future. It is not unusual
for companies involved in the placement and administration of clinical trials to
derive more than 10% of their revenue from a single customer. However, the
Company's small revenue base makes it more dependent on major customers than
many of the larger participants in the clinical research industry. The loss of
business from a significant customer could materially and adversely effect the
Company's revenue.
CONTRACTING AND BACKLOG
The Company's contracts provide a fixed price for each component or
service delivered. The ultimate contract value depends on such variables as the
number of research sites selected, patients enrolled and other services required
by the Sponsor. Generally, the Company's contracts range in duration from
several months to several years. As services are performed over the life of the
contract, revenue is earned under the percentage of completion method utilizing
units of delivery. Costs associated with contract revenue are recognized as
incurred. Cash flows vary with each contract, although generally a portion of
the contract fee is paid at the time the trial begins, with the balance paid as
pre-determined contract milestones are satisfied.
Generally, Sponsors may terminate a contract with the Company with or
without cause. In the event of termination, the Company is entitled to payment
for all work performed through the date of notice of termination and for costs
associated with termination of the study. Clinical trials may be terminated for
several reasons, including unexpected results or adverse patient reactions to
the drug, inadequate patient enrollment or investigator recruitment,
manufacturing problems resulting in shortages of the drug, and decisions by the
Sponsor to de-emphasize or terminate either a particular trial or drug. A
Sponsor's decision to terminate a sizable trial in which the Company
participates could have a material adverse effect on the Company's backlog,
future revenue and profitability.
Backlog consists of anticipated revenue from letters of intent and
signed contracts yet to be completed. In certain cases, the Company will work on
a project prior to finalizing a letter of intent or contract. Such projects are
excluded from backlog until a definitive letter of intent or contract is
executed.
The Company's backlog is not necessarily a meaningful predictor of
future results. Contracts included in backlog are subject to termination or
delay at any time. There can be no assurance that the Company will realize
revenue from backlog or as to the amount of backlog that will be converted to
revenue within any fiscal period. Delayed contracts remain in the Company's
backlog until canceled. As
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of December 31, 1996 and 1997, the Company's backlog was $22.5 million and $25.9
million, respectively.
COMPETITION
The clinical research industry is highly fragmented and comprised of
several large, full-service CROs and many small CROs and limited service
providers. The major competitors in the industry include the research
departments of pharmaceutical companies, CROs and other SMOs. The Company
competes in this market on the basis of its ability to provide rapid access to
high-quality clinical investigators and patients through its Network of
Affiliated Sites. In addition, through DataTRAK, the Company will integrate
information technology to provide EDC and remote monitoring through its QRC in
order to further accelerate the clinical trial process. Many of the Company's
competitors have substantially greater financial and other resources than the
Company, and there can be no assurance of the Company's ability to continue to
compete effectively with these larger competitors. To the extent the Company's
approach to the conduct of clinical trials continues to gain acceptance in the
market, there can be no assurance that these larger competitors will not develop
their own networks of research sites, nor as to the effect of such competing
networks on the Company's operations. The Company may also face competition from
other networks of research sites in the recruitment of potential Affiliated
Sites.
Further, the electronic data capture market, which is still developing,
is also highly fragmented. The major competitors include EDC software vendors,
clinical trial data service companies and in-house development efforts within
large pharmaceutical companies. There can be no assurance that the Company will
be able to capture or establish the market presence necessary to effectively
compete in this emerging sector of the clinical research industry.
REGULATORY MATTERS
Government Regulation
The clinical investigation of new pharmaceutical and biotechnology
products is highly regulated. The purpose of these regulations is to assure that
products are safe and effective before broad public use. The Food and Drug
Administration ("FDA") has promulgated regulations and guidelines pertaining to
applications to initiate trials of new compounds, approval and conduct of
studies, report and record retention, informed consent, applications for
approval of new compounds and post-marketing requirements. Under FDA
regulations, companies providing clinical research services that assume the
obligations of a drug Sponsor are required to comply with applicable FDA
regulations and are subject to regulatory action for failure to comply with such
regulations. The historical trend has been toward increased regulation by the
FDA; however, recent initiatives have been undertaken by the FDA to streamline
the agency's internal review processes.
The services provided by the Company are ultimately subject to FDA
regulation and to appropriate regulatory authorities in other countries where
the Company offers its services. The level of regulation in other countries
generally has been less comprehensive than that present in the United States.
However, through the efforts of the International Committee on Harmonization,
the governing regulations of participating nations are moving toward
equivalence. Depending on the nature of services provided with respect to a
particular research trial, the Company may be required to comply with FDA
regulations governing such activities as selecting investigators, obtaining
documentation from investigators, verifying that patient informed consent is
obtained, monitoring the validity and accuracy of data, verifying drug
accountability and instructing investigators to maintain records and reports.
The Company must also maintain records for each study for specified periods for
inspection by the study Sponsor and the FDA. If FDA audits indicate that the
Company has failed to adequately comply with federal regulations and guidelines,
it could have a material adverse effect on the Company. In addition, the failure
of the Company to comply with applicable regulations could result in termination
of on-going research or the
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disqualification of data, either of which could also have a material adverse
effect on the Company's results of operations, financial condition and
reputation.
The Drug Development and Approval Process
All drugs proposed to be marketed in the United States must undergo an
extensive development and approval process. Pre-clinical testing is the first
stage in this process. During the pre-clinical stage, a new compound is tested
in vitro and in animals over a one to three year period in order to obtain
information concerning the basic biological activity and safety of the drug. If
the results of pre-clinical studies are satisfactory, the Sponsor files an IND
with the FDA before beginning human testing. In order to receive IND status, the
Sponsor must provide the FDA with manufacturing data, preclinical test results,
information concerning the uses of the drug in other countries or in the United
States for other purposes and a plan for conducting clinical trials. The design
of each clinical trial, or its "protocol," is an essential component of the drug
development effort. Each protocol must anticipate the nature of the data and
results that the FDA will require before approving the drug.
In the absence of any comments from the FDA on the IND, a Sponsor may
begin clinical trials on human subjects 30 days after the IND is filed. Clinical
trials often represent the most expensive and time consuming part of the drug
development process. The trial process usually starts on a small scale with
trials intended to assess safety, and then expands to larger trials in order to
test a compound's efficacy. There are four phases of clinical testing, with
multiple trials generally conducted within each phase.
Phase I testing typically consists of specialized studies designed to
acquire safety and dosing information on a new compound. In these
studies, the drug is tested on approximately 20 to 80 individuals and
data is gathered concerning toxicity, absorption, metabolism and other
pharmacological actions. Each individual study lasts from a period of
days to several weeks, and the phase itself typically lasts from six
months to one year.
Phase II testing typically consists of studies in approximately 100 to
200 patients who suffer from the targeted disease or condition. Phase
II trials focus on obtaining information on the drug's effectiveness
and dose-response relationship. Because these trials gather early
evidence of a compound's efficacy, their results are often pivotal to a
Sponsor's decision concerning whether to proceed to larger trials.
These trials typically last one to two years.
Phase III testing typically consists of large, multi-center trials
involving hundreds to thousands of patients. Phase III trials are
intended to collect efficacy and safety information on a large scale.
The collection of such data is most critical in Phase III, because the
data developed during these trials will have a significant influence on
the labeling aspects of the new drug. At least one Phase III trial is
required to be performed within the United States on any compound
before it will be approved by the FDA. These trials typically last two
to three years.
Phase IV studies are frequently required by the FDA as a condition to
granting marketing approval. After a drug is approved for marketing,
the FDA will often require Sponsors to conduct additional clinical
trials to monitor long-term risks and benefits, alternative dosage
levels or evaluate safety and efficacy in targeted patient populations.
These studies are usually less data intensive than those conducted in
other phases of clinical research, but may involve hundreds to
thousands of patients and can last for several years.
After a new compound has successfully completed the first three phases
of the clinical trial process, a NDA is submitted to the FDA. The NDA is a
comprehensive filing that includes the results of all pre-clinical and clinical
studies, with the majority of its clinical data derived from Phase II and Phase
III trials. In addition, the NDA contains information about the drug's
composition and the Sponsor's plans for producing, packaging and labeling the
product. The FDA's review process for an NDA can take anywhere from a few
months, for drugs related to life threatening conditions, to many years, with
the average review
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lasting more than two and one-half years. Drugs that successfully complete this
review may be marketed in the United States, subject to such conditions as the
FDA may specify. As a result of increasing public pressure to allow new drugs to
reach the market more quickly, the FDA has increased its reliance on Phase IV
studies. In some instances, the FDA has granted conditional approval to
potentially lifesaving drugs or those for previously untreatable conditions in
order to permit marketing while Phase IV studies are conducted.
When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the manufacturer to make the new
drug available to a larger number of patients through the regulated mechanism of
a Treatment Investigational New Drug ("TIND"). Although less scientifically
rigorous than a controlled clinical trial, a TIND trial may enroll and collect a
substantial amount of data from tens of thousands of patients.
The pre-clinical and clinical testing and approval processes for
biotechnology products are substantially similar to those applicable to drugs,
except that the results of clinical trials are submitted in the form of a
Product License Application rather than an NDA. In many cases, medical device
products are also subject to extensive pre-clinical and clinical testing
requirements.
FDA Guidance for Industry: Computerized Systems Used in Clinical Trials
On June 18, 1997, the FDA issued draft guidelines, on the use of
computer systems in clinical trials, for review and comment by the public and
affected industries. The FDA draft includes guidelines related to standard
operating procedures, data entry, system design, security, system dependability
and controls, personnel training, records inspection, and certification of
electronic signatures. Based on its review of these draft guidelines, the
Company believes the DataTRAK(R) process for electronic data capture and
management is consistent with this draft guidance. Because the FDA's development
of this guidance is still in the early stages, the Company will continue to
monitor this guidance to ensure compliance.
POTENTIAL LIABILITY AND INSURANCE
Clinical trials involve the testing of approved and non-approved drugs
on human beings. This testing carries with it a significant risk of liability
for personal injury or death to participants resulting from an adverse reaction
to, or improper administration of, the trial drug. Many clinical trial
participants are seriously ill and are at great risk of further illness or death
as a result of factors other than their participation in the trial. The Company
participates with Sponsors in the site selection process, and contracts on
behalf of Sponsors with physicians who render professional services, including
administering the drugs being tested, to participants in these trials. Company
personnel and subcontractors also render professional services to participants
in trials, and are materially involved in the patient treatment process.
Consequently, the Company may be subject to claims in the event of personal
injury or death of persons participating in clinical trials and arising from
professional malpractice of physicians with whom it has contracted and its own
employees. To date, the Company has not received any claims resulting from
either the testing of new drugs or professional malpractice.
The Company believes that the risk of liability associated with
clinical trials is mitigated by various regulatory requirements, including the
role of IRB's. An IRB is an independent committee that includes medical and
non-medical personnel and is obligated to protect the interests of patients
enrolled in the trial. The FDA requires each human clinical trial to be reviewed
and approved by the IRB at each research site After the trial begins, the IRB
monitors the protocol and the measures designed to protect patients, such as the
requirement to obtain informed consent. In addition, regulations governing the
conduct of clinical trials and the protection of human subjects place
responsibility for proper study conduct
9
<PAGE> 12
and subject protection directly on the principal investigator at each location
where a study is performed. At its owned research facilities, the Company has
assumed the duties and liabilities of a principal investigator.
In order to reduce its exposure to liability, the Company generally
obtains indemnification from Sponsors and, in some cases, from investigators and
Affiliated Sites contracted by the Company. The Affiliated Sites' agreement
obligates the Company to pursue contracts only with Sponsors that provide
indemnification for adverse outcomes, and that allow such indemnification rights
to pass through to the Affiliated Sites and investigators. These indemnity
rights do not protect the Company against certain of its own actions, such as
negligence or misconduct. Furthermore, these indemnities are contractual
arrangements that are subject to negotiation, and the terms and scope of such
indemnities may vary. In order for such indemnification to be valid, the Company
and its employees and agents must act within the bounds of specific procedural
requirements governing the conduct of the clinical trial. Since the value of the
indemnification depends on the financial viability of the indemnifying party,
there can be no assurance that the Company will be able to rely on such
indemnification in each instance of potential liability. The financial position
of the Company could be materially adversely affected if the Company was forced
to undertake the defense of, or was found financially responsible for, claims
based upon the foregoing or related risks.
The Company maintains an errors and omissions professional liability
insurance policy in amounts it believes to be sufficient. However, there can be
no assurance that this coverage will be adequate, or that insurance coverage
will continue to be available to the Company.
PATENTS AND TRADEMARKS
The Company holds registered service marks incorporating the
Collaborative Clinical Research logo, the DataTRAK(R) process, and various
DataTRAK trademarks, including the DataTRAK EDC(TM) software. Through
acquisitions the Company holds additional registered service marks. The DataTRAK
EDC(TM) software is the foundation of the DataTRAK(R) process. The Company does
not own any patents. The Company believes that its ability to attract and retain
highly-skilled employees and manage the growth of its business are more
important to its performance than any intellectual property rights that it has
purchased or developed to date. The Company anticipates that DataTRAK will
constitute a material portion of its business in the future, and the
DataTRAK(R) process will become an important component of the Company's
business.
INFORMATION TECHNOLOGY
Information systems are an integral part of the services the Company
provides. The Company is reviewing its systems to assess the Year 2000 issue.
Management believes that neither the costs nor expenses of the Year 2000 issue
will be material to the Company. The Company's services are also dependent on
the systems used by its Affiliated Sites, Sponsors, and other customers and
vendors. Year 2000 issues encountered by these companies could have a material
adverse effect on the Company.
EMPLOYEES
As of January 31, 1998, the Company had approximately 150 full-time
employees, of whom eight had executive and managerial responsibilities. None of
the Company's employees are represented by a union. The Company considers
relations with its employees to be satisfactory.
The Company's growth continues to place significant demands on its
management resources. The success of the Company's business is dependent on the
services of its senior management team, which changed substantially in 1997. The
Company has employment agreements with all but one of its executive officers.
The loss of the services of any of its executive officers could have a material
adverse effect on the Company. To address these risks, the Company must, among
other things, continue to attract, retain and
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<PAGE> 13
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks.
ITEM 2. PROPERTIES
The Company presently maintains its executive offices in approximately
14,000 square feet of space in Cleveland, Ohio pursuant to two leases with
unaffiliated third parties. The Company leases approximately 32,000 square feet
of office and medical space in Evansville, Indiana. This facility houses, among
other things, an 80 bed in-patient Phase I research facility. The Company also
leases property in two additional states and the United Kingdom, most of which
is used to conduct or manage clinical research projects. Collaborative believes
that its facilities are adequate for its operations and suitable additional
space will be available when needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to various lawsuits arising
in the ordinary course of business. The Company does not believe that the
outcome of such litigation will have a material adverse effect on its results of
operations or financial condition.
On September 5, 1997, a summons and complaint was filed by the Company
in the Netherlands against the shareholders of U-Gene Research B.V. for breach
of contract. The claim is for money damages for costs incurred and liquidated
damages related to an aborted acquisition of U-Gene Research B.V. To date,
responsive pleading by the defendants is pending.
On July 18, 1997, two former executive officers of the Company claimed
that their employment agreements were violated by the Company and, by letter,
each demanded payment from the Company of an amount equal to one year's annual
salary. The Company believes their claims are without merit, and is pursuing the
non-compete provisions of the employment contracts. Under the terms of their
employment agreements, the dispute will be resolved through arbitration. An
arbitration hearing was held on March 7, 1998 but to date, the arbitrator's
ruling has not been announced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
ITEM 4A EXECUTIVE OFFICERS OF THE COMPANY*
The name, age and positions of each of the Company's executive officers
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dr. Jeffrey A. Green 42 President, Chief Executive Officer and Director
Herbert L. Hugill 49 Chief Operating Officer
Terry C. Black 40 Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
Patrick G. Chassaigne 45 President of DataTRAK, Inc.
Gregory A. Folz 40 Vice President of Marketing and Sales
Dr. Richard J. Kasmer 40 Vice President of Operations, General Counsel and
Assistant Secretary
Philip A. Stark 46 Vice President of Corporate Development
Dr. William H. Stigelman, Jr. 52 Vice President of Affiliated Site Relations
</TABLE>
*Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
11
<PAGE> 14
Jeffrey A. Green, Pharm.D., FCP, is the Company's founder and has
served as its President and Chief Executive Officer since March 1992. From 1984
to 1992, Dr. Green served as an Assistant Professor of Medicine and Radiology at
Case Western Reserve University, Cleveland, Ohio. During his tenure at Case
Western Reserve University, Dr. Green established and directed the
Cardiovascular Clinical Pharmacology Research Program at University Hospitals of
Cleveland. In addition, Dr. Green was an established investigator in clinical
cardiology and PET scanning, and was responsible for directing over 90
individual investigations during his tenure. Dr. Green has authored over 90
publications and has been an invited speaker at more than 125 national meetings.
He was the recipient of the McKeen Cattell Distinguished Achievement Award from
the American College of Clinical Pharmacology in 1988. Dr. Green is a graduate
of Purdue University (B.S.) and the University of Texas (Pharm.D.).
Herbert L. Hugill has served as the Company's Chief Operating Officer
since December 1997. Mr. Hugill is responsible for leading and managing
implementation of the Company's clinical business strategy on a worldwide basis.
From 1996 to 1997, Mr. Hugill was President and Chief Executive Officer and a
member of the Board of Directors of Mediscience Technology Corp., a development
stage, biomedical technology company. From 1985 through 1995 he was employed in
various senior management capacities at RpScherer Corporation where from 1991
through 1995 he was president of RpScherer North America, that firm's largest
operating division.
Terry C. Black has served as the Company's Vice President of Finance
and Chief Financial Officer since June 1994 and has served as the Treasurer and
Assistant Secretary since January 1996. Prior to joining the Company, Mr. Black
served as Chief Financial Officer for Action Auto Rental, Inc., a Cleveland,
Ohio based insurance replacement automobile rental company, from 1992 to 1994.
Before joining Action Auto Rental, Mr. Black served in a variety of financial
and accounting positions within the insurance replacement rental car industry.
In 1993, Action Auto Rental filed for protection from its creditors under
Chapter 11 of the United States Bankruptcy Code and was subsequently liquidated.
Patrick G. Chassaigne has served as the President of DataTRAK, Inc.
since July 1997. Mr. Chassaigne is responsible for the overall management of the
Company's DataTRAK subsidiary, including development of the marketing, strategic
planning and operating functions. Prior to joining the Company, Mr. Chassaigne
served as Director, Research and Technology Solutions in the Industry Expertise
Center of Digital Equipment Corporation in Littleton, Massachusetts. Over the
past sixteen years, he has held positions of increasing management
responsibility with the common function of delivering technology-based solutions
to Research and Development organizations in industries including
pharmaceuticals, chemicals, food, automotive and aerospace.
Gregory A. Folz has served as the Company's Vice President of Marketing
and Sales since September 1997. Mr. Folz is responsible for the strategic
marketing and business development initiatives for the Company. From June 1996
to September 1997, Mr. Folz served as the Executive Director of GFI. Prior to
joining the Company, Mr. Folz was an independent consultant providing strategic
marketing direction and research to GFI and other members of the healthcare
industry, including 20 major medical centers, health systems and managed care
organizations throughout the US.
Richard J. Kasmer, Pharm.D., J.D., has served as the Company's Vice
President of Operations, General Counsel and Assistant Secretary since January
1996. From 1992 to 1996, Dr. Kasmer served as the Company's Vice President of
Clinical Operations and Secretary. Dr. Kasmer is responsible for managing the
Company's Affiliated Site operations. Prior to joining the Company, Dr. Kasmer
was employed by the VA Medical Center in Cleveland, Ohio for eight years and is
an established investigator with over 15 years of experience in Phase I through
Phase IV trials and has participated in over 80 individual investigations. Dr.
Kasmer is a graduate of Creighton University (Pharm.D.) and the Cleveland -
Marshall College of Law (J.D.).
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<PAGE> 15
Philip A. Stark has served as the Company's Vice President of Corporate
Development since May 1997. Mr. Stark is responsible for direction and
negotiation of the Company's partnership, joint-venture, and merger and
acquisition activities. In addition, he oversees the Company's investor
relations program. Prior to joining the Company, Mr. Stark developed and
executed investor relations programs as a consultant. For nearly 20 years, Mr.
Stark worked as a banker, in corporate finance and as an investment banker.
William H. Stigelman, Jr., M.S., Pharm.D., has served as the Company's
Vice President of Affiliated Site Relations since December 1992. Dr. Stigelman
is responsible for worldwide Affiliated Site development, including the
development and implementation of standard operating procedures and quality
control procedures for the Affiliated Site Network. Prior to joining the
Company, Dr. Stigelman served in a variety of positions during his 23-year
career in the United States Air Force. Dr. Stigelman served as director of
pharmacy at three Air Force medical centers and as a director of a clinical
research facility. As Chief of Clinical Investigations at the Air Force Surgeon
General's Office, Dr. Stigelman directed an Air Force wide research program
involving more than 1,000 protocols and annual budgets exceeding $8.0 million.
Dr. Stigelman is a graduate of the Massachusetts College of Pharmacy (B.S. and
M.S.) and the University of Texas (Pharm.D.).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
The Company's Common Shares are traded on The Nasdaq National Market
("Nasdaq") under the symbol "CCLR". The Common Shares were initially offered to
the public on June 11, 1996 at a price of $13.50 per share and commenced trading
on Nasdaq on that date. The following table sets forth, for the fiscal years
ended December 31, 1996 and 1997, the high and low sale prices per share for the
Common Shares, as reported by Nasdaq. These prices do not include retail
markups, markdowns or commission.
<TABLE>
<CAPTION>
High Low
---- ---
1996
----
<S> <C> <C>
Second Quarter (from June 11, 1996) $ 15.00 $ 11.25
Third Quarter $ 15.25 $ 8.00
Fourth Quarter $ 15.50 $ 9.75
1997
----
First Quarter $ 12.75 $ 7.00
Second Quarter $ 8.25 $ 5.75
Third Quarter $ 7.38 $ 5.63
Fourth Quarter $ 6.63 $ 4.50
</TABLE>
On February 27, 1998, the last sale price of the Common Shares as
reported by Nasdaq was $4.38 per share. As of February 27, 1998, there were 98
holders of record and approximately 1,100 beneficial holders of the Common
Shares.
The Company has never declared or paid cash dividends on its Common
Shares. The Company currently intends to retain any earnings for use in its
business and therefore does not anticipate paying any dividends in the
foreseeable future. Any determination to pay cash dividends in the future will
be at the discretion of the Board of Directors after taking into account various
factors, including the Company's financial condition, results of operations,
current and anticipated cash needs and plans for expansion.
13
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 1,423 $ 4,047 $ 10,453 $ 25,715 $ 17,327
Direct costs 975 2,908 8,491 17,976 12,637
-------- -------- -------- -------- --------
Gross profit 448 1,139 1,962 7,739 4,690
Selling, general and administrative expenses 686 1,386 2,770 6,141 10,009
Special items -- -- -- -- 2,995
Depreciation and amortization 118 59 62 606 1,015
-------- -------- -------- -------- --------
Income (loss) from operations (356) (306) (870) 992 (9,329)
Other income (expense) 5 92 117 1,038 1,888
-------- -------- -------- -------- --------
Income (loss) before income taxes (351) (214) (753) 2,030 (7,441)
Income tax expense (benefit) -- -- -- 383 (58)
-------- -------- -------- -------- --------
Net income (loss) $ (351) $ (214) $ (753) $ 1,647 $ (7,383)
======== ======== ======== ======== ========
Net income (loss) per share: basic $ (0.36) $ (0.13) $ (0.31) $ 0.36 $ (1.16)
======== ======== ======== ======== ========
Shares used in the computation of basic net
income (loss) per share 966 1,621 2,464 4,626 6,384
======== ======== ======== ======== ========
Net income (loss) per share: diluted $ (0.36) $ (0.13) $ (0.31) $ 0.33 $ (1.16)
======== ======== ======== ======== ========
Shares used in the computation of diluted net
income (loss) per share 966 1,621 2,464 5,052 6,384
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $ 207 $ 4,105 $ 3,011 $ 34,683 $ 33,613
Working capital (deficit) (82) 3,879 2,961 39,626 33,021
Total assets 651 5,523 7,025 53,687 48,321
Long-term liabilities -- -- -- -- --
Retained earnings (accumulated deficit) (644) (858) (1,611) 36 (7,347)
Total shareholders' equity 30 4,004 3,323 49,548 42,350
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company is an SMO managing a clinical research network comprised of
over 540 Affiliated Sites. Collaborative also manages three owned clinical
research sites. Collaborative's revenue is derived by providing Sponsors with an
innovative, timely, cost effective and low risk means of selecting clinical
research sites and managing clinical trials as part of the pharmaceutical
product development process.
Since commencing operations in 1991, Collaborative has grown through a
combination of internal expansion and strategic acquisitions. Collaborative
acquired two companies in 1996, GFI and WCE. GFI conducts Phase I through IV
clinical research at the Company's three owned clinical research sites. WCE's
services include studies necessary to switch prescription drugs to OTC products,
label comprehension
14
<PAGE> 17
evaluations and consumer product testing. Both acquisitions have been accounted
for under the purchase method of accounting, and the consolidated results of
operations include the results of operations of both businesses from their
respective acquisition dates. After allocating purchase price to the fair value
of the net assets acquired, the Company recorded approximately $8.4 million of
goodwill in connection with the acquisitions. The Company amortizes goodwill
using the straight-line method over a period of 20 years.
The Company's wholly owned subsidiary, DataTRAK, was formed in 1996.
DataTRAK will provide certain electronic data management services, through its
EDC software and QRC, to improve quality, efficiency, and timeliness of the
clinical research process.
The Company's backlog at December 31, 1997 was $25.9 million, as
compared to backlog of $22.5 million at December 31, 1996. Backlog is composed
of a number of contracts, each with a different term and duration. As is
customary, these contracts are subject to modification and/or possible
cancellation. Therefore, the amount of backlog is not necessarily indicative of
the Company's future quarterly or annual revenues. The Company has taken several
steps to reorganize its sales and operating structure, however its future
financial performance continues to depend on its success in bringing in new
business and converting backlog into revenue. To that end, management expects
its financial performance in the first half of 1998 to continue to reflect the
weaknesses experienced in the second half of 1997, but believes the remainder of
the year will begin to evidence a turn-around in the Company's business.
The Company's clinical research service contracts generally have terms
ranging from several months to several years. A portion of the contract fee is
generally payable upon execution of the contract, with the balance payable in
installments over the life of the contract. Revenue and related direct costs are
recognized as specific contract terms are fulfilled under the percentage of
completion method utilizing units of delivery. The Company's contracts are
broken down into discrete units of deliverable services for which a fixed fee
for each unit is established. Pass-through costs that are paid directly by the
Company's Sponsors, and for which the Company does not bear the risk of economic
loss, are excluded from revenue. These costs can include investigator meeting
fees, IRB fees and travel costs. The termination of a contract results in no
material adjustments to revenue or direct costs previously recognized, and the
Company is entitled to payment for all work performed through the date of notice
of termination and all costs associated with termination of a study.
The Company's contracts generally may be terminated by the Sponsor with
or without cause. Some of the reasons clinical trials may be terminated include
unexpected results or adverse patient reactions to the drug, inadequate patient
enrollment or investigator recruitment, manufacturing problems resulting in
shortages of the drug or decisions by the Sponsor to de-emphasize or terminate a
particular trial or development efforts on a particular drug. Depending on the
size of the trial, a Sponsor's decision to terminate or delay the trial could
have a material adverse effect on the Company's backlog, future revenue and
profitability.
The Company's quarterly results can fluctuate as a result of a number
of factors, including success in attracting new business, the size and duration
of the clinical trials in which the Company and members of its Network of
Affiliated Sites participate, the timing of Sponsor decisions to conduct new
clinical trials or to cancel or delay ongoing trials, the impact of acquisitions
made by the Company and other factors, many of which are beyond the Company's
control.
15
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's Statements of Operations, expressed as a percentage of
revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
--------- ---------- ---------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Direct costs 81.2 69.9 72.9
Gross profit 18.8 30.1 27.1
Selling, general and administrative expenses 26.5 23.9 57.8
Special items --- --- 17.3
Depreciation and amortization 0.6 2.3 5.8
Income (loss) from operations (8.3) 3.9 (53.8)
Other income 1.1 4.0 10.9
Income (loss) before income taxes (7.2) 7.9 (42.9)
Income tax expense (benefit) --- 1.5 (.3)
Net income (loss) (7.2) 6.4 (42.6)
</TABLE>
- --------------
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenue decreased by $8.4 million, or 32.7%, from $25.7 million in 1996
to $17.3 million in 1997. The decrease was the result of a $12.8 million decline
in revenue from clinical trials conducted within the Company's Network of
Affiliated Sites, offset, in part, by the $4.4 million increase in revenue
attributable to operations acquired in 1996. The low level of revenue generated
by the Affiliated Sites was the result of the Company's inability to attract
sufficient new business and convert existing backlog into revenue during 1997.
Management has taken actions that it believes will result in growth in the
Company's level of backlog during 1998.
Direct costs include compensation and related fringe benefits for
non-administrative employees (including those at Company-owned research
facilities) and other expenses directly related to contracts, which can be
subcontracted to the Affiliated Sites and other vendors. These costs decreased
by $5.4 million, or 30.0%, from $18.0 million in 1996 to $12.6 million in 1997.
Direct costs increased as a percentage of revenue from 69.9% in 1996 to 72.9% in
1997. Of the $5.4 million decrease, $9.0 million was caused by the decline in
revenue generated by the Affiliated Sites, which was partially offset by an
increase of $3.6 million due to the GFI and WCE acquisitions. The increase in
direct cost percentage was the result of the Company's low level of revenue and
its subsequent inability to leverage fixed costs.
Selling, general and administrative expenses include all administrative
personnel costs, business and Affiliated Site development costs, and all other
expenses not directly chargeable to a specific contract. Selling, general and
administrative expenses increased by $3.9 million, or 63.9%, from $6.1 million
in 1996 to $10.0 million in 1997. Of the $3.9 million increase, approximately
$3.3 million reflects normal ongoing expenses, including $1.0 million incurred
at acquired research facilities and $1.2 million associated with DataTRAK. The
$3.9 million increase also includes approximately $600,000 of expenses related
to terminated negotiations for potential acquisitions. As a percentage of
revenue, selling, general and administrative expenses increased from 23.9% in
1996 to 57.8% in 1997. The increase in selling, general and administrative
expenses as a percentage of revenue reflects the lower absorption of fixed
operating costs resulting from decreased revenues, as well as the impact of
additional expenses incurred to support the Company's efforts to rebuild sales
and backlog, and its strategic initiatives.
16
<PAGE> 19
Special items include charges of $3.0 million for costs associated with
exiting certain Company activities. The charges were recorded in the fourth
quarter of 1997. These charges relate to changes in DataTRAK's business
including the write off of software and licenses, and changes in other parts of
the Company's business, including the disposal of certain medical equipment,
computer equipment, software and licenses, and the closing of a leased facility.
Depreciation and amortization expense increased by $394,000 from
$606,000 in 1996 to $1.0 million in 1997. Of the $394,000 increase, $57,000
resulted from the depreciation of assets acquired with GFI and WCE, $133,000
resulted from the amortization of goodwill and $204,000 resulted from increased
capital expenditures.
Other income increased from $1.0 million in 1996 to $1.9 million in
1997. This was the result of a $791,000 increase in interest income on invested
cash (primarily the proceeds of the Company's initial public offering), and a
$93,000 decrease in interest expense. Interest expense for 1996 was related the
issuance of notes payable to the former shareholders of GFI, and borrowings
against the Company's line of credit. Also, there was a $33,000 increase in the
Company's share of Health Research Innovations L.L.C's. ("HRI") net loss for the
twelve months ended December 31, 1997. The HRI joint venture, between the
Company and Pharmaceutical Marketing Services, Inc., was terminated during the
second quarter of 1997.
As a result of the Company's net operating loss for the year ended
December 31, 1997, a $198,000 federal income tax benefit has been recorded at
December 31, 1997. This benefit represents the refund the Company is to receive
from its net operating loss carryback for federal income tax purposes. At
December 31, 1997, the Company has a net operating loss carryforward of
approximately $5.0 million which will expire in the year 2012. The Company's
federal tax benefit is offset by $140,000 of state income taxes for 1997.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenue increased by $15.3 million, or 147.1%, from $10.4 million in
1995 to $25.7 million in 1996. Approximately $6.7 million of the increase was a
result of the GFI and WCE acquisitions. The remaining $8.6 million of the
increase was due to the number and size of the Company's new and ongoing
clinical trials primarily conducted at its Affiliated Sites. Approximately $7.6
million of the $8.6 million related to a full service clinical trial which began
in the fourth quarter of 1995. On a pro forma basis, giving effect to the GFI
and WCE acquisitions as if they had occurred on January 1, 1995, pro forma
revenue for 1996 of $28.8 million would have increased by 45% compared to 1995
pro forma revenue of $19.9 million.
Direct costs increased by $9.5 million, or 111.8%, from $8.5 million in
1995 to $18.0 million in 1996. Direct costs decreased as a percentage of revenue
from 81.2% in 1995 to 69.9% in 1996. Of the $9.5 million increase, $4.0 million
was due to the acquisitions of GFI and WCE, and $5.5 million was due to the
number and size of Collaborative's new and ongoing clinical trials. Direct costs
for Collaborative's ongoing and new clinical trials, primarily conducted at the
Company's Affiliated Sites, decreased from 81.2% to 73.5% as a percentage of
revenue for 1995 and 1996, respectively. This reflects the effects of pricing
changes implemented by the Company during the second half of 1995 intended to
increase prices for certain services and include charges for certain
administrative contract costs that had previously been absorbed. As a percentage
of revenue, Collaborative's higher direct costs at its Affiliated Sites were
offset by the GFI and WCE subsidiaries' lower direct costs.
Selling, general and administrative expenses increased by $3.3 million,
or 117.9%, from $2.8 million in 1995 to $6.1 million in 1996. Of the $3.3
million increase, $1.9 million reflects expenses associated with GFI and WCE's
operations and the remainder was due to the Company's internal growth. As a
percentage of revenue, selling, general and administrative expenses decreased
from 26.5% in 1995 to
17
<PAGE> 20
23.9% in 1996. The decrease in selling, general and administrative expenses as a
percentage of revenue reflects improved absorption of fixed costs resulting from
the increase in the Company's revenue.
Depreciation and amortization expense increased by $544,000 from
$62,000 in 1995 to $606,000 in 1996. Of the $544,000 increase, $199,000 resulted
from the depreciation of assets acquired with the acquisitions of GFI and WCE,
$288,000 resulted from the amortization of goodwill resulting from the
acquisitions and $57,000 resulted from increased capital expenditures.
Other income increased from $117,000 in 1995 to $1.0 million in 1996.
This was the result of a $924,000 increase in interest income on invested cash
(primarily the proceeds of the Company's initial public offering), offset by a
$93,000 increase in interest expense due to the issuance of notes payable to the
former shareholders of GFI, and borrowings against the Company's line of credit.
Also, there was a $90,000 decrease in the Company's share of HRI's net loss for
the twelve months ended December 31, 1996.
As a result of the Company's net operating loss carryforwards of $1.4
million for federal income tax purposes, the Company's effective tax rate for
1996 was 19% of pre-tax income. This effective tax rate is reflected in the
Company's Consolidated Statement of Operations for the year ended December 31,
1996. The Company fully utilized its net operating loss carryforwards, at
December 31, 1995, for federal income tax purposes during 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's principal sources of cash have been
cash flow from operations and proceeds from the sale of equity securities. The
Company's investing activities primarily reflect capital expenditures,
acquisitions and net purchases of short-term investments.
The Company's contracts usually require a portion of the contract
amount to be paid at the time the contract is initiated. Additional payments are
generally received upon completion of negotiated performance milestones
throughout the life of the contract. Cash receipts do not necessarily correspond
to costs incurred or revenue recognized. The Company typically receives a low
volume of large-dollar receipts. Accounts receivable will fluctuate due to the
timing and size of cash receipts. Accounts receivable (net of allowance for
doubtful accounts) was $4.5 million at December 31, 1997 and $8.4 million at
December 31, 1996. Deferred revenue was $852,000 at December 31, 1997 and
$932,000 at December 31, 1996.
Cash and cash equivalents increased $872,000 during the year ended
December 31, 1997. This was the result of $1.6 million provided by investing
activities, offset by $704,000 used in operating activities. Cash used for
operating activities resulted primarily from the Company's net loss and working
capital needs offset by the decrease in accounts receivable. Investing
activities included net proceeds of $3.0 million from purchases and maturities
of short-term investments offset by $1.4 million used to purchase property and
equipment.
In January 1998, the Company announced the termination of its
technology alliance agreement with ISSC, a unit of IBM Global Services. The
alliance was formed in June 1996 to develop and market an electronic data
collection and project management system for use in clinical trials. During
1997, the Company invested $1.0 million in the technology alliance. As a result
of the termination of the agreement, the unamortized portion of the Company's
investment was written off in December 1997. The amount written off does not
include expenses incurred by the Company in connection with the technology
alliance throughout 1997. The Company and IBM Global Services disagree on a
number of issues concerning the parties' financial responsibilities in
connection with the termination of the alliance, and have engaged in discussions
concerning those matters. To date, those discussions have not resulted in an
acceptable resolution of these issues. The Company does not believe that it has
any continuing financial obligations to IBM Global Services and, based on
information known to date, does not believe that additional
18
<PAGE> 21
expenditures associated with the termination of this alliance, if any, will have
a material adverse effect on the Company's results of operations and financial
condition.
In January 1998, DataTRAK purchased the EDC software known as OpusTWO
from EDS. The Company will be responsible for funding the future development and
testing of this software, which has been renamed DataTRAK EDC(TM). The Company
will continue to invest in the development of the DataTRAK(R) process. As
related to 1997 fourth quarter expense levels, additional expenses of $1.0 to
$1.5 million will be incurred throughout 1998 to build DataTRAK's service
infrastructure.
In March 1998, the Company announced a reorganization plan including a
reduction of its personnel. In connection with this plan, the Company will
record a charge of approximately $1.4 million in the first quarter of 1998 to
recognize costs associated with employee severance and other special items.
The Company anticipates that its capital expenditures for 1998 will be
approximately $2.0 million for its DataTRAK and clinical divisions. The
Company's principal cash needs on both a short-term and long-term basis are for
the funding of its operations, capital expenditure requirements, and the
development of its DataTRAK(R) process and service business. The Company
expects to continue expanding its operations through internal growth, joint
ventures and alliances, and after its turn-around has been accomplished,
through strategic acquisitions. The Company expects such activities will be
funded from existing cash and cash equivalents, maturities of short-term
investments, cash flow from operations and borrowings under its line of credit.
The Company has a line of credit agreement with a bank which provides
for borrowings up to $5.0 million that bears interest at rates not to exceed
prime (no amounts are outstanding at December 31, 1997). The Company's accounts
receivable are pledged as collateral on the line of credit. The line of credit
agreement also requires that the Company maintain investments of $2.0 million
with the bank. Of the $5.0 million line of credit, $2.0 million is considered to
be committed and is subject to renewal at January 31, 2000. The $3.0 million
uncommitted amount is subject to renewal at July 31, 1998.
As the Year 2000 approaches, an issue has emerged regarding how
existing application software and operating systems can accommodate this date
value. The Company is reviewing its systems to determine if any Year 2000
problems may occur. Management does not anticipate incurring any material
operating expenses or significant computer system investments to be Year 2000
compliant. However, Year 2000 issues incurred by the Company's Affiliated Sites,
Sponsors or other vendors and customers could indirectly affect the Company.
The Company believes that cash generated from operations, maturities of
short-term investments and amounts available under its line of credit will be
sufficient to fund its working capital and capital expenditure requirements for
the foreseeable future. However, selective acquisitions and joint ventures may
play a role in the Company's growth strategy. To the extent that the Company
were to acquire additional research organizations, it may require additional
capital. There can be no assurance as to the Company's ability to obtain
additional financing.
INFLATION
To date, the Company believes the effects of inflation have not had a
material adverse effect on its results of operations or financial condition.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K, other SEC
filings or written materials or orally by the Company or its representatives may
constitute forward looking statements. The Company wishes to take advantage of
the safe harbor for forward looking statements provided by the Securities
Litigation Reform Act of 1995 (the "Act"), and is including this information in
its Annual Report on Form 10-K in order to do so. The Company has identified the
following important factors which could cause the Company's actual operational
or financial results to differ materially from any projections, estimates,
forecasts or other forward looking statements made by or on behalf of the
Company. Under no circumstances should the factors listed below be construed as
an exhaustive list of all factors which could
19
<PAGE> 22
cause actual results to differ materially from those expressed in forward
looking statements made by the Company.
LIMITED OPERATING HISTORY; LACK OF PROFITABLE OPERATIONS
The Company commenced operations in 1991 and has a limited operating
history upon which investors may evaluate its performance. With the exception of
1996, the Company has recognized losses in each year since its inception. There
can be no assurance that the Company will be profitable during future periods.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company is subject to significant fluctuations in quarterly results
caused by many factors, including the Company's success in obtaining new
contracts, the size and duration of the clinical trials in which the Company and
members of its Network of Affiliated Sites participate, the timing of Sponsor
decisions to conduct new clinical trials or cancel or delay ongoing trials and
other factors. As a result of the Company's limited operating history, the
Company does not have historical financial data for a significant number of
periods on which to base planned operating expenses. Therefore, the Company's
expense levels are based in part on its expectations as to future revenue and to
a certain extent are fixed. There can be no assurance as to the Company's
revenue in any given period, and it may be unable to adjust expenses in a timely
manner to compensate for any unexpected revenue shortfall. As a result of the
Company's relatively small revenue base, any significant shortfall in revenue
recognized during a particular period could have an immediate adverse effect on
its results of operations and financial condition. There can be no assurance
that the Company will be able to accurately anticipate quarterly results.
Volatility in the Company's quarterly results may adversely affect the market
price of the Company's Common Shares.
RISKS ASSOCIATED WITH UNPROVEN BUSINESS STRATEGIES AND EARLY STAGE OF THE
COMPANY'S DEVELOPMENT
The Company's efforts to establish a network of Affiliated Sites and
market the Network as a method of streamlining the process of selecting
investigators, conducting clinical trials and to establish a standardized EDC
and QRC process for collection and management of clinical research data
represent a significant departure from the traditional clinical research
practices of Sponsors. The long-term viability of the Company's strategy remains
unproven. There can be no assurance that the Company's strategy will continue to
gain acceptance among Sponsors, research sites or investigators. In that regard,
the Company has undertaken a number of strategic initiatives intended to expand
the scope of its services. These initiatives are identified in this Form 10-K
and in the Company's other SEC filings. All of these initiatives are based upon
assumptions made by the Company concerning trends in the clinical research
market and the health care industry. Any of these assumptions could prove to be
incorrect, which could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, and there can be no assurance
that the Company will be successful in these efforts.
POTENTIAL DELAY OR LOSS OF CONTRACTS
Although the Company's contracts with Sponsors provide that it is
entitled to receive revenue earned through the date of termination, Sponsors
generally are free to delay or terminate a clinical trial or the Company's
contract related thereto at any time. The length of a typical clinical trial
contract varies from several months to several years. Sponsors may delay or
terminate clinical trials for several reasons, including unexpected results or
adverse patient reactions to a potential product, inadequate patient enrollment
or investigator recruitment, manufacturing problems resulting in shortages of a
potential product or decisions by the Sponsor to de-emphasize or terminate a
particular trial or drug. A Sponsor's decision to delay or terminate a trial in
which the Company participates could have a material adverse effect on the
Company's business, results of operations and financial condition.
20
<PAGE> 23
DEPENDENCE ON MAJOR CUSTOMERS
The Company's primary customers are companies in the pharmaceutical
industry. The Company's business is substantially dependent on the research and
development expenditures of companies in this industry. During each of the three
years in the period ended December 31, 1997, sales to companies in the
pharmaceutical industry accounted for more than 69% of the Company's revenue.
During 1995 and 1996, respectively, sales to Merck & Co., Inc. accounted for
approximately 76% and 22% of the Company's revenue. Also during 1996, sales to
Dey Laboratories accounted for 31% of the Company's revenue. Other customers in
the pharmaceutical industry have from time to time accounted for more than 10%
of the Company's annual revenue. The extent to which the Company relies on sales
to one customer varies from period to period, depending upon, among other
things, its ability to generate new business, the timing and size of clinical
trials and other factors. In light of the Company's small revenue base, it is
more dependent on major customers than many of the larger participants in the
clinical research industry. The Company's operations could be materially and
adversely affected by, among other things, any economic downturn in the
pharmaceutical or biotechnology industries, any decrease in their research and
development expenditures or a change in the regulatory environment in which
these companies operate.
RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES
The Company has made several acquisitions and has begun a number of
joint ventures. Management expects to continue to seek and evaluate such
opportunities in the future. There can be no assurance that the Company will be
able to successfully integrate and profitably manage the businesses acquired and
joint ventures entered to date or that it will be able to identify, acquire,
successfully integrate or profitably manage additional acquisitions and joint
ventures without substantial costs, delays or other problems. In addition, there
can be no assurance that such endeavors will be profitable at the time of their
acquisition or that these businesses will achieve or maintain revenue and
profitability that justify the investment therein. Such endeavors involve a
number of special risks, including adverse effects on the Company's reported
operating results, potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities, diversion of management's
attention, dependence on retention, hiring and training of key personnel, risks
associated with unanticipated problems or legal liabilities and amortization of
goodwill and acquired company intangible assets, or the write off of assets with
diminished value, some or all of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
EFFECT OF EXPANSION STRATEGY ON THE COMPANY'S CORE BUSINESS
The Company's efforts to expand the range of its services expose it to
significant risks. As the Company expands its ability to conduct clinical
research through acquisitions and otherwise, circumstances will arise in which
it will compete for research projects with its Affiliated Sites. There can be no
assurance as to the impact of this competition on the Company's relationship
with its current Affiliated Sites or on its ability to continue to expand the
Affiliated Site Network. The Company's inability to continue to expand its
Network of Affiliated Sites, or the withdrawal of a significant number of
Affiliated Sites or those with expertise in certain therapeutic areas, could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, because of the rapid access to clinical
investigators provided by the Company's Affiliated Site Network, CROs have from
time to time engaged the Company to assist them in the site selection process.
During fiscal 1995, 1996 and 1997, services provided to CROs represented
approximately 6%, 7% and 12%, respectively, of the Company's total revenue.
There is no assurance that CROs will continue to do business with the Company.
MANAGEMENT OF GROWTH; NEED FOR IMPROVED SYSTEMS
The Company believes that the expansion of its business will continue
to place a strain on its operational, human and financial resources. In order to
manage such expansion, the Company must
21
<PAGE> 24
continue to improve its operating, administrative and information systems and
accurately predict its future personnel and resource needs. In addition,
expansion of foreign operations also may involve the additional risks of
assimilating differences in foreign business practices, hiring and retaining
qualified personnel and overcoming language barriers. Failure by the Company to
meet the demands of and to manage expansion of its business and operations could
have a material adverse effect on the Company's business, results of operations
and financial condition.
LIMITED OBLIGATIONS OF AFFILIATED SITES
The Company's Network of Affiliated Sites is essential to its business.
The Company enters into affiliation agreements with each Affiliated Site. The
obligations of Affiliated Sites under the affiliation agreements are limited.
Affiliated Sites have full discretion as to whether to participate in clinical
research opportunities presented by the Company, are free to pursue research
opportunities presented to them from sources other than the Company and may
withdraw from the Network at any time.
DEPENDENCE ON KEY PERSONNEL
As of January 31, 1998, the Company had approximately 150 full-time
employees, of whom eight had executive and managerial responsibilities. The
Company's growth continues to place significant demands on its management
resources. The success of the Company's business is dependent on the services of
its senior management team, which changed substantially in 1997. The Company has
employment agreements with all but one of its executive officers. The loss of
the services of any of its executive officers could have a material adverse
effect on the Company. The Company's performance depends on its ability to
attract and retain qualified personnel. The level of competition among employers
for skilled personnel is high. There can be no assurance that the Company will
be able to continue to attract and retain qualified personnel.
GOVERNMENT REGULATION; POTENTIAL IMPACT OF HEALTH CARE REFORM
Demand for the Company's services is largely a function of the
regulatory requirements associated with the approval of an NDA by the FDA. These
requirements are more stringent and thus more burdensome than those imposed by
many other developed countries. In recent years, efforts have been made to
streamline the drug approval process and coordinate U.S. standards with those of
other developed countries. Changes in the level of regulation, including a
relaxation in regulatory requirements or the introduction of simplified drug
approval procedures could have a material adverse effect on the demand for the
Company's services. Several competing proposals to reform the system of health
care delivery in the United States have been considered by Congress from time to
time. None of the proposals have been adopted.
The FDA's guidelines related to the use of computerized systems in
clinical trials are still in the early stages of development. There can be no
assurance that the DataTRAK(R) process can be kept in compliance with these
guidelines as they develop.
The failure of the Company to comply with applicable regulations could
result in the termination of on-going research or the disqualification of data
for submission to regulatory authorities. Further, the issuance of a notice or
finding by the FDA to either the Company or its clients based upon a material
violation by the Company of either Good Clinical Practices or Good Laboratory
Practices could have a material adverse effect on the Company's business,
results of operations and financial condition.
COMPETITION
The clinical research industry is highly fragmented and is comprised of
several large, full-service CROs and many small CROs and limited service
providers. The major competitors in the industry include
22
<PAGE> 25
the research departments of pharmaceutical companies, CROs and SMOs. Many of the
Company's competitors have substantially greater financial and other resources
than the Company, and there can be no assurance of the Company's ability to
continue to compete effectively with these larger competitors. There can be no
assurance that these larger competitors will not develop their own networks of
Affiliated Sites, nor as to the effect of such competing networks on the
Company's operations. The Company may also face competition from other networks
of research sites in the recruitment of potential Affiliated Sites.
The electronic data capture market, which is still developing, is also
highly fragmented. The major competitors include EDC software vendors, clinical
trial data service companies and in-house development efforts within large
pharmaceutical companies. There can be no assurance that the Company will be
able to capture or establish the market presence necessary to effectively
compete in this emerging sector of the clinical research industry.
POTENTIAL LIABILITY FROM OPERATIONS
Clinical trials involve the testing of approved and experimental drugs
on human beings. This testing carries with it a significant risk of liability
for personal injury or death to participants resulting from an adverse reaction
to, or improper administration of, the potential product. The Company
participates with Sponsors in the site selection process. The Company also
contracts on behalf of its customers with physicians who render, and itself
renders, professional services including administering the drugs being tested to
participants in these trials. Consequently, the Company may be subject to claims
in the event of personal injury or death of persons participating in clinical
trials and arising from professional malpractice of physicians with whom it has
contracted and its own employees. Although the Company is generally indemnified
by its clients for such liability, in order for such indemnification to be
valid, the Company and its employees and agents must act within the bounds of
specific procedural requirements governing the conduct of the clinical trial.
Since the value of the Company's indemnification depends on the financial
viability of the indemnifying party, there can be no assurance that the Company
will be able to rely on such indemnification in each instance of potential
liability. In addition, the Company has significant involvement in the patient
treatment process at its owned research facilities. Accordingly, the Company's
risk of liability for malpractice is increased. If the Company was forced to
undertake the defense of, or found financially responsible for, claims based
upon the foregoing or related risks, there could be a material adverse effect on
the Company's business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS, PREFERRED SHARE PURCHASE RIGHTS
The Company's Articles of Incorporation and By-Laws contain provisions
that may discourage a third party from acquiring, or attempting to acquire the
Company. These provisions could limit the price that certain investors might be
willing to pay for Common Shares of the Company's stock. In addition Preferred
Shares of the Company's stock can be issued by the Company's Board of Directors,
without shareholder approval, whether under the Company's shareholder rights
plan or for other uses determined by the Board. The issuance of Preferred Shares
may adversely affect the rights of common shareholders, the market price of the
Common Shares and may make it more difficult for a third party to acquire a
majority of the outstanding Common Shares of the Company. At the present time,
the Company does not plan to issue any Preferred Shares.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Quarterly results of operations for the year ended December 31, 1997
are included in Note 16 of the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding Directors appearing under the caption
"Election of Directors" in the Company's definitive Proxy Statement to be used
in connection with the Annual Meeting of Shareholders to be held on May 28, 1998
(the "1998 Proxy Statement") is incorporated herein by reference. Information
required by this Item as to the executive officers of the Company is included as
Item 4A of Part I of this Annual Report on Form 10-K as permitted by Instruction
3 to Item 401(b) of Regulation S-K. Information required by Item 405 of
Regulation S-K is set forth in the 1998 Proxy Statement under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to "Executive Compensation" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to "Security Ownership of Principal Holders and Management" in the
1998 Proxy Statement.
24
<PAGE> 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the extent applicable, the information required by this Item is
incorporated herein by reference to "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See Item 8 of Part II of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
All financial statement schedules for the Company and its subsidiaries
have been included in the consolidated financial statements or the related
footnotes, or they are either inapplicable or not required.
(a)(3) Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the period
covered by this Annual Report on Form 10-K.
25
<PAGE> 28
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
COLLABORATIVE CLINICAL RESEARCH, INC.
/s/ Jeffrey A. Green
-------------------------------------
Jeffrey A. Green
President and Chief Executive Officer
Date: March 26, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title
--------- -----
/s/ Jeffrey A. Green President and Chief Executive Officer
- -------------------------------- and Director
Jeffrey A. Green (Principal Executive Officer)
/s/ Terry C. Black Vice President of Finance, Chief
- -------------------------------- Financial Officer and Treasurer
Terry C. Black (Principal Financial and Accounting
Officer)
/s/ Timothy G. Biro Director
- --------------------------------
Timothy G. Biro
/s/ Seth B. Harris Director
- --------------------------------
Seth B. Harris
/s/ Robert M. Stote Director
- --------------------------------
Robert M. Stote
/s/ Alan G. Walton Director
- --------------------------------
Alan G. Walton
Date: March 26, 1998
26
<PAGE> 29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F - 1
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Collaborative Clinical Research, Inc.
We have audited the accompanying consolidated balance sheets of
Collaborative Clinical Research, Inc. and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Collaborative Clinical Research, Inc. and subsidiaries at December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
January 30, 1998
F - 2
<PAGE> 31
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 5,509,460 $ 6,381,512
Short-term investments 29,173,736 27,231,976
Accounts receivable, net 8,420,539 4,497,255
Taxes receivable -- 197,990
Notes receivable - officer -- 165,000
Prepaid expenses 661,292 517,510
------------------ ------------------
Total current assets 43,765,027 38,991,243
Property, plant and equipment
Equipment 1,839,614 2,050,715
Leasehold improvements 239,373 341,427
------------------ ------------------
2,078,987 2,392,142
Less accumulated depreciation 458,206 831,291
------------------ ------------------
1,620,781 1,560,851
Goodwill, less accumulated amortization of $288,000
and $714,000 as of December 31, 1996 and 1997, respectively 8,131,875 7,727,014
Other assets 168,910 41,530
------------------ ------------------
8,300,785 7,768,544
------------------ ------------------
Total assets $ 53,686,593 $ 48,320,638
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,900,060 $ 779,542
Accrued expenses 1,306,285 4,338,686
Deferred revenue 932,460 852,132
------------------ ------------------
Total current liabilities 4,138,805 5,970,360
Shareholders' equity
Serial Preferred Shares, without par value; authorized
1,000,000 shares; none issued -- --
Common Shares, without par value, authorized 15,000,000
shares; issued and outstanding 6,310,414 and 6,412,872
shares as of December 31, 1996 and 1997, respectively 49,511,964 49,697,057
Retained earnings (accumulated deficit) 35,824 (7,346,779)
------------------ ------------------
Total shareholders' equity 49,547,788 42,350,278
------------------ ------------------
Total liabilities and shareholders' equity $ 53,686,593 $ 48,320,638
================== ==================
</TABLE>
See accompanying notes.
F - 3
<PAGE> 32
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $ 10,452,920 $ 25,715,004 $ 17,327,232
Direct costs 8,490,465 17,976,472 12,637,223
------------------ ------------------ ------------------
Gross profit 1,962,455 7,738,532 4,690,009
Selling, general and administrative expenses 2,770,590 6,140,400 10,009,638
Special items - - 2,994,597
Depreciation and amortization 61,500 606,061 1,014,548
------------------ ------------------ ------------------
Income (loss) from operations (869,635) 992,071 (9,328,774)
Other income (expense):
Interest income 222,054 1,146,111 1,936,389
Interest expense - (93,330) -
Loss from joint venture (105,144) (15,042) (47,788)
------------------ ------------------ ------------------
Income (loss) before income taxes (752,725) 2,029,810 (7,440,173)
Income tax expense (benefit) - 383,200 (57,570)
------------------ ------------------ ------------------
Net income (loss) $ (752,725) $ 1,646,610 $ (7,382,603)
================== ================== ==================
Net income (loss) per share:
Basic
Net income (loss) per share $ (0.31) $ 0.36 $ (1.16)
================== ================== ==================
Weighted average shares outstanding 2,464,176 4,625,924 6,384,469
================== ================== ==================
Diluted
Net income (loss) per share $ (0.31) $ 0.33 $ (1.16)
================== ================== ==================
Weighted average shares outstanding 2,464,176 5,052,494 6,384,469
================== ================== ==================
</TABLE>
See accompanying notes.
F - 4
<PAGE> 33
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
PREFERRED SHARES
-------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
----------------------- ------------------------ ----------------------------
NUMBER NUMBER NUMBER
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE
------------ ---------- --------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 530,604 $ 531 66,667 $ 67 1,465,658 $ 1,465
Exercise of Common Share Options
Series A and Series C Preferred Share dividends 9,396 9 110,028 110
Stock compensation
Net loss
----------- ---------- --------- -------------- -------------- ------------
BALANCE AT DECEMBER 31, 1995 540,000 540 66,667 67 1,575,686 1,575
Exercise of Common Share Options
Exercise of Common Share Warrants
Issuance of Common Shares in business acquisition
Series C Preferred Share dividends 18,780 19
Initial Public Offering of Common Shares, net
Conversion of Series A, B and C Preferred Shares (540,000) (540) (66,667) (67) (1,594,466) (1,594)
Stock compensation
Net income
----------- ---------- --------- -------------- -------------- ------------
BALANCE AT DECEMBER 31, 1996 -- -- -- -- -- --
Exercise of Common Share Options
Stock compensation
Net loss
----------- ---------- --------- -------------- -------------- ------------
BALANCE AT DECEMBER 31, 1997 -- $ -- -- $ -- -- $ --
=========== ========== ========= ============== ============== ============
<CAPTION>
COMMON SHARES RETAINED
ADDITIONAL ----------------------------- EARNINGS
PAID-IN NUMBER STATED (ACCUMULATED
CAPITAL OF SHARES AMOUNT DEFICIT) TOTAL
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $4,848,004 400,000 $ 11,906 $ (858,061) $ 4,003,912
Exercise of Common Share Options 2,500 375 375
Series A and Series C Preferred Share dividends (119) -
Stock compensation 71,730 71,730
Net loss (752,725) (752,725)
------------- ------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1995 4,847,885 402,500 84,011 (1,610,786) 3,323,292
Exercise of Common Share Options 22,633 8,352 8,352
Exercise of Common Share Warrants 136,000 884,000 884,000
Issuance of Common Shares in business acquisition 148,148 2,000,000 2,000,000
Series C Preferred Share dividends (19) --
Initial Public Offering of Common Shares, net 3,400,000 41,656,465 41,656,465
Conversion of Series A, B and C Preferred Shares (4,847,866) 2,201,133 4,850,067 --
Stock compensation 29,069 29,069
Net income 1,646,610 1,646,610
------------- ------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1996 -- 6,310,414 49,511,964 35,824 49,547,788
Exercise of Common Share Options 102,458 170,737 170,737
Stock compensation 14,356 14,356
Net loss (7,382,603) (7,382,603)
------------- ------------- -------------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 $ -- 6,412,872 $49,697,057 $ (7,346,779) $42,350,278
============= ============= ============== ============= =============
</TABLE>
See accompanying notes.
F - 5
<PAGE> 34
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (752,725) $ 1,646,610 $ (7,382,603)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Equity loss in HRI 105,144 15,042 47,788
Depreciation and amortization 61,500 606,061 1,014,548
Provision for doubtful accounts 24,000 93,643 194,044
Accretion of discount on investments (143,526) (919,723) (1,078,577)
Stock compensation expense 71,730 29,069 14,356
Special items - - 2,994,597
Changes in operating assets and liabilities:
Accounts and taxes receivable (1,758,815) (2,628,285) 3,531,250
Prepaid expenses (623,770) 78,629 143,782
Other assets (19,653) (91,972) 85,062
Accounts payable and accrued expenses 2,245,428 (1,056,152) (188,122)
Deferred revenue (62,403) (199,964) (80,328)
------------ ------------ ------------
Net cash used in operating activities (853,090) (2,427,042) (704,203)
INVESTING ACTIVITIES
Purchases of property and equipment (241,722) (932,953) (1,422,979)
Purchases of businesses (net of cash acquired) - (7,278,038) (21,370)
Maturities of short-term investments 3,075,700 25,749,178 50,519,484
Purchases of short-term investments (1,798,072) (52,148,794) (47,499,147)
Investment in HRI (143,081) (27,225) (5,470)
------------ ------------ ------------
Net cash provided by (used in) investing activities 892,825 (34,637,832) 1,570,518
FINANCING ACTIVITIES
Borrowings on line of credit - 1,271,111 -
Payments on line of credit - (2,402,520) -
Issuance of notes receivable - officer - - (165,000)
Proceeds from issuance of shares 375 42,548,818 170,737
------------ ------------ ------------
Net cash provided by financing activities 375 41,417,409 5,737
------------ ------------ ------------
Increase in cash and cash equivalents 40,110 4,352,535 872,052
Cash and cash equivalents at beginning of year 1,116,815 1,156,925 5,509,460
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,156,925 $ 5,509,460 $ 6,381,512
============ ============ ============
Cash paid during the year for interest $ - $ 93,330 $ -
============ ============ ============
Cash paid during the year for income taxes $ - $ - $ 397,012
============ ============ ============
</TABLE>
See accompanying notes.
F - 6
<PAGE> 35
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Collaborative Clinical Research, Inc. (the "Company") is an SMO managing a
network of affiliated and owned clinical research sites. The Company provides
Sponsors of clinical research (primarily pharmaceutical and biotechnology
companies and, in selected cases, contract research organizations) with an
innovative, timely, cost effective and low risk means of selecting clinical
research sites and managing clinical trials as part of the pharmaceutical
product development process.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue and related direct costs of revenue are recognized as specific contract
terms are fulfilled under the percentage of completion method (the units of
delivery method). Fees for individual contract services are fixed upon execution
of the contract and provide for payment for all work performed. Pass-through
costs that are paid directly by the Company's clients, and for which the Company
does not bear the risk of performance, are excluded from revenue. The
termination of a contract results in no material adjustments to the revenue or
costs previously recognized.
The following sets forth the revenue generated by customers who accounted for
more than 10% of the Company's revenue during each of the periods presented (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------- ----------------- ----------------
CUSTOMER 1995 1996 1997
-------- ---- ---- ----
<S> <C> <C> <C>
A $7,935 $5,754 $*
B * 7,925 *
C * * 1,779
D * * 2,184
</TABLE>
* Less than 10% of revenue.
CONCENTRATION OF CREDIT RISK
The Company is subject to credit risk through accounts receivable and short-term
investments. Credit risk with respect to accounts receivable is minimized
because of the diversification of the Company's customer base and its
geographical dispersion. The Company generally does not require collateral and
the majority of its accounts receivable is unsecured. Short-term investments are
placed with high credit-quality financial institutions or in short-duration with
high credit-quality debt securities. The Company limits the amount of credit
exposure in any one institution or type of investment instrument.
F - 7
<PAGE> 36
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments in cash
equivalents are carried at cost which approximates market value.
PREPAID EXPENSES
Included in prepaid expenses is $108,300 and $126,600 at December 31, 1996 and
1997, respectively, advanced to vendors for services to be provided under
current contracts.
SHORT-TERM INVESTMENTS
Short-term investments are comprised of U.S. Treasury securities and obligations
of U.S. government agencies, obligations of states and U.S. corporate securities
with maturities of one year or less. These securities are stated at amortized
cost, which approximates fair value. The Company has the positive intent and
ability to hold the securities to maturity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciable assets consist of
medical, office and computer equipment. Depreciation on equipment is computed
using the straight-line method over estimated useful lives of 3 to 7 years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the assets' estimated useful life or the lease term.
DEFERRED REVENUE
Deferred revenue represents cash advances received in excess of revenue earned
on on-going contracts. Payment terms vary with each contract but may include an
initial payment at the time the contract is executed, with future payments
dependent upon the completion of certain contract phases or targeted milestones.
In the event of contract cancellation, the Company is entitled to payment for
all work performed through the point of cancellation.
NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("Statement 128"), which replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the Statement 128 requirements.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25").
GOODWILL
The Company has classified as goodwill the cost in excess of fair value of the
net assets acquired in purchase transactions. Goodwill is amortized over a
20-year period using the straight-line method. The carrying value of
F - 8
<PAGE> 37
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
goodwill is evaluated if circumstances indicate a possible impairment in value.
If undiscounted cash flows over the remaining amortization period indicate that
goodwill may not be recoverable, the carrying value of goodwill will be reduced
by the estimated shortfall of cash flows on a discounted basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
might affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value due to
the short-term of these financial instruments. Investments are reported at
amortized cost which approximates fair value.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Advertising expenses were $309,000, $173,000 and
$302,000 for 1995, 1996 and 1997, respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current year
reporting presentation.
2. SPECIAL ITEMS
Results of operations for 1997 include fourth quarter charges of $2,994,597 or
($0.47) per share for costs associated with exiting certain Company activities.
These charges were for the disposal of certain medical equipment, computer
software and licenses and the closing of a leased facility. In addition the
Company has made a provision for its best estimate of costs associated with the
termination of the technology alliance between IBM and the Company's wholly
owned subsidiary, DataTRAK, Inc.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- ----------------
1996 1997
---- ----
<S> <C> <C>
Billed $ 6,731,028 $ 3,527,078
Unbilled 1,953,011 1,280,177
Allowance for doubtful accounts (263,500) (310,000)
------------ ------------
$ 8,420,539 $ 4,497,255
============ ============
</TABLE>
F - 9
<PAGE> 38
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
4. NOTE RECEIVABLE - OFFICER
In September 1997, the Company loaned an officer of DataTRAK, Inc. $165,000 as
part of a relocation package. The loan bears interest at the applicable federal
rate, adjusted on a monthly basis. The note, plus any accrued but unpaid
interest, is payable on demand.
5. FINANCING ARRANGEMENTS
The Company has a line of credit agreement with a bank which provides for
borrowings up to $5.0 million that bears interest at rates not to exceed prime
(no amounts are outstanding at December 31, 1996 and 1997). The Company's
accounts receivable are pledged as collateral on the line of credit. The line of
credit agreement also requires that the Company maintain investments of $2.0
million with the bank. Of the $5.0 million line of credit, $2.0 million is
considered to be committed and is subject to renewal at January 31, 2000. The
$3.0 uncommitted amount is subject to renewal at July 31, 1998.
6. SHORT-TERM INVESTMENTS
The following is a summary of held-to-maturity securities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1996 1997
---------------------------------- --------------------------------
AMORTIZED AMORTIZED
COST COST COST COST
---- ---- ---- ----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies $17,419,974 $17,640,993 $ 8,985,366 $ 9,132,615
Obligations of states and political
subdivisions 2,500,000 2,506,783 --- ---
U.S. corporate securities 8,893,180 9,025,960 17,728,082 18,099,361
----------- ----------- ----------- -----------
Total $28,813,154 $29,173,736 $26,713,448 $27,231,976
=========== =========== =========== ===========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
------------------------------------------------ -------------------------------------------
Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal $ 209,200 $ (10,000) $ 199,200 $ (197,990) $ --- $ (197,990)
State and local 185,700 (1,700) 184,000 140,420 --- 140,420
--------- ---------- ---------- ------------ --------- -----------
$ 394,900 $ (11,700) $ 383,200 $ ( 57,570) $ --- $ ( 57,570)
========= ========== ========== ============ ========= ===========
</TABLE>
F - 10
<PAGE> 39
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
A reconciliation of income taxes at the United States Federal statutory rate to
the effective income tax rate for the year ended December 31, 1996 and 1997 is
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
----------- -----------
<S> <C> <C>
Income taxes at the United States statutory rate $ 706,800 $(1,897,400)
State and local income taxes 162,500 140,420
Net operating loss carryforwards (476,500) ---
Valuation allowance --- 2,396,000
Allowances and accruals (9,600) (696,590)
----------- -----------
$ 383,200 $ (57,570)
=========== ===========
</TABLE>
At December 31, 1997 the Company had a net operating loss carryforward of
approximately $5.0 million which will expire in the year 2012. The significant
components of the Company's deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 568,000 $ --- $ 1,706,000
Allowances and accruals 79,000 106,000 873,000
Depreciation and amortization (9,000) (53,000) (130,000)
---------------- ---------------- ----------------
638,000 53,000 2,449,000
Valuation allowance (638,000) (53,000) (2,449,000)
---------------- ---------------- ----------------
Net deferred tax assets recorded $ --- $ --- $ ---
================ ================ ================
</TABLE>
8. OPERATING LEASES
The Company leases certain office equipment and space. Rent expense relating to
these operating leases was approximately $123,000, $580,000 and $1,010,000 in
1995, 1996 and 1997, respectively. Future minimum lease payments for the Company
under noncancelable operating leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------
<S> <C>
1998 $ 867,400
1999 936,600
2000 912,400
2001 836,000
2002 342,000
------------
$3,894,400
============
</TABLE>
9. SHAREHOLDERS' EQUITY
On June 5, 1996, a total of 136,000 Common Share warrants were exercised. On
June 11, 1996, the Company issued 3,000,000 Common Shares at $13.50 per share in
connection with an initial public offering. A portion of the proceeds from the
stock issuance were used to repay $3,250,000 of outstanding indebtedness. Upon
the closing of the initial public offering, the Company issued 148,148 Common
Shares to the former shareholders of GFI and all of the Company's outstanding
series A, B and C Convertible Preferred Shares were automatically converted into
a
F - 11
<PAGE> 40
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
total of 2,201,133 Common Shares. On July 11, 1996, an additional 400,000 Common
Shares were sold at $13.50 per share to cover underwriting over-allotments from
the initial public offering.
Convertible Preferred Shares
The Series A Preferred Shares had a cumulative dividend rate of $0.10. Dividends
accrued between the second and third anniversary of the original issue date were
paid in the form of Series A Preferred Shares. From and after the third
anniversary of the original issue date, dividends were paid in the form of
Series C Preferred Shares. Dividends on Series B Preferred Shares were
discretionary and accrued only to the extent dividends were declared on Common
Shares. The Series C Preferred Shares had a dividend rate of $0.24 and were
cumulative. Dividends on the Series C Preferred Shares were paid in Series C
Preferred Shares.
Serial Preferred Shares
At December 31, 1996 and 1997, the Company had 1,000,000 Serial Preferred
Shares, without par value, authorized, with none outstanding.
10. SHARE OPTION PLANS
The Company has four share option plans. At December 31, 1997, the Company had
reserved 955,833 Common Shares for the exercise of Common Share options. The
weighted average contractual life of all options outstanding was 8.3 years as of
December 31, 1997. The range of exercise prices for all options outstanding at
December 31, 1997 was $0.15 to $15.00; the weighted average exercise price was
$5.29. At December 31, 1997 there were 196,500 options exercisable at a weighted
average price of $2.54.
The Amended and Restated 1994 Directors' Share Option Plan ("Director Plan") was
established by the Company in July 1994. The Director Plan provided for the
granting of a maximum of 11,000 options to purchase Common Shares to directors
of the Company for their participation in Board of Directors' meetings. The
option price per share is equal to the fair market value of a Common Share on
the date of grant. Options fully vest after six months and one day from the date
of grant, and all options granted under the Director Plan expire ten years after
the grant date.
The Amended and Restated 1992 Share Incentive Plan ("1992 Plan") was approved by
the Company's shareholders on September 23, 1992. The 1992 Plan provided for the
granting of a maximum of 481,333 options to purchase Common Shares to key
employees and consultants of the Company and its affiliates. Prior to May 1995,
options to purchase 316,499 Common Shares were granted at exercise prices of
less than the fair market value of a Common Share on the date of grant. The
Company has recognized compensation expense related to these Common Share
options of $71,730 in 1995, $29,069 in 1996 and $14,356 in 1997. Options
awarded under the plan vest in equal increments over a three to five year
period commencing on the first anniversary date of the grant. If all options
vest, additional compensation expense of $5,584 will be recognized through
1998. Subsequent to April 1995, all options to purchase Common Shares awarded
under the 1992 Plan were granted at exercise prices that represented the fair
market value of a Common Share on the date of grant. All options granted under
the 1992 Plan expire ten years after the grant date.
F - 12
<PAGE> 41
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
The Amended and Restated 1996 Outside Directors' Stock Option Plan ("1996
Director Plan") was established by the Company in February 1996. The 1996
Director Plan provides for the granting of a maximum of 50,000 options to
purchase Common Shares to outside directors of the Company. The option price per
share is equal to the fair market value of a Common Share on the date of grant.
Options fully vest after one year and one day from the date of grant, and all
options granted under the 1996 Director Plan expire ten years after the grant
date.
The Amended and Restated 1996 Key Employees and Consultants Stock Option Plan
("1996 Plan") was established by the Company in February 1996. The 1996 Plan
provides for the granting of a maximum of 557,667 options to purchase Common
Shares to key employees and consultants of the Company and its affiliates.
Vesting of options awarded under the plan is determined by the Company's
Compensation Committee, as appointed by the Board of Directors, and all options
granted under the 1996 Plan expire ten years after the grant date.
F - 13
<PAGE> 42
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
Information regarding the Company's share option plans is summarized below:
<TABLE>
<CAPTION>
1992 DIRECTOR 1996 1996 DIRECTOR
PLAN PLAN PLAN PLAN
---- ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995 301,999 2,666 --- ---
Granted 190,000 6,000 --- ---
Exercised (2,500) --- --- ---
Canceled (10,666) --- --- ---
-------- -------- -------- --------
Outstanding at December 31, 1995 478,833 8,666 --- ---
Granted --- 1,334 93,800 9,000
Exercised (22,633) --- --- ---
Canceled (46,000) --- --- ---
-------- -------- -------- --------
Outstanding at December 31, 1996 410,200 10,000 93,800 9,000
Granted --- --- 278,600 9,000
Exercised (102,458) --- --- ---
Canceled (94,000) (3,167) (40,200) (6,000)
-------- -------- -------- --------
Outstanding at December 31, 1997 213,742 6,833 332,200 12,000
======== ======== ======== ========
Options available to grant at:
December 31, 1997 --- --- 245,467 38,000
======== ======== ======== ========
Average option price per share:
At December 31, 1995 $ 1.85 $ 3.45 $ --- $ ---
At December 31, 1996 1.75 4.27 11.36 9.60
At December 31, 1997 0.70 4.54 7.74 8.93
Options exercisable:
At December 31, 1995 118,183 5,666 --- ---
At December 31, 1996 200,450 10,000 --- 9,000
At December 31, 1997 158,617 6,833 19,050 12,000
Average price of options granted:
At December 31, 1995 $ 4.35 $ 3.46 $ --- $ ---
At December 31, 1996 --- 9.60 11.36 9.60
At December 31, 1997 --- --- 6.95 8.25
Average price of options exercised:
At December 31, 1995 $ 0.15 $--- $--- $---
At December 31, 1996 0.37 --- --- ---
At December 31, 1997 1.67 --- --- ---
Average price of options canceled:
At December 31, 1995 $ 0.18 $--- $--- $---
At December 31, 1996 3.39 --- --- ---
At December 31, 1997 2.81 3.68 10.78 8.93
</TABLE>
F - 14
<PAGE> 43
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
11. STOCK BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. As discussed below, the alternative
fair value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25 compensation
expense has been recognized for all options granted at less than the fair market
value of the Company's Common Shares on the date of grant (see footnote 10).
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1995, 1996 and 1997,
respectively: risk free interest rate of 5.0%, 5.0% and 6.0%, a volatility
factor of the expected market price of the Company's Common Shares of 0.53, 0.53
and 0.66, and a dividend yield of 0.0% for each year and a weighted-average
expected life of the option of seven years. Using the Black-Scholes model, the
weighted-average fair value of options granted during 1995, 1996 and 1997 was
$2.73, $6.66, and $5.18, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated value of the options is
amortized to expense over the options' vesting period. The pro forma results are
not necessarily indicative of what would have occurred had the Company adopted
Statement 123. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------- ----------------- ----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) $ (795,548) $ 1,410,028 $ (7,835,677)
Pro forma basic income (loss) per share $ (0.33) $ 0.31 $ (1.29)
Pro forma diluted income (loss) per share $ (0.33) $ 0.28 $ (1.29)
</TABLE>
12. RETIREMENT SAVINGS PLAN
The Company sponsors The Collaborative Clinical Research, Inc. Retirement
Savings Plan (the "Plan") as defined by section 401(k) of the Internal Revenue
Code of 1986, as amended. The Plan covers substantially all employees who elect
to participate. Participants may contribute up to 20% of their annual
compensation into a variety of mutual fund options or Common Shares of the
Company's stock. Matching and profit sharing contributions by the Company are
discretionary.
13. ACQUISITIONS
During the year ended December 31, 1996, the Company completed two acquisitions.
Effective January 31, 1996, the Company acquired GFI, located in Evansville,
Indiana. The purchase price was $6.0 million and consisted of
F - 15
<PAGE> 44
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
$2.0 million each of cash, Common Shares (148,148) and notes payable. The notes
payable were paid in full in June 1996. Effective October 25, 1996, WCE, in
Indianapolis, Indiana was acquired by the Company for $3.0 million in cash. The
excess purchase price over the fair value of the net assets acquired was
recorded as goodwill in both acquisitions.
Both acquisitions have been accounted for under the purchase method of
accounting, and the consolidated results of operations include the results of
each business from the date of acquisition. Unaudited pro forma data for the
year ended December 31, 1995 and 1996 as though the Company had completed its
initial public offering and used the net proceeds to repay approximately $3.25
million in indebtedness and purchase GFI and WCE at the beginning of 1995 are
set forth below. The pro forma operating results are not necessarily indicative
of what would have occurred had the transactions taken place on January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------- -----------------
1995 1996
---- ----
<S> <C> <C>
Pro forma revenue $ 19,907,997 $ 28,769,847
Pro forma net income (loss) $ (1,380,034) $ 1,469,184
Pro forma basic income (loss) per share $ (0.46) $ 0.24
Pro forma diluted income (loss) per share $ (0.46) $ 0.22
</TABLE>
14. INVESTMENT IN HRI
In June 1995, the Company entered into an equally owned joint venture, Health
Research Innovations L.L.C. ("HRI"), with Pharmaceutical Marketing Services,
Inc. ("PMSI") to collect health care information. Through HRI, the Company and
PMSI marketed their health care data collection and analysis capabilities to the
health care industry. During 1997, the joint venture was terminated. The Company
accounted for its investment in HRI using the equity method.
15. NET INCOME (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement 128, which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported net income (loss) per share. In addition, effective February
3, 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 98. SAB 98 revises the views of the staff contained in certain topics
of the staff accounting bulletin series, including SAB 83, "Earnings Per Share
Computations in an Initial Public Offering," to be consistent with the
provisions of Statement 128. All earnings per share amounts for all periods have
been restated to conform to the requirements of Statement 128 and SAB No. 98.
F - 16
<PAGE> 45
COLLABORATIVE CLINICAL RESEARCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
================================================================================
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) used in the calculation of
basic and diluted earnings per share $ (752,725) $ 1,646,610 $(7,382,603)
=========== =========== ===========
Denominator for basic net income (loss) per
share - weighted average Common Shares
outstanding 2,464,176 4,625,924 6,384,469
Effect of dilutive Common Share options and
warrants --- 426,570 ---
----------- ----------- -----------
Denominator for diluted net income (loss)
per share 2,464,176 5,052,494 6,384,469
=========== =========== ===========
Basic net income (loss) per share $ (0.31) $ 0.36 $ (1.16)
=========== =========== ===========
Diluted net income (loss) per share $ (0.31) $ 0.33 $ (1.16)
=========== =========== ===========
</TABLE>
Certain Common Share options were excluded from the computation of diluted
earnings per share since the exercise prices were greater than the average
market price of Common Shares which would have an antidilutive effect on net
income (loss) per share.
16. QUARTERLY DATA (UNAUDITED)
Selected quarterly data is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- -------- -----------
<S> <C> <C> <C> <C>
Revenue $ 5,303 $ 6,842 $ 7,176 $ 6,394
Gross profit 1,290 2,012 2,294 2,143
Income from operations 98 347 411 136
Net income 56 288 709 594
Net income per share: basic 0.02 0.09 0.11 0.09
Net income per share: diluted 0.02 0.08 0.11 0.09
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- -------- -----------
<S> <C> <C> <C> <C>
Revenue $ 4,578 $ 4,459 $ 3,647 $ 4,643
Gross profit 1,407 1,240 838 1,205
Loss from operations (797) (1,079) (1,957) (5,496)
Net loss (418) (487) (1,462) (5,016)
Net loss per share: basic (0.07) (0.08) (0.23) (0.78)
Net loss per share: diluted (0.07) (0.08) (0.23) (0.78)
</TABLE>
Note: Net income per share for the year ended December 31, 1996 does not equal
the sum of the quarterly net income per share amounts because of the Company's
initial public offering in 1996.
F - 17
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
2.1 Stock Purchase Agreement among GFI, Ohio Valley IRB, Inc., Debra S. Adamson,
the Revocable Trust of Debra S. Adamson, UAT dated August 26, 1992, Mary L.
Westrick and the Company, dated February 5, 1996 (A)
2.2 Asset Purchase Agreement, dated October 16, 1996, between Collaborative
Holdings, Inc. and Walker Information, Inc. (B)
3.1 Fifth Amended and Restated Articles of Incorporation (C)
3.2 Third Amended and Restated Code of Regulations (C)
4.1 Specimen Certificate of the Company's Common Shares, without par value (A)
4.2 Credit Agreement between the Company and Key Bank, dated October 1, 1997
4.3 Second Amended and Restated Registration Agreement, dated July 15,1994,
as amended on June 1, 1995 and February 5, 1996 (A)
10.1 Amended and Restated 1994 Directors' Share Option Plan (D)
10.2 Amended and Restated 1996 Outside Directors' Stock Option Plan (D)
10.3 Amended and Restated 1992 Share Incentive Plan (D)
10.4 Amended and Restated 1996 Key Employees' and Consultants
Stock Option Plan (D)
10.5 Form of Affiliation Agreement by and among the Company and physicians (A)
10.6 Form of Affiliation Agreement by and among the Company and research institutions (A)
10.7 Form of Indemnification Agreement (A)
10.8 Limited Liability Company Agreement, dated as of June 1, 1995, by and among the
Company and PMSI (A)
10.9 Employment Agreement between the Company and Richard J. Kasmer, dated
June 14, 1994 (A)
10.10 Employment Agreement between the Company and Jeffrey A. Green, dated
July 1, 1994 (A)
10.11 Employment Agreement between the Company and William H. Stigelman, Jr.,
dated July 15, 1994 (A)
10.12 Employment Agreement between the Company and Terry C. Black,
dated July 20, 1994 (A)
10.13 Employment Agreement between the Company and Philip A. Stark,
dated May 2, 1997 (E)
</TABLE>
E - 1
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.14 Employment Agreement between the Company and Patrick G. Chassaigne,
dated July 6, 1997 (F)
10.15 Employment Agreement between the Company and Herbert L. Hugill,
dated December 8, 1997
10.16 Collaborative Clinical Research, Inc. Retirement Savings Plan (G)
10.17 Lease Agreement between St. Mary's Medical Center of Evansville, Inc. and GFI
Pharmaceutical Services, Inc., dated January 5, 1996 (A)
10.18 Supplemental Lease Agreement between St. Mary's Medical Center of Evansville, Inc.
and GFI Pharmaceutical Services, Inc., dated June 28, 1996 (C)
10.19 License Agreement, dated October 16, 1996, between Collaborative Holdings, Inc. and
Walker Information, Inc. (B)
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
(A) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-1 (Registration statement No.
333-2140).
(B) Incorporated herein by reference to the appropriate exhibit to the
Company's Current Report on Form 8-K, dated October 25, 1996 (Commission
File No. 000-20699).
(C) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended June 30, 1996
(Commission file No. 000-20699).
(D) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-8 (Registration statement No.
333-16061).
(E) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended June 30, 1997
(Commission file No. 000-20699).
(F) Incorporated herein by reference to the appropriate exhibit to the
Company's Form 10-Q for the quarterly period ended September 30, 1997
(Commission file No. 000-20699).
(G) Incorporated herein by reference to the appropriate exhibit to the
Company's Registration Statement on Form S-8 (Registration statement No.
333-26251).
E - 2
<PAGE> 1
EXHIBIT 4.2
CREDIT AGREEMENT
----------------
THIS AGREEMENT is made by and between the Company (as herein defined)
and the Lender (as herein defined).
In consideration of the covenants and agreements contained herein, the
Company and the Lender hereby mutually agree as follows:
ARTICLE I. DEFINITIONS
----------------------
SECTION 1.1. GENERAL. Any accounting term used but not specifically
defined herein shall be construed in accordance with GAAP. The definition of
each agreement, document, and instrument set forth in Section 1.2 hereof shall
be deemed to mean and include such agreement, document, or instrument as
amended, restated, or modified from time to time.
SECTION 1.2. DEFINED TERMS. As used in this Agreement:
"ADVISED LINE OF CREDIT" shall mean an uncommitted line of credit in
the amount of Three Million Dollars ($3,000,000.00) which, if issued shall be
subject to any reduction of the commitment of the Lender to make loans hereunder
pursuant to Section 2.1 hereof, and upon satisfaction of the following
conditions:
(a) No Event of Default or Potential Event shall have occurred.
(b) The Company shall have paid Lender any and all fees required
to issue credit on this Advised Line of Credit.
(c) Lender, in its sole discretion after application of prudent
lending guidelines, shall have approved issuance of the
Advised Line of Credit.
"APPLICABLE MARGIN" shall mean two percent (2%)
"BANK" shall mean Key Bank National Association, a national banking
association with its main office at 127 Public Square, Cleveland, Ohio
44114-1306, and its successors and assigns.
"BUSINESS DAY" means a day of the year on which banks are not required
or authorized to close in Cleveland, Ohio and, if the applicable Business Day
relates to any Libor Rate Loan, on which dealings are carried on in the London
interbank Eurodollar market.
"COMMITTED AMOUNT" shall mean Two Million Dollars ($2,000,000.00), the
amount of the Revolving Line of Credit, subject to any reduction of the
commitment of the Lender to make Loans hereunder pursuant to Section 2.1 upon
satisfaction of the following conditions:
(a) No Event of Default or Potential Event shall have occurred.
(b) The Company shall have paid Lender the fees set forth in
Section 2.6.
"COMPANY" shall mean Collaborative Clinical Research, Inc. ("CCLR") an
Ohio corporation, with its principal office located at 20600 Chagrin Blvd.,
Suite 1050, Cleveland, Ohio 44122 and its successors.
1
<PAGE> 2
"ELIGIBLE ACCOUNTS RECEIVABLES" shall be defined as accounts receivable
less than or equal to ninety (90) days old, net of allowances for doubtful
accounts and net of advances on contracts.
"ENVIRONMENTAL LAW" means any federal, state, or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to, or
imposing liability upon a Person in connection with the use, release or disposal
of any hazardous toxic or dangerous substance, waste or material.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"EVENT OF DEFAULT" shall mean any one or more of the occurrences
described in ARTICLE VII hereof.
"FUNDED DEBT" shall mean all Indebtedness which matures more than one
year after the date such Indebtedness was incurred, less any portion thereof
that is payable within twelve (l2) months following the date as of which the
calculation is made.
"GAAP" shall mean generally accepted accounting principles as then in
effect, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, consistently applied.
"INDEBTEDNESS" shall mean for any Person (i) all obligations to repay
borrowed money, direct or indirect, incurred, assumed, or guaranteed, (ii) all
obligations for the deferred purchase price of capital assets excluding trade
payable, (iii) all obligations under conditional sales or other title retention
agreements, and (iv) and all lease obligations which have been or should be
capitalized on the books of such Person and (v) all guarantees by such Person of
any of the foregoing.
"INTEREST PERIOD" means, with respect to any Libor Rate Loan, the
period commencing on the date such Loan is made, continued, or converted and
ending on the last day of such period as selected by the Company pursuant to the
provisions below and, thereafter, each subsequent period commencing on the last
day of the immediately preceding Interest Period and ending on the last day of
such period as selected by the Company pursuant to the provisions below. The
duration of each Interest Period for any Libor Rate Loan shall be thirty (30)
days provided that whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall occur on the next succeeding Business Day, provided that if such extension
of time would cause the last day of such Interest period for a Libor Rate Loan
to occur in the next following calendar month, the last day of such Interest
Period shall occur on the next preceding Business Day.
"LENDER" shall mean Key Corporate Capital Inc. with its chief
administrative office at 127 Public Square, Cleveland, Ohio 44114-1306, and its
successors and assigns.
"LIBOR RATE" means for any Interest Period for any Libor Advance or
Libor Rate Loan, an interest rate per annum (rounded upwards to the next higher
whole multiple of 1/16% if such rate is not such a multiple) equal at all times
during such Interest Period to the rate per annum (rounded upward to the next
higher whole multiple of 1/16% if such rate is not such a multiple) at which
deposits in Untied States dollars are offered at 11:00 a.m. (London, England
time) (or as soon thereafter as is reasonably practicable) by prime banks in the
London interbank eurodollar market two Business Days prior to the first day of
such Interest Period in an amount and maturity of such Libor Advance or Libor
Rate Loan.
"LIBOR RATE LOAN" means any Loan that bears interest with reference to
the Libor Rate.
"LIBOR RESERVE REQUIREMENTS" means, for any Interest Period for any
Libor Rate Loan, the maximum reserves (whether basic, supplemental, marginal,
emergency, or otherwise) prescribed by the Board of Governors of the Federal
Reserve System (or any successor) with respect to liabilities or assets
consisting of or including "Eurocurrency liabilities" (as defined in Regulation
D of the Board of Governors of the Federal Reserve System) having a term equal
to such Interest Period.
2
<PAGE> 3
"LIEN" shall mean any mortgage, security interest, lien, charge,
encumbrance on, pledge or deposit of, or conditional sale or other title
retention agreement with respect to any property or asset.
"LOAN" OR "LOANS" shall mean the credit to the Company extended by the
Lender in accordance with Section 2.1(a) and (b) hereof.
"LOAN DOCUMENTS" shall mean this Agreement, the Note, the Security
Instruments, if any, and any other documents relating thereto.
"MARGIN STOCK" shall have the meaning given to it under Regulation U of
the Board of Governors of the Federal Reserve System, as amended from time to
time.
"MULTIEMPLOYER PLAN" shall mean a Plan described in ERISA which covers
employees of the Company and employees of any other Person, which together would
be treated as a single employer for purposes of ERISA.
"NOTE OR NOTES" shall mean the promissory note, in the form of Exhibits
A & B attached hereto, signed and delivered by the Company to evidence its
Indebtedness to the Lender in accordance with Section 2.1 hereof.
"PERSON" shall mean any natural person, corporation (which shall be
deemed to include business trust), association, limited liability company,
partnership, joint venture, political entity, or political subdivision thereof.
"PLAN" shall mean any plan (other than a Multiemployer Plan) defined in
ERISA in which the Company or any Subsidiary is, or has been at any time during
the preceding two (2) years, an "employer" or a "substantial employer" as such
terms are defined in ERISA.
"POTENTIAL DEFAULT" shall mean any condition, action, or failure to act
which, with the passage of time, service of notice, or both, will constitute an
Event of Default under this Agreement.
"PRIME RATE" shall mean that interest rate established from time to
time by the Lender as the Lender's Prime Rate, whether or not such rate is
publicly announced; the Prime Rate may not be the lowest interest rate charged
by Lender for commercial or other extensions of credit.
"PRIME RATE LOAN" means any Loan that bears interest with reference to
the Prime Rate.
"REVOLVING LINE OF CREDIT" shall mean the credit in the Committed
Amount evidenced by the Note in the form of Exhibit "A".
"SECURITY" shall mean Two Million Dollars ($2,000,000.00) that will be
invested in an account at Key Investment, Inc. and will be subject to KeyBank
Credit Policy advance rates as set forth in Section 5.9 hereof.
Lender shall also have first security interest in accounts receivable.
"SECURITY INSTRUMENT(S)" shall mean the written document(s) listed in
Exhibit C attached hereto, signed and delivered from time to time to the Lender
in connection with Indebtedness owed by Company to the Lender.
"SUBORDINATED DEBT" shall mean Indebtedness of a Person which is
subordinated, in a manner satisfactory to the Bank, to all Indebtedness owing to
the Lender.
"SUBSIDIARY" shall mean any Person of which more than fifty percent
(50%) of (i) the voting stock entitling the holders thereof to elect a majority
of the Board of Directors, managers, or trustees thereof, or (ii) the interest
in the capital or profits of such Person, which at the time is owned or
controlled, directly or indirectly, by the Company or one or more other
Subsidiaries.
"TERMINATION DATE" shall mean January 31, 2000, or such earlier date on
which the commitment of the Lender to make Loans under the Revolving Line of
Credit shall have been terminated pursuant to ARTICLE VIII of
3
<PAGE> 4
this Agreement. The credit facility may be extended for additional one (1) year
periods at Lender's sole discretion.
"TYPE" means, when used in respect of any Advance, the LIBOR Rate or
the Prime Rate in effect in respect of such Advance.
The foregoing definitions shall be applicable to the singulars and
plurals of the foregoing defined terms.
ARTICLE II. CREDIT FACILITY
---------------------------
SECTION 2.1. AMOUNT OF CREDIT. The Lender hereby agrees, subject to the
terms and conditions of this Agreement, to make, continue, and convert Loans to
the Company as follows:
(a) The Lender will make one or more Loans to the Company under
the Revolving Line of Credit on the date of this Agreement in
an aggregate principal amount not to exceed Two Million
dollars ($2,000,000.00) outstanding at any one time. The
Lender during the loan period, upon the request of the
Company, shall also continue Loans of any type or any portion
thereof or convert Loans of one type or any portion thereof,
into Loans of another type at appropriate intervals.
(b) The Lender may in its sole and absolute discretion make one or
more Loans to the Company on an Advised Line of Credit, in an
aggregate principal amount not to exceed Three Million Dollars
($3,000,000.00) outstanding at any one time. The Lender may in
its discretion continue this Loan.
(c) The Lender will make one or more Loans to the Company under
the Revolving Line Credit from time to time on and after the
date of this Agreement through and including the Termination
Date, in an aggregate principal amount not to exceed the
Committed Amount outstanding at any one time. The Lender shall
upon the request of the Company continue Loans of any type or
any portion thereof or convert Loans of any type or any
portion thereof into Loans of another type at appropriate
intervals. The Company may borrow, prepay, and reborrow such
Loans; provided, however, that the Company may prepay any
Libor Rate Loan only on the last day of the applicable
Interest Period for such Loan. The Company may at any time or
from time to time, upon not less than ninety (90) Business
Days' prior notice made by telegraph, telex, or telephone and
confirmed in a writing delivered to the Lender, terminate or
reduce permanently the commitment of the Lender to make Loans
pursuant to this Section 2.1(a) hereof by the amount of
$100,000.00 or any integral multiple thereof; provided that
the Company shall immediately pay to the Lender the amount, if
any, by which the aggregate principal amount of such Loans
outstanding exceeds such reduced commitment of the Lender at
that time. If, however, after giving effect to any such
payment any Libor Rate Loans would be prepaid prior to the end
of their respective Interest Periods, the notice of the
termination or permanent reduction in the commitment of the
Lender to make Loans pursuant to Section 2.1(a) shall be
deemed to be the Company's request that such termination or
reduction be effective on the last day of such Interest
Periods. Concurrently with such reduction or termination, the
company shall pay the unpaid commitment fee that shall have
accrued on the portion of such terminated or reduced
commitment.
(d) Each Loan that is made as or converted into a Prime Rate Loan
shall be made or converted on such Business Day in such amount
(equal to One Hundred Thousand Dollars ($100,000.00) or an
integral multiple thereof) as the Company shall request by
written notice given to the Lender no later than 11:00 a.m.
(Cleveland, Ohio time) on the date of disbursement of or
conversion into the requested Prime Rate Loan, each Loan that
is made or continued as or converted into a Libor Rate Loan
shall be made, continued, or converted on such Business Day,
in such amount (equal to One Hundred Thousand Dollars
($100,000.00) or an integral multiple thereof), and with such
an interest Period as the Company shall request by written
notice given to the Lender no later than 11:00 a.m.
(Cleveland, Ohio time) on the third Business Day prior to the
date of disbursement or continuation of or conversion into the
requested Libor Rate Loan. Each written notice of any
4
<PAGE> 5
Libor Rate Loan shall be irrevocable and binding on the
Company and the Company shall indemnify the Lender against any
loss or expense incurred by the Lender as a result of any
failure by the Company to consummate such transaction,
including, without limitation, any loss (including loss of
anticipated profits) or expense incurred by reason of
liquidation or re-employment of deposits or other funds
acquired by the Lender to fund the Loan. A certificate as to
the amount of such loss or expense submitted by the Lender to
the Company shall be conclusive and binding for all purposes,
absent error. In the event that the Company fails to provide
the Lender with the required written notice, the Company shall
be deemed to have given a written notice that such Loan shall
be converted to a Prime Rate Loan on the last day of the
applicable Interest Period. All Loans shall be evidenced by
the Note, dated the date hereof. The Note shall be a master
note, and the principal amount of all loans outstanding shall
be evidenced by the Note or any ledger or other record of the
Lender, which shall be presumptive evidence of the principal
owing and unpaid on the Note.
(e) The Company shall repay to the Lender on the Termination Date,
the principal amount of all Loans under the Revolving Line of
Credit evidenced by the Note that are outstanding on the
Termination Date.
(f) The Company shall repay to the Lender on the earlier of July
31, 1998 or demand, the amount of all Loans under the Advised
Line of Credit.
SECTION 2.2. INTEREST RATE.
--------------
(a) Each Libor Rate Loan shall bear interest at a fixed rate per
annum equal to the Libor Rate for such Interest Period plus
the Applicable Margin.
(b) Each Prime Rate Loan shall bear interest at a floating rate
per annum equal to Prime Rate. In the event of any change in
the Prime Rate, the rate of interest upon each Prime Rate Loan
shall be adjusted to immediately correspond with such change,
except such interest rate shall not exceed the highest rate
permitted by law.
SECTION 2.3. INTEREST PAYMENTS. The Company shall pay to the Lender
interest on the unpaid principal balance of each Prime Rate Loan monthly
commencing on April 1, 1998 or on the date such Loan is converted to a Libor
Rate Loan. The Company shall pay to the Lender interest on the unpaid principal
balance of each Libor Rate loan outstanding on the date such Loan is converted
to a Prime Rate Loan, or the last day of the applicable Interest Period of such
Loan, whichever is earlier. After maturity, whether by acceleration or
otherwise, the principal of the Loans and the unpaid interest and fees thereon
shall bear interest at three percent (3%) in excess of the highest applicable
interest rate provided herein.
SECTION 2.4. PREPAYMENT. The Company may prepay any Prime Rate Loans in
whole, or in part, in the principal amount of $50,000.00 or any integral
multiple thereof, at any time or times upon not less than one (1) Business Day's
prior notice made by telephone to the Lender. The Company may prepay any Libor
Rate Loan, in whole or in part, in the principal amount of $50,000.00 or any
integral multiple thereof only on the last day of the Interest Period applicable
to such Loan upon not less than one (1) Business Day's prior written notice
given to the Lender.
SECTION 2.5. USE OF PROCEEDS. The Loans shall be used as working
capital. Any excess proceeds shall be used by the Company for general operating
purposes consistent with the provisions of this Agreement.
SECTION 2.6. FEES. The Company shall pay to the Lender:
(a) An origination fee equal to Five Thousand Dollars ($5,000.00)
for the Revolving Credit Line of Credit payable on the date of
execution of this agreement.
5
<PAGE> 6
(b) A commitment fee computed at the rate of 25 basis points on
the unused portion of the Committed Amount. The commitment fee
will be paid quarterly in arrears.
(c) Prior to maturity (whether acceleration or otherwise), for
each payment of principal or interest not paid when due, a
late fee equal to five percent (5.0%) of such payment shall be
charged.
(d) Out of pocket expenses, including Lender's legal fees will be
paid by the Company on the date of execution of this
Agreement.
SECTION 2.7 COMPUTATION OF INTEREST AND FEES. Interest on Loans shall
be computed on the basis of a year of 360 days and paid for the actual number of
days elapsed. Interest on unpaid fees, if any, hereunder shall be computed on
the basis of a year of 360 days and paid for the actual number of days elapsed.
SECTION 2.8 ADDITIONAL COSTS.
-----------------
(a) If, due to either (i) the introduction of, or any change in,
or in the interpretation of, any law or regulation or (ii) the
compliance with any guideline or request from any central bank
or other governmental authority (whether or not having the
force of law), there shall be any increase in the cost to the
Lender of making, funding or maintaining Loans, then the
Company shall from time to time, upon demand by the Lender pay
to the Lender additional amounts sufficient to reimburse the
Lender for any such additional costs. A certificate of the
Lender submitted to the Company as to the amount of such
additional costs, shall be conclusive and binding for all
purposes, absent manifest error. Upon notice from the Company
to the Lender within five (5) Business Days after the Lender
notifies the Company of any such additional costs pursuant to
this Section 2.8(a), the Company may either (A) prepay in full
all Loans of any types so affected then outstanding, together
with interest accrued thereon to the date of such prepayment,
or (B) convert all Loans of any types so affected then
outstanding into Loans of any other type not so affected upon
not less than four (4) Business Days' notice to the Lender. If
any such prepayment or conversion of any Libor Rate Loan
occurs on any day other than the last day of the applicable
Interest Period for such Loan, the Company also shall pay to
the Lender such additional amounts sufficient to indemnify the
Lender against any loss, cost, or expense incurred by the
Lender as a result of such prepayment or conversion,
including, without limitation, any loss (including loss of
anticipated profits), cost, or expense incurred by reason of
the liquidation or reemployment of deposits or other funds
acquired by the Lender to fund any such Loan, and a
certificate as to the amount of any such loss, cost, or
expense submitted by the Lender to the Company shall be
conclusive and binding for all purposes, absent manifest
error.
(b) If either (i) the introduction of, or any change in, or in the
interpretation of, any law or regulation or (ii) the
compliance with any guideline or request from any central bank
or other governmental authority (whether or not having the
force of law), affects or would affect the amount of capital
required or expected to be maintained by the Lender or any
corporation controlling the Lender and the Lender determines
that the amount of such capital is increased by or based upon
the existence of the Loans (or commitment to make the Loans)
and other extensions of credit (or commitments to extend
credit) of similar type, then, upon demand by the Lender, the
Company shall pay to the Lender from time to time as specified
by the Lender additional amounts sufficient to compensate the
Lender in the light of such circumstances, to the extent that
the Lender reasonably determines such increase in capital to
be allocable to the existence of the Lender's Loans (or
commitment to make the Loans). A certificate of the Lender
submitted to the Company as to such amounts shall be
conclusive and binding for all purposes, absent manifest
error. Upon notice from the Company to the Lender within five
(5) Business Days after the Lender notifies the Company of any
such additional costs pursuant to this Section 2.8(b), the
Company may either (A) prepay in full all Loans of any types
so affected then outstanding, together with interest accrued
thereon to the date of such prepayment, or (B) convert all
Loans of any types so affected
6
<PAGE> 7
then outstanding into Loans of any other type not so affected
upon not less than four (4) Business Days' notice to the
Lender. If any such prepayment or conversion of any Libor Rate
Loan occurs on any day other than the last day of the
applicable Interest Period for such Loan, the Company also
shall pay to the Lender such additional amounts sufficient to
indemnify the Lender against any loss, cost, or expense
incurred by the Lender as a result of such prepayment or
conversion, including, without limitation, any loss (including
loss of anticipated profits), cost, or expense incurred by
reason of the liquidation or reemployment of deposits or other
funds acquired by the Lender to fund any such Loan, and a
certificate as to the amount of any such loss, cost, or
expense submitted by the Lender to the Company shall be
conclusive and binding for all purposes, absent manifest
error.
SECTION 2.9. ILLEGALITY. Notwithstanding any other provision of this
Agreement, if the introduction of or any change in or in the interpretation of
any law or regulation shall make it unlawful, or any central bank or other
governmental authority shall assert that it is unlawful, for the Lender to
perform its obligations hereunder to make, continue, or convert Libor Rate Loans
hereunder, then, (a) on notice thereof by the Lender to the Company, the
obligation of the Lender to make or continue a Loan of a type so affected or to
convert any type of Loan into a Loan of a type so affected shall terminate and
the Lender shall thereafter be obligated to make Prime Rate Loans whenever any
written notice requests any type of Loans so affected and (b) upon demand
therefor by the Lender to the Company, the Company shall either (i) forthwith
prepay in full all Loans of the type so affected then outstanding, together with
interest accrued thereon or (ii) request that the Lender, upon four (4) Business
Days' notice, convert all Loans of the type so affected then outstanding into
Loans of a type not so affected. If any such prepayment or conversion of any
Libor Rate Loan occurs on any day other than the last day of the applicable
Interest Period for such Loan, the Company also shall pay to the Lender such
additional amounts sufficient to indemnify the Lender against any loss, cost, or
expense incurred by the Lender as a result of such prepayment or conversion,
including, without limitation, any loss (including loss of anticipated profits),
cost, or expense incurred by reason of the liquidation or reemployment of
deposits or other funds acquired by the Lender to fund any such Loan, and a
certificate as to the amount of any such loss, cost, or expense submitted by the
Lender to the Company shall be conclusive and binding for all purposes, absent
manifest error.
ARTICLE III. WARRANTIES
-----------------------
The Company represents and warrants to the Lender (which
representations and warranties will survive the delivery of the Note and all
extensions of credit under this Agreement) that:
SECTION 3.1. ORGANIZATION; CORPORATE POWER.
------------------------------
(a) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction in
which it is incorporated;
(b) The Company has the corporate power and authority to own its
properties and assets and to carry on its business as now
being conducted;
(c) The Company is qualified to do business in every jurisdiction
in which the ownership or leasing of its property or the doing
of business requires such qualification; and
(d) The Company has the corporate power to execute, deliver, and
perform its Loan Documents and to borrow hereunder.
SECTION 3.2. AUTHORIZATION OF BORROWING. The execution, delivery, and
performance of the Loan Documents and the Loans by the Company have been duly
authorized by all requisite corporate action.
SECTION 3.3. NO CONFLICT. The execution, delivery, and performance of
the Loan Documents will not (a) violate any provision of law, the Articles of
Incorporation, the Code of Regulations, or By-Laws of the Company, (b) violate
any order of any court or other agency of any federal or state government or any
provision of
7
<PAGE> 8
any indenture, agreement, or other instrument to which the Company is a party or
by which it or any of its properties or assets are bound, (c) conflict with,
result in a breach of, or constitute (with passage of time or delivery of
notice, or both), a default under any such indenture, agreement, or other
instrument, or (d) result in the creation or imposition of any Lien or other
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company except in favor of the Lender.
SECTION 3.4. EXECUTION OF LOAN DOCUMENTS. The Loan Documents have been
duly executed and are valid and binding obligations of the Company fully
enforceable in accordance with their respective terms.
SECTION 3.5. FINANCIAL CONDITION. The Company has furnished to the
Lender true and correct financial statements prepared by a certified public
accountant as of the end of the Company's fiscal year which ended December 31,
1996, which audited financial statements present fairly the Company's financial
condition at such date, and there has been no material adverse change in the
Company's financial condition since that date.
SECTION 3.6. LIABILITIES; LIENS. Except as set forth in the schedules
herein attached, the Company has made no investment in, advance to, or guarantee
of, the obligations of any Person nor are the Company's assets and properties
subject to any claims, liabilities, Liens, or other encumbrances, except as
disclosed in the financial statements and related notes thereto referred to in
Section 3.5 hereof.
SECTION 3.7. LITIGATION. Except as set forth in the schedules herein
attached, there is no action, suit, examination, review, or proceeding by or
before any governmental instrumentality or agency now pending or, to the
knowledge of the Company, threatened against the Company or against any property
or rights of the Company, which, if adversely determined, would materially
impair the right of the Company to carry on business as now being conducted or
which would materially adversely affect the financial condition of the Company,
except for the litigation, if any, described in the notes to the financial
statements referred to in Section 3.5 hereof.
SECTION 3.8. PAYMENT OF TAXES. Federal income tax returns of the
Company have been examined by the Internal Revenue Service for all years prior
to and including its fiscal year which ended December 31, 1996, and all
deficiencies finally resulting from such examinations have been discharged or
proper amounts have been set aside on the Company's books to cover such
deficiencies. The Company has filed, or caused to be filed, all Federal, state,
local, and foreign tax returns required to be filed, and has paid, or caused to
be paid, all taxes as are shown on such returns, or on any assessment received
by the Company, to the extent that such taxes become due, except as otherwise
contested in good faith. The Company has set aside proper amounts on its books,
determined in accordance with GAAP, for the payment of all taxes for the years
that have not been audited by the respective tax authorities or for taxes being
contested by the Company.
SECTION 3.9. AGREEMENTS. Except as set forth in the schedules herein
attached, the Company is not in default in the performance, observance, or
fulfillment of any of the obligations, covenants, or conditions contained in any
agreement or instrument to which it is a party, which default materially
adversely affects the business, properties, assets, or financial condition of
the Company.
SECTION 3.10. REGULATORY STATUS. Neither the making nor the performance
of this Agreement, nor any extension of credit hereunder, requires the consent
or approval of any governmental instrumentality or political subdivision
thereof, any other regulatory or administrative agency, or any court of
competent jurisdiction.
SECTION 3.11. FEDERAL RESERVE REGULATIONS: USE OF LOAN PROCEEDS. The
Company is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying any
Margin Stock. No part of the proceeds of the Loans will be used, directly or
indirectly, for a purpose which violates any law, rule or regulation of any
governmental body, including without limitation the provisions of Regulations G,
U, or X of the Board of Governors of the Federal Reserve System, as amended. No
part of the proceeds of the Loans will be used, directly or indirectly, to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock. Following application of the
proceeds of each Loan, not more than 25 percent of the value of the assets of
the Company and its Subsidiaries on a consolidated basis will be Margin Stock.
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<PAGE> 9
SECTION 3.12. SUBSIDIARIES. The Company has no Subsidiaries, other than
as set for in the schedules herein attached herein.
SECTION 3.13. LICENSES. The Company has all licenses, franchises,
consents, approvals, or authorizations required in connection with the conduct
of the business of the Company, the absence of which would have a material
adverse affect on the conduct of the Company's business, and all such licenses,
franchises, consents, approvals, and authorizations are in full force and
effect.
SECTION 3.14. ERISA. The Company does not maintain, sponsor, or
participate in any Plan or Multiemployer Plan insured, or required to be
insured, by the Pension Benefit Guaranty Corporation.
SECTION 3.15. ENVIRONMENTAL MATTERS. The Company is in compliance with
all Environmental Laws and all applicable federal, state and local health and
safety laws, regulations, ordinances or rules, except to the extent that any
non-compliance will not, in the aggregate, have a materially adverse effect on
the Company or the ability of the Company to fulfill its obligations under this
Agreement or the Note.
SECTION 3.16. SOLVENCY. The Company has received consideration which is
the reasonable equivalent value of the obligations and liabilities that the
Company has incurred to Bank. The Company is not insolvent as defined in any
applicable state or federal statute, nor will the Company be rendered insolvent
by the execution and delivery of this Agreement or the Note to Lender. The
Company is not engaged or about to engage in any business or transaction for
which the assets retained by it shall be an unreasonably small capital, taking
into consideration the obligations to Lender incurred hereunder. The Company
does not intend to, nor does it believe that it will, incur debts beyond its
ability to pay them as they mature.
ARTICLE IV. CONDITIONS OF LENDING
---------------------------------
SECTION 4.1. FIRST LOAN. The obligation of the Lender to make a Loan
shall be subject to satisfaction of the following conditions, unless waived in
writing by the Lender: (a) all legal matters and Loan Documents incident to the
transactions contemplated hereby shall be satisfactory, in form and substance,
to Lender's counsel; (b) the Lender shall have received (i) certificates by an
authorized officer of the Company, upon which the Lender may conclusively rely
until superseded by similar certificates delivered to the Lender, certifying (1)
all requisite action taken in connection with the transactions contemplated
hereby and (2) the names, signatures, and authority of the Company's authorized
signers executing the Loan Documents, and (ii) such other documents as the
Lender may reasonably require to be executed by, or delivered on behalf of, the
Company; (c) the Lender shall have received the Note with all blanks
appropriately completed, executed by an authorized signer of the Company; (d)
the Company shall have paid to the Lender the fee(s) then due and payable in
accordance with ARTICLE II of this Agreement; (e) the Lender shall have received
the written opinion of legal counsel selected by the Company and satisfactory to
the Lender, dated the date of this Agreement, in the form of Exhibit C attached
to this Agreement, and covering such other matter(s) as the Lender may
reasonably require; (f) the Lender shall have received written instructions by
the Company with respect to disbursement of the proceeds of the Loan; (g) the
Lender shall have received all Security Instruments duly executed by all parties
thereto; provided, the obligation of the Lender to make any Loan under the
Advised Line of Credit is subject to the sole and absolute discretion of the
Lender.
SECTION 4.2. EACH LOAN. The obligation of the Lender to make any Loan
shall be subject to compliance with Section 4.l herein and also subject to
satisfaction of the following conditions that at the date of making such Loan,
and after giving effect thereto: (a) no Event of Default or Potential Default
shall have occurred and be then continuing and (b) each representation and
warranty set forth in ARTICLE III above is true and correct as if then made.
ARTICLE V. AFFIRMATIVE COVENANTS
--------------------------------
As long as credit is available hereunder or until all principal of and
interest on the Note have been paid in full:
9
<PAGE> 10
SECTION 5.1. ACCOUNTING; FINANCIAL STATEMENTS AND OTHER INFORMATION.
The Company will maintain a standard system of accounting, established and
administered in accordance with GAAP consistently followed throughout the
periods involved, and will set aside on its books for each fiscal quarter the
proper amounts or accruals for depreciation, obsolescence, amortization, bad
debts, current and deferred taxes, prepaid expenses, and for other purposes as
shall be required by GAAP. The Company will deliver to the Lender:
(a) As soon as practicable after the end of each fiscal quarter in
each year, except the last, and in any event within forty-five
(45) days thereafter, a balance sheet of the Company as of the
end of such quarter, and statements of income, changes in
financial position, and shareholders' equity of the Company
for such quarter, certified as complete and correct by the
principal financial officer of the Company, subject to changes
resulting from year-end adjustments;
(b) As soon as practicable after the end of each fiscal year, and
in any event within one hundred twenty (120) days thereafter,
a balance sheet of the Company as of the end of such year, and
statements of income, changes in financial position, and
shareholders' equity of the Company for such year, setting
forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and accompanied
by a report and an unqualified opinion of independent
certified public accountants of recognized standing, selected
by the Company and satisfactory to the Bank;
(c) Together with each set of financial statements required by
subparagraph (a) above, a certificate by the chief financial
officer or other authorized officer of the Company stating
whether or not there exists any Event of Default or Potential
Default, specifying the nature and period of existence thereof
and what action, if any, the Company is taking or proposes to
take with respect thereto;
(d) With reasonable promptness, such other data and information as
from time to time may be reasonably requested by the Lender;
(e) Promptly and in any event within ten (10) days after the
occurrence of a Reportable Event with respect to a Plan, a
copy of any materials required to be filed with the PBGC with
respect to such Reportable Event or these that would have been
required to be filed if the thirty (30) day notice requirement
to the PBGC were not waived;
(f) Promptly upon receipt, and in no event more than three (3)
days after receipt of a notice by the Company or any ERISA
Affiliate or any administrator of any Plan or Multi-employee
Plan that the PBGC has instituted proceedings to terminate
such Plan or to appoint a trustee to administer such Plan, a
copy of such notice;
(g) As soon as practicable after the end of each month, and in any
event within thirty (30) days thereafter, an accounts
receivable aging report in a form acceptable to Lender, will
be provided to the Lender.
SECTION 5.2. INSURANCE; MAINTENANCE OF PROPERTIES. The Company will
maintain with financially sound and reputable insurers, insurance with coverage
and limits as may be required by law or as may be reasonably required by the
Lender. The Company will, upon request from time to time, furnish to the Lender
a schedule of all insurance carried by it, setting forth in detail the amount
and type of such insurance. The Company will maintain in good repair, working
order, and condition, all properties used or useful in the business of the
Company.
SECTION 5.3. EXISTENCE; BUSINESS. The Company will cause to be done all
things necessary to preserve and keep in full force and effect its existence and
rights, to conduct its business in a prudent manner, to maintain in full force
and effect, and renew from time to time, its franchises, permits, licenses,
patents, and trademarks that are necessary to operate its business. The Company
will comply in all material respects with all valid laws and regulations now in
effect or hereafter promulgated by any properly constituted governmental
authority having jurisdiction; provided, however, the Company shall not be
required to comply with any law or regulation which it is
10
<PAGE> 11
contesting in good faith by appropriate proceedings as long as either the effect
of such law or regulation is stayed pending the resolution of such proceedings
or the effect of not complying with such law or regulation is not to jeopardize
any franchise, license, permit patent, or trademark necessary to conduct the
Company's business.
SECTION 5.4. PAYMENT OF TAXES. The Company will pay all taxes,
assessments, and other governmental charges levied upon any of its properties or
assets or in respect of its franchises, business, income, or profits before the
same become delinquent, except that no such taxes, assessments, or other charges
need be paid if contested by the Company in good faith and by appropriate
proceedings promptly initiated and diligently conducted and if the Company has
booked appropriate reserves, determined in accordance with GAAP, for the payment
of all such taxes, changes, and assessments.
SECTION 5.5. LITIGATION; ADVERSE CHANGES. The Company will promptly
notify the Lender in writing of (a) any future event which, if it had existed on
the date of this Agreement, would have required qualification of the
representations and warranties set forth in ARTICLE III hereof and (b) any
material adverse change in the condition, business, or prospects, financial or
otherwise, of the Company.
SECTION 5.6. NOTICE OF DEFAULT. The Company will promptly notify the
Lender of any Event of Default or Potential Default hereunder and any demands
made upon the Company by any Person for the acceleration and immediate payment
of any Indebtedness owed to such Person.
SECTION 5.7. INSPECTION. The Company will make available for inspection
by duly authorized representatives of the Lender, or its designated agent, the
Company's books, records, and properties three (3) times a year, unless the loan
is in default, and will furnish the Lender such information regarding its
business affairs and financial condition within a reasonable time after written
request therefor.
SECTION 5.8. ENVIRONMENTAL MATTERS. The Company and each of its
Subsidiaries:
(a) Is in compliance with all Environmental Laws and all
applicable federal, state and local health and safety laws,
regulations, ordinances or rules, except to the extent that
any non-compliance will not in the aggregate, have a
materially adverse effect on the Company or the ability of the
Company to fulfill its obligations Agreement or the Note.
(b) Shall deliver promptly to Lender (i) copies of any documents
received from the United States Environmental Protection
Agency or any state, county or municipal environmental or
health agency, and (ii) copies of any documents submitted by
Company or any of its Subsidiaries to the United States
Environmental Protection Agency or any state, county or
municipal environmental or health agency concerning its
operations.
SECTION 5.9. SECURITY FOR LOAN(S). The Company will maintain in an
account maintained by Company at KeyBank National Association or one of its
subsidiaries the sum of Two Million Dollars ($2,000,000.00) as collateral for
the Revolving Line of Credit; advances under Revolving Line of Credit will be
based on KeyBank Credit Policy advance rates which are currently:
<TABLE>
<CAPTION>
TYPE MAXIMUM PERCENT ADVANCE ON MARKET VALUE
<S> <C>
Traded Common or Preferred Stock 65%
Traded Corporate Bond 80%
U.S. Treasury Bond 85%
U.S. Agency Bond 70%
Mutual Fund 60%
Cash Value Life Insurance 90%
Key Corp. Bank Time Deposit 100%
</TABLE>
11
<PAGE> 12
These advance rates are subject to change from time to time in the sole
discretion of the Bank.
SECTION 5.10. SECURITY FOR ADVISED LINE. Should the Lender issue any
Loans on the Advised Line of Credit, the Company will maintain an Eligible
Accounts Receivable balance in an amount equal to one hundred thirty three
percent (133%) of the Advised Line of Credit outstanding at that time.
ARTICLE VI. NEGATIVE COVENANTS
------------------------------
As long as credit is available hereunder or until all principal of and
interest on the Notes have been paid in full:
SECTION 6.1. SALE OR PURCHASE OF ASSETS. The Company will not, directly
or indirectly, (a) purchase, lease, or otherwise acquire any assets except in
the ordinary course of business or as otherwise permitted by any provision of
this Agreement or (b) sell, lease, transfer, or otherwise dispose of any plant
or any manufacturing facility or other assets; PROVIDED, that this Section shall
not prohibit any of the actions referenced in clauses (a) or (b) above so long
as the taking of such action does not (i) materially and adversely affect the
financial condition of the Company and (ii) materially and adversely affect the
Collateral of the Lender (as defined in the Security Instruments).
SECTION 6.2. LIENS. The Company will not, directly or indirectly,
create, incur, assume, or permit to exist any Lien with respect to any property
or asset of the Company now owned or hereafter acquired other than:
(a) Liens for taxes or governmental assessments, charges, or
levies the payment of which is not at the time required by
Section 5.4 hereof;
(b) Liens imposed by law, such as Liens of landlords, carriers,
warehousemen, mechanics, and materialmen arising in the
ordinary course of business for sums not yet due or being
contested by appropriate proceedings promptly initiated and
diligently conducted, provided the Company has reserved proper
amounts, determined in accordance with GAAP, for the payment
of all such Liens;
(c) Liens incurred or deposits made in the ordinary course of
business in connection with worker's compensation,
unemployment insurance, and other types of social security, or
to secure the performance of tenders, statutory obligations,
and surety and appeal bonds, or to secure the performance and
return of money bonds and other similar obligations, but
excluding Indebtedness; and
(d) Liens in respect of judgments or awards with respect to which
the Company shall, in good faith, be prosecuting an appeal or
proceeding for review and with respect to which a stay of
execution upon such appeal or proceeding for review shall have
been obtained;
(e) Liens that secure the Company's Indebtedness for the purchase
price of any real or personal property and that only encumber
the property purchased so long as no such Liens, when taken
singly or in the aggregate materially and adversely affects
the financial condition of the Company;
(f) Liens disclosed in the financial statements and related notes
thereto;
(g) Liens in favor of the Lender or any affiliate of Lender.
SECTION 6.3. INDEBTEDNESS. The Company will not, directly or
indirectly, create, incur, or assume Indebtedness, or otherwise become liable
with respect to, any Indebtedness other than:
(a) Indebtedness now or hereafter payable, directly or indirectly,
by the Company to the Lender or any Affiliate;
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<PAGE> 13
(b) Subordinated Debt of the Company;
(c) To the extent permitted by this Agreement, Indebtedness for
the purchase price of any real or personal property, which is
secured only by a Lien on the property purchased;
(d) Unsecured current Indebtedness and deferred liabilities (other
than for borrowed money or represented by bonds, notes, or
other securities) incurred in the ordinary course of business;
and
(e) Indebtedness for taxes, assessments, governmental charges,
liens, or similar claims to the extent not yet due and
payable.
(f) Any unsecured or secured Indebtedness so long as the
incurrence thereof does not (i) materially and adversely
affect the financial condition of the Company and (ii)
materially and adversely affect the collateral of the Lender
(as defined in the Security Instruments).
SECTION 6.4. INVESTMENTS; LOANS. The Company will not, directly or
indirectly, (a) purchase or otherwise acquire or own any stock or other
securities of any other Person or (b) make or permit to be outstanding any loan
or advance (other than trade advances in the ordinary course of business) or
enter into any arrangement to provide funds or credit, to any other Person;
PROVIDED, that this Section shall not prohibit any of the actions referenced in
clauses (a) or (b) above so long as the taking of such action does not (i)
materially and adversely affect the financial condition of the Company and (ii)
materially and adversely affect the Collateral of the Lender (as defined in the
Security Instruments).
SECTION 6.5. MERGERS; CONSOLIDATION. The Company will not merge or
consolidate with any Person or sell, assign, lease, or otherwise dispose of
(whether in one transaction or in a series of transactions), all or
substantially all of its assets (whether now owned or hereafter acquired) to any
Person; PROVIDED, that this Section shall not prohibit any merger or
consolidation so long as (a) such merger or consolidation does not (i)
materially and adversely affect the financial condition of the Company and (ii)
materially and adversely affect the Collateral of the Lender (as defined in the
Security Instruments) and (b) the surviving entity of such merger or
consolidation acknowledges that it is bound by the terms of this Agreement and
the Security Instruments in writing and takes such action as is required by the
Lender to maintain its security interest in the Collateral (as defined in the
Security Instruments).
ARTICLE VII. EVENTS OF DEFAULT
------------------------------
The occurrence of any one or more of the following events shall
constitute an Event of Default under this Agreement:
SECTION 7.1. PRINCIPAL OR INTEREST. If the Company fails to pay any
installment of principal or interest on that or any other sums of money within
three (3) days after its due date under this Agreement; or
SECTION 7.2. MISREPRESENTATION. If any representation or warranty made
herein by the Company or in any written statement, certificate, report, or
financial statement at any time furnished by, or on behalf of the Company in
connection herewith, is incorrect or misleading in any material respect when
made or furnished, at anytime thereafter; or
SECTION 7.3. FAILURE OF PERFORMANCE OF THIS AGREEMENT. If the Company
fails to perform or observe any covenant or agreement contained in this
Agreement, other than any sums of money payable hereunder, and such failure
remains unremedied for thirty (30) calendar days after the Lender shall have
given written notice thereof to the Company; or
SECTION 7.4. CROSS-DEFAULT. If the Company (or any Guarantor) (a) fails
to pay any Indebtedness (other
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<PAGE> 14
than as evidenced by the Note) owing by the Company (or such Guarantor) in the
aggregate principal amount of more than Two Hundred Fifty Thousand Dollars
($250,000.00) when due, whether at maturity, by acceleration, or otherwise or
(b) fails to perform any term, covenant, or agreement on its part to be
performed under any agreement or instrument (other than the Loan Documents)
evidencing, securing, or relating to such Indebtedness when required to be
performed, or is otherwise in default thereunder, if the effect of such failure
is to accelerate, or to permit the holder(s) of such Indebtedness or the
trustee(s) under any such agreement or instrument to accelerate, the maturity of
such Indebtedness, whether or not such failure shall be waived by such holder(s)
or trustee(s); or
SECTION 7.5. EVENT OF DEFAULT UNDER ANY SECURITY INSTRUMENT. If an
event of default occurs (with passage of time or service of notice, or both) and
is continuing under the terms of any Security Instrument; or
SECTION 7.6. ERISA. If the Company at anytime hereafter sponsors or
establishes any Plan, and the Company (a) fails to notify the Lender in writing
of such occurrence within ten (l0) days after such Plan is authorized by the
Board of Directors or otherwise by the Company or (b) fails to agree within a
reasonable time to such amendments to this Agreement regarding provisions with
respect to ERISA as the Lender customarily uses at that time in loan agreements
with other borrowers; or
SECTION 7.7. INSOLVENCY. If the Company (or any Guarantor) shall
discontinue business or (a) is adjudicated a bankrupt or insolvent under any law
of any existing jurisdiction, domestic or foreign, or ceases, is unable, or
admits in writing its inability, to pay its debts generally as they mature, or
makes a general assignment for the benefit of creditors, (b) applies for, or
consents to, the appointment of any receiver, trustee, or similar officer for it
or for any substantial part of its property, or any such receiver, trustee, or
similar officer is appointed without the application or consent of the Company
(or such Guarantor), and such appointment continues thereafter undischarged for
a period of thirty (30) days, (c) institutes, or consents to the institution of
any bankruptcy, insolvency, reorganization, arrangement, readjustment or debt,
dissolution, liquidation, or similar proceeding relating to it under the laws of
any jurisdiction, (d) any such proceeding is instituted against the Company (or
such Guarantor) and remains thereafter undismissed for a period of sixty (60)
days, or (e) any judgment, writ, warrant of attachment or execution, or similar
process is issued or levied against a substantial part of the property of the
Company or any Subsidiary (or Guarantor) and such judgment, writ, or similar
process is not effectively stayed within thirty (30) days after its issue or
levy, or any Guarantor becomes deceased.
ARTICLE VIII. REMEDIES UPON DEFAULT
-----------------------------------
SECTION 8.1. OPTIONAL ACCELERATION. In the event that one or more of
the Events of Default set forth in Sections 7.l through 7.6 above occurs and
continues and is not waived by the Lender, then, in any such event, and at any
time thereafter, the Lender may, at its option, terminate its commitment to make
any Loan and declare the unpaid principal of, and all accrued interest on, the
Note, and any other liabilities hereunder, and all other Indebtedness of the
Company to the Lender forthwith due and payable, whereupon the same will
forthwith become due and payable without presentment, demand, protest, or other
notice of any kind, all of which the Company hereby expressly waives, anything
contained herein or in the Note to the contrary notwithstanding.
SECTION 8.2. AUTOMATIC ACCELERATION. Upon the happening of an Event of
Default referred to in Section 7.7 above, the unpaid principal of, and all
accrued interest on, the Note, and any other liabilities hereunder and all other
Indebtedness of the Company to the Lender then existing will thereupon become
immediately due and payable in full and the commitment, if any, of the Lender to
make any Loan, if not previously terminated, will thereupon immediately
terminate without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived by the Company, anything contained herein or
in the Note to the contrary notwithstanding.
SECTION 8.3. RIGHT OF SET OFF; SECURITY. Upon the occurrence and
continuation of an Event of Default, the Lender has the right, in addition to
all other rights and remedies available to it, to set off the unpaid balance of
the Note and any other Indebtedness payable to the Lender held by it against any
debt owing to the Company by the Lender or by any Affiliate, including, without
limitation, any obligation under a repurchase agreement or any funds held at
anytime by the Lender or any Affiliate, whether collected or in the process of
collection, or in any time or demand deposit account maintained by the Company
at, or evidenced by any certificate of deposit issued by, the
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Lender or any Affiliate. The Company hereby grants, pledges, and assigns to the
Lender a security interest in, or lien upon, all cash, negotiable instruments,
securities, deposit accounts, and other cash equivalents, whether collected or
in the process of collection, whether matured or unmatured, now or hereafter in
the possession of the Bank or any Affiliate and upon which the Company has or
may hereafter have any claim. The Company acknowledges and agrees that all of
the foregoing shall constitute "cash collateral" for purposes of this Agreement.
The Company agrees, to the fullest extent it may effectively do so under
applicable law, that any holder of a participation in the Note may exercise
rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Company pursuant to this Agreement in the amount of such
participation.
SECTION 8.4. NO WAIVER. The remedies in this ARTICLE VIII are in
addition to, not in limitation of, any other right, power, privilege, or remedy,
either in law, in equity, or otherwise, to which the Lender may be entitled. No
failure or delay on the part of the Lender in exercising any right, power, or
remedy will operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right hereunder.
ARTICLE IX. MISCELLANEOUS
-------------------------
SECTION 9.1. AMENDMENTS. No waiver of any provision of this Agreement
or the Note, or consent to departure therefrom, is effective unless in writing
and signed by the Lender. No such consent or waiver extends beyond the
particular case and purpose involved. No amendment to this Agreement is
effective unless in writing and signed by the Company and the Lender.
SECTION 9.2. EXPENSES; DOCUMENTARY TAXES. The Company shall pay (a) all
reasonable out-of-pocket expenses of the Lender, including reasonable fees and
disbursements of special counsel for the Lender, in connection with the
preparation of this Agreement, any waiver or consent hereunder or any amendment
hereof or any Event of Default hereunder and (b) if an Event of Default or
Potential Default occurs, all out-of-pocket expenses incurred by the Lender,
including reasonable fees and disbursements of counsel, in connection with such
Event of Default or Potential Default and collection and other enforcement
proceedings resulting therefrom. The Company shall reimburse the Lender for its
payment of all transfer taxes, documentary taxes, assessments, or charges made
by any governmental authority by reason of the execution and delivery of this
Agreement or the Note.
SECTION 9.3. INDEMNIFICATION. The Company shall indemnify and hold the
Lender harmless against any and all liabilities, losses, damages, costs, and
expenses of any kind (including, without limitation, the reasonable fees and
disbursements of counsel in connection with any investigative, administrative or
judicial proceeding, whether or not the Lender shall be designated a party
thereto) which may be incurred by the Lender relating to or arising out of this
Agreement or any actual or proposed use of proceeds of any Loan hereunder;
provided, that the Lender shall have no right to be indemnified hereunder for
its own bad faith or willful misconduct as determined by a court of competent
jurisdiction. The Company further agrees to indemnify the Lender against any
loss or expense which the Lender may sustain or incur as a consequence of any
default by the Company in payment when due of any amount due hereunder in
respect of any Libor Rate Loan, including, but not limited to, any loss of
profit, premium, or penalty incurred by the Lender in respect of funds borrowed
by it for the purpose of making or maintaining any such Loan, as determined by
the Lender in the exercise of its sole but reasonable discretion. A certificate
as to any such loss or expense shall be promptly submitted by the Lender to the
Company and shall, in the absence of manifest error, be conclusive and binding
as to the amount thereof.
SECTION 9.4. CONSTRUCTION. This Agreement and the Note will be governed
by and construed in accordance with the laws of the State of Ohio, without
regard to principles of conflict of laws. The several captions to different
Sections of this Agreement are inserted for convenience only and shall be
ignored in interpreting the provisions hereof.
SECTION 9.5. EXTENSION OF TIME. Whenever any payment hereunder or under
the Note becomes due on a date which the Lender is not open for the transaction
of business, such payment will be due on the next succeeding Business Day and
such extension of time will be included in computing interest in connection with
such payment.
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<PAGE> 16
SECTION 9.6. NOTICES. All written notices, requests, or other
communications herein provided for must be addressed:
to the Company as follows:
Collaborative Clinical Research, Inc.
20600 Chagrin Blvd., Suite 1050
Cleveland, Ohio 44122
Attn: Terry C. Black
Vice-President-CEO
to the Lender as follows:
Key Corporate Capital Inc.
127 Public Square
Cleveland, Ohio 44114-1306
Attn: Manager Healthcare Finance
or at such other address as either party may designate to the other in writing.
SECTION 9.7. SURVIVAL OF AGREEMENTS; RELATIONSHIP. All agreements,
representations, and warranties made in this Agreement will survive the making
of the extension of credit hereunder, and will bind and inure to the benefit of
the Company and the Lender, and their respective successors and assigns;
PROVIDED, that no subsequent holder of the Note shall by reason of acquiring
that Note become obligated to make any Loan hereunder and no successor to or
assignee of the Company may borrow hereunder without the Lender's written
assent. The relationship between the Company and the Lender with respect to this
Agreement, the Notes and any other Loan Document is and shall be solely that of
debtor and creditor, respectively, and the Lender has no fiduciary obligation
toward the Company with respect to any such document or the transactions
contemplated thereby.
SECTION 9.8. SEVERABILITY. If any provision of this Agreement or the
Notes, or any action taken hereunder, or any application thereof, is for any
reason held to be illegal or invalid, such illegality or invalidity shall not
affect any other provision of this Agreement or the Note, each of which shall be
construed and enforced without reference to such illegal or invalid portion and
shall be deemed to be effective or taken in the manner and to the full extent
permitted by law.
SECTION 9.9. ENTIRE AGREEMENT. This Agreement, the Notes and any other
Loan Document integrate all the terms and conditions mentioned herein or
incidental hereto and supersede all oral representations and negotiations and
prior writings with respect to the subject matter hereof.
SECTION 9.10. JURY TRIAL WAIVER. COMPANY AND LENDER EACH WAIVE ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, BETWEEN LENDER AND COMPANY ARISING OUT OF, IN
CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE
TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE,
LIMIT, AMEND OR MODIFY LENDER'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY
CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT BETWEEN LENDER AND COMPANY.
IN WITNESS WHEREOF, the Company and the Lender have each caused this
Agreement to be executed by their duly authorized officers as of this 1st day of
October, l997.
16
<PAGE> 17
COMPANY: COLLABORATIVE CLINICAL RESEARCH,
BY: /s/ Jeffrey A. Green
--------------------------------------------
TITLE: President & CEO
-----------------------------------------
LENDER: KEY CORPORATE CAPITAL INC.
BY: /s/ Rufus D. Heard
--------------------------------------------
TITLE: Vice President
-----------------------------------------
17
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and effective as of the dates written
below by and between COLLABORATIVE CLINICAL RESEARCH, INC. ("Company") and
HERBERT L. HUGILL (the "Employee").
WITNESSETH:
WHEREAS, the Employee wishes to become employed by the Company; and
WHEREAS, the Company desires to employ Employee consistent with the
terms of this Agreement; and
WHEREAS, the Employee and the Company desire to enter into an agreement
expressly indicating the terms and conditions of their relationship;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the Company and the Employee agree as follows:
1. DUTIES. The Company employs Employee in the position of Chief
Operating Officer. Employee shall generally be responsible for overall
management of Company's business operations including business operations of the
Company's subsidiaries and divisions, but excluding DataTRAK, which shall
operate as an independent business unit. Employee shall be responsible for the
overall profit and loss performance of Company including generation of sales
revenues, oversight and maintenance of the Affiliated Network and oversight of
internal operations. Principle departments which shall report to Employee
include sales and marketing, affiliate site relations, and clinical operations.
Employee shall perform his duties under the direction of the Chief Executive
Officer of Collaborative Clinical Research, Inc. During the course of his
employment, Employee shall at all times, faithfully, industriously and to the
best of his abilities, perform all duties that reasonably may be required of him
by virtue of his position and shall devote his full business time and efforts to
the affairs of the Company. The Employee may, however, serve as an outside
director of any other corporation provided Employee obtains the written consent
of the Company, which shall not be unreasonably withheld.
2. SALARY. The Company will pay Employee a base salary of One Hundred
Seventy Thousand Dollars ($170,000.00) per year in accordance with the Company's
payroll practices, or in such other periodic method to which both parties agree,
minus appropriate withholdings and deductions. The Company will review
Employee's compensation hereunder on an annual basis, and may adjust the
above-indicated level, in its sole discretion, based on Employee's performance
of his duties hereunder and/or the performance of Collaborative Clinical
Research, Inc., provided, however, that the Company shall not reduce the
Employee's salary to be paid in any succeeding year to an amount less than the
Employee's base salary as established herein. Both parties agree that the above
reference to an "annual base salary" or to other benefits of employment,
including but not limited to bonuses, does not in any way guarantee and/or add
to the express length of employment of Employee, other than as set forth herein.
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<PAGE> 2
3. STOCK OPTION PLAN. Within 30 days after Employee begins employment,
Employee shall receive a Stock Option Agreement for the granting of 50,000 stock
options for the purchase of Company Common Stock ("the Common Stock") at a per
share exercise price equal to the closing price of the Common Stock on the date
of the Stock Option Grant. Pursuant to the terms of the separate Stock Option
Agreement, Employee will vest 12,500 stock options on each anniversary date of
the Stock Option Agreement. The employee will be entitled to receive additional
stock option grants of 50,000 each on January 1, 1999, 2000 and 2001. These
additional stock option grants will be based upon the Employee achieving
established targets as outlined in Exhibit A. The strike price for these
additional stock option grants will be the closing price as quoted on the NASDAQ
on the date of grant (1/1/99, 1/1/00, 1/1/01).
4. BENEFITS. During the course of employment, Employee shall be
entitled to participate in any employment benefit plans which are maintained or
established by the Company for its similarly-situated employees, including
enrollment in medical, dental, and life insurance policies or plans, as well as
a 401K plan, and all paid holidays afforded to other similarly-situated
employees.
5. VACATIONS. During the course of employment, Employee shall be
entitled to paid vacation time equal to fifteen (15) days, to be taken at a time
or times acceptable to the Company and otherwise consistent with the terms and
conditions of this Agreement and the Company's vacation pay policy.
6. RELOCATION EXPENSES. The Company will reimburse Employee for all
reasonable relocation expenses, including the expense of moving Employee's
possessions from Florida to the Cleveland, Ohio area, and reasonable expenses
incurred in travel to the Cleveland, Ohio area for the purpose of locating
housing. The Company will reimburse Employee for all reasonable Cleveland
housing expenses for first 90 days after the effective date of this Employment
Agreement.
6.1 REAL ESTATE BROKER'S COMMISSIONS. The Company will reimburse
Employee for reasonable licensed real estate broker's commission (Broker's Fee)
incurred by Employee in the Sale of the Employee's current residence located in
Oldsmar, Florida. The Company will pay $20,000 upon the sale of Employee's
current residence. The balance of the Broker's Fees will be paid only after
Employee has completed 12 months of employment with the Company. If the Employee
is not employed by the Company at the time each portion of the Broker's Fee
become payable, the Company will have no obligation to reimburse the Employee
for any unreimbursed Broker's Fees. The Employee will provide the Company with
reasonable documentation to support the Broker's Fee incurred by Employee.
7. TERM AND TERMINATION OF AGREEMENT. The Term of this Agreement shall
commence on the date written below and shall continue for a period of four (4)
years, unless sooner terminated as provided in paragraphs 7.1, 7.2, 7.3, 7.5,
7.6, 7.7 or 7.8 below.
7.1 TERMINATION FOR DEATH. This Agreement shall terminate
automatically upon the Employee's death. With the exception of any benefits
under the Company's employee benefit plans or stock options that have vested
under the Company's Stock Option Plan
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<PAGE> 3
which may inure to the benefit of Employee's beneficiaries, upon Employee's
death, the Company shall have no further obligations under the terms and
conditions of this Agreement.
7.2 TERMINATION FOR DISABILITY. The Company and the Employee
acknowledge and agree that the essential functions of the Employee's position
are unique and critical to the Company and that a disability condition which
causes the Employee to be unable to perform the essential functions of his
position with or without reasonable accommodations for a period in excess of one
hundred twenty (120) calendar days will constitute an undue hardship on the
Company. If the Company determines in good faith upon medical certification and
in consultation with Employee and, if necessary or appropriate, with Employee's
physician(s), that the Employee is disabled and unable to perform the essential
function of his position with or without reasonable accommodations, it may give
Employee written notice of its intention to terminate Employee's employment. If
Employee's employment is terminated pursuant to this provision during the term
of this Agreement, employee shall be entitled to his salary through the date of
such termination, and to any other employee benefits maintained or established
by the Company for its similarly situated employees.
7.3 TERMINATION FOR CAUSE. The Company may terminate Employee's
employment for cause by written notification citing the specific reasons for
termination. For purposes of this Agreement, "Cause" means:
(1) Employee's conviction of a felony involving moral
turpitude or a felony in connection with his employment;
(2) Employee's theft, fraud, embezzlement, material willful
destruction of property or material disruption of the operations of the Company;
(3) Employee's use or possession of illegal drugs and/or
alcohol on Company premises or reporting to work under the influence of same; or
(4) Employee's engaging in conduct, in or out of the
workplace, which in the Company's reasonable determination has an adverse effect
on the reputation or business of the Company; or
Under any such termination for Cause, all rights, benefits, obligation and
duties of the parties hereunder shall immediately cease, except any compensation
due and owing through the date of termination and/or fringe benefits which have
vested on Employee's behalf prior to such termination, if any.
7.4 SUSPENSION. In the event Employee engages in conduct
subjecting Employee to potential civil or criminal liability which could have an
adverse effect upon the Company's reputation or business or is related to
Employee's duties and responsibilities, the Company reserves the right to
immediately suspend Employee with pay, pending investigation and/or the outcome
of the matter.
7.5 TERMINATION BY EMPLOYEE. Employee may terminate his
employment and this Agreement at any time for any or no reason. Employee
acknowledges and
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<PAGE> 4
agrees that a voluntary resignation, termination or retirement by Employee prior
to the expiration of this Agreement shall result in the termination of this
Agreement and all rights and obligations under this Agreement shall immediately
cease, except any fringe benefits or stock options which have vested on
Employee's behalf prior to such termination.
7.6 TERMINATION BY EMPLOYEE FOR GOOD REASON. Employee may
terminate his employment and this Agreement at any time, in the event of (i) any
material reduction by the Company of such Employee's duties, responsibilities or
title and, (ii), any involuntary removal of such Employee from any position
previously held (except in connection with a promotion or a termination for
Cause, Death or Disability, or the voluntary termination by the Employee other
than for Good Reason). In the even of such termination by Employee for Good
Reason, Employee shall be entitled to receive (i) his salary through the date of
such termination and for a period of six (6) months after such termination, and
(ii) outplacement services from an agency to be selected by the Company in an
amount not to exceed Ten Thousand ($10,000) Dollars, and (iii) continuation for
six (6) months of medical, dental and life insurance benefits in accordance with
Employee's then existing plan, including deduction from Employee's salary of the
then existing bi-weekly employee contribution for such plan benefits and (iv)
the Company will make a recommendation to the Company's Compensation Committee
to consider vesting the Employee in all granted non-vested stock options. The
Compensation Committee, in its sole discretion, will make the determination to
vest or not to vest Employee in granted non-vested stock options.
7.7 TERMINATION OTHER THAN FOR CAUSE. The Company may terminate
the Employee for other than Cause at any time during the term of this Agreement,
upon not less than thirty (30) days notice. In the event the Company exercises
its right to terminate the Employee other than for Cause at any time during this
Agreement, Employee shall at the time of such termination be entitled to receive
(i) his salary through the date of such termination and for a period of one (1)
year after such termination, and (ii) outplacement services from an agency to be
selected by the Company in an amount not to exceed Ten Thousand ($10,000.00)
Dollars, and (iii) continuation for one (1) year of medical, dental and life
insurance benefits in accordance with Employee's then existing plan, including
deduction from Employee's salary of the then existing bi-weekly employee
contribution for such plan benefits and (iv) the Company will make a
recommendation to the Company's Compensation Committee to consider vesting the
Employee in all granted non-vested stock options. The Compensation Committee, in
its sole discretion, will make the determination to vest or not to vest Employee
in granted non-vested stock options.
7.8 CHANGE OF CONTROL. If a Change of Control (as defined in this
paragraph) shall occur during the Term of this Agreement, and Employee's
employment is (a) not continued by the purchaser or successor or (b) there is a
material change in the Employee's role, duties, responsibility or title
following a Change of Control and Employee voluntarily terminates his employment
and this Agreement therefor, Employee shall be entitled to receive (i) his
salary through the date of such non-continuation and for a period of one (1)
year after such non-continuation, and (ii) outplacement services from an agency
to be selected by the Company in an amount not to exceed Ten Thousand
($10,000.00) Dollars, (iii) continuation for one (1) year of medical, dental and
life insurance benefits in accordance with Employee's then existing plan,
including deductions from Employee's salary of the then existing bi-weekly
employee contribution for such plan benefits. For purposes hereof, the term
"Change of Control" shall mean (A) the sale of all or substantially all of the
assets of the Company, (B) the sale of a majority of the
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<PAGE> 5
outstanding shares of capital stock of the Company entitled to vote in a single
transaction or series of related transactions (except with respect to a public
offering of the Company's shares of capital stock), (C) the consummation of a
merger, consolidation or similar transaction involving the Company in which the
holders of the Company's capital stock immediately prior to the transaction do
not retain at least a majority of the voting power of the Company surviving the
merger or its parent Company, or (D) the complete liquidation or dissolution of
the Company.
8. RESTRICTIVE COVENANTS OF EMPLOYEE.
8.1 NONCOMPETITION. During the period of Employee's employment by
the Company and, (i) in the case of the termination of Employee's employment
under Section 7.6 hereof, for a period of six (6) months thereafter or, (ii) in
the case of the termination of Employee's employment under section 7.7 hereof,
for a period of twelve (12) months thereafter, or (iii) in the case of the
termination of Employee's employment under any provision of Section 7 hereof
other than Section 7.6 or 7.7, for a period of fifteen (15) months (the
"Noncompetition Period"), Employee shall not, directly or indirectly, whether as
an individual on his own account, or as a shareholder, partner, joint venturer,
director, officer, employee, consultant, creditor and/or agent or otherwise, in
any State of the United States in which the Company now or hereafter conducts
business:
(iii) enter into or engage in any business including, without
limitation, for a clinical contract research organization (a " clinical CRO"),
or otherwise perform any clinical contract research, which competes with the
business now or hereafter carried on by the Company or any parent or subsidiary
of, or entity controlled by the Company ("Company Affiliates");
(iv) solicit customers, business patronage or orders on behalf of,
or perform other services for, any business, including, without limitation, any
clinical CRO, which directly or indirectly competes with the business of the
Company or any Company Affiliate; or
(v) promote or assist, financially or otherwise, any person, firm,
association, Company or other entity, including, without limitation, any
clinical CRO, engaged in the business which competes with the current or future
business of the Company or any Company Affiliates;
provided, however, that the foregoing covenant shall not be deemed to have been
violated solely by (a) the ownership of equity securities of any entity which
competes with a future business of the Company or any Company Affiliate, to the
extent that such securities are acquired prior to the date that the Company or
Company Affiliate commences such future business; or (b) the ownership for
investment purposes of less than five percent (5%) of the equity securities of
an entity which has equity securities listed on a national securities exchange
or publicly traded in the over-the-counter-market.
8.2 CONFIDENTIALITY AND WORK PRODUCT. Employee acknowledges that
during his/her employment with the Company he/she has had and will have access
to confidential information, knowledge, and data regarding the business of the
Company and Company Affiliates, whether received, acquired or developed by
him/her or otherwise, including, without limitation, trade secrets, design
information, research methods and techniques, scientific data and formulae,
pricing data, customer information and all other information or data relevant to
the business of the
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<PAGE> 6
Company (collectively, except any of the foregoing which is at the time
generally known to the public and which did not become generally known through
the breach of any agreement restricting its disclosure, "Proprietary
Information"). Employee further acknowledges that in the course of his/her
employment he/she may be producing designs, analyses, recommendations, reports,
complications, studies and other worth product, acquiring information on behalf
of the Company and any conceive of ideas, innovations, processes and
improvements relating to the business of the Company (collectively, "Work
Product"). As to the ownership, disclosure and use of Proprietary Information
and Work Product, Employee agrees that, from and after the date hereof:
(i) he/she will promptly disclose in writing to the Company all
Work Product;
(ii) all Proprietary Information, all Work Product and all rights
therein are and shall be the sole and exclusive property of the Company and all
rights or interest of Employee therein are hereby assigned by Employee to the
Company, and Employee will cooperate with and assist the Company from time to
time, in any manner reasonably requested by the Company, in obtaining title or
ownership therein or evidence thereof;
(iii) Employee shall not divulge, disclose or communicate to any
third party in any manner, directly or indirectly, Proprietary Information or
Work Product;
(iv) Employee will not use for his/her own benefit or purposes or
for the benefit or purposes of any third party or permit or assist, by
acquiescence or otherwise, any third party to use in any manner, directly or
indirectly, Proprietary Information or Work Product;
(v) upon the termination of his/her employment, Employee will
promptly deliver to the Company all Proprietary Information and Work Product,
including, without limitation, any reproductions, copies, abstracts, summaries
or other documents or records of Proprietary Information or Work Product; and
(vi) Following termination of the Non-competition Period, the
obligations of Employee in this Section 8.2 shall not apply to Proprietary
Information or Work Product of the Company as it existed on the effective date
hereof but shall continue for all Proprietary Information of the Company or any
Affiliate, whenever developed, and any Proprietary Information and Work Product
of Collaborative Clinical Research, Inc. for the period after such effective
date.
8.3 NO INTERFERENCE. During the Non-competition Period, Employee
agrees that he/she shall not:
(i) take any action which would:
(a) interfere with the contractual relationship of the
Company, any Company Affiliate, customers, suppliers, employees or other which
relate to the business of the Company or any Company Affiliate; or
(b) induce any employee or representative of the Company or
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<PAGE> 7
any Company Affiliate not to continue as an employee or representative of the
Company or any Company Affiliate;
(ii) make remarks or take any other action which disparages
or diminishes the reputation of the Company or any Company Affiliate;
(iii) without limiting the generality of the foregoing,
without the prior written consent of the Chief Executive Officer, directly or
indirectly employ, whether as an employee, officer, director, agent, consultant
or independent contractor, any person who was an employee, representative,
officer or director of the Company or any Company Affiliate at any time during
the six-month period prior to the date of such proposed employment; provided,
however, that the covenants contained in this clause (iii) shall not apply with
respect to such person terminated by action of the Company or any Company
Affiliate or who has resigned their position with the Company or any Company
Affiliate.
8.4 INJUNCTIVE RELIEF. Both parties hereto recognize that the
services to be rendered by Employee to the Company are special, unique and of
extraordinary character, that the market for the Company's services and products
is worldwide, and that if Employee hereafter fails to comply with the
restrictions and obligations imposed upon him/her hereunder, the Company may not
have an adequate remedy at law. Accordingly, the Company, in addition to any
other rights which it may have, shall be entitled to seek injunctive relief to
enforce such restrictions and obligations without the necessity of posting any
bond.
9. REPRESENTATIONS OF EMPLOYEE. Employee represents and warrants to the
Company that he has the capacity to enter into this Agreement that he is not a
party to any agreement, arrangement or other understanding with any person or
entity which might affect, restrain or conflict with the provisions of this
Agreement and/or the services to be provided to the Company by Employee under
this Agreement.
10. REFORMATION OF AGREEMENT; SEVERABILITY. In the event that any
provision or term of this Agreement is found to be void or unenforceable to any
extent for any reason, it is the agreed-upon intent of the parties hereto that
all remaining provisions or terms of the Agreement shall remain in full force
and effect to the maximum extent permitted and that the Agreement shall be
enforceable as if such void or unenforceable provision or term had never been a
part hereof.
11. ASSIGNMENT. This Agreement shall inure to the benefit of, and shall
be binding upon, the Company, its successors and assigns. Employee shall not
assign this Agreement without the prior written consent of the Company.
12. NOTICE. Any notice required to be given under the terms of this
Agreement shall be in writing, and mailed to the recipient's last known address
or delivered in person. If sent by registered or certified mail, such notice
shall be effective when mailed; otherwise, it shall be effective upon delivery.
13. ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement, Exhibit A,
and the Stock Option Agreement contain the entire agreement between the
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<PAGE> 8
parties hereto with respect to the subject matter hereof and replaces or
supersedes any previous agreement on such subject matter. It may not be changed
orally, but only by agreement, in writing, signed by each of the parties hereto.
The terms or covenants of this Agreement may be waived only by a written
instrument specifically referring to this Agreement, executed by the party
waiving compliance. The failure of the Company at any time, or from time to
time, to require performance of any of Employee's obligations under this
Agreement shall in no manner affect the Company's right to enforce any
provisions of this Agreement at a subsequent time; and the waiver by the Company
of any right arising out of any breach shall not be construed as a waiver of any
right arising out of any subsequent breach.
14. HEADINGS. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
15. COUNTERPARTS. This Agreement may be executed in multiple
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same document.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio without giving effect to the
conflict of law provisions thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the dates written below.
Date: DECEMBER 8, 1997 /S/ HERBERT L. HUGILL
------------------------------- ------------------------------------
HERBERT L. HUGILL
COLLABORATIVE CLINICAL RESEARCH, INC.
Date: DECEMBER 8, 1997 By: /S/ JEFFREY A. GREEN
------------------------------- ----------------------------------
Title: PRESIDENT & CEO
-------------------------------
-8 of 8
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Collaborative Holdings, Inc.
GFI Pharmaceutical Services, Inc.
Ohio Valley Institutional Review Board, Inc.
DataTRAK, Inc.
Collaborative Clinical Research Limited, PLC
DataTRAK Deutschland, GmbH
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 333-16061) pertaining to the Collaborative Clinical
Research, Inc. 1992 Share Incentive Plan, Collaborative Clinical Research, Inc.
1994 Directors' Share Option Plan, Collaborative Clinical Research, Inc. 1996
Outside Directors Stock Option Plan and the Collaborative Clinical Research,
Inc. 1996 Key Employees and Consultants Stock Option Plan of our report dated
January 30, 1998, with respect to the consolidated financial statements of
Collaborative Clinical Research, Inc. and subsidiaries included in the Annual
Report on Form 10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER
31, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,613,488
<SECURITIES> 0
<RECEIVABLES> 4,807,255
<ALLOWANCES> 310,000
<INVENTORY> 0
<CURRENT-ASSETS> 38,991,243
<PP&E> 2,392,142
<DEPRECIATION> 831,291
<TOTAL-ASSETS> 48,320,638
<CURRENT-LIABILITIES> 5,970,360
<BONDS> 0
0
0
<COMMON> 49,697,057
<OTHER-SE> (7,346,779)
<TOTAL-LIABILITY-AND-EQUITY> 48,320,638
<SALES> 0
<TOTAL-REVENUES> 17,327,232
<CGS> 0
<TOTAL-COSTS> 12,637,223
<OTHER-EXPENSES> 13,824,739
<LOSS-PROVISION> 194,044
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,440,173)
<INCOME-TAX> (57,570)
<INCOME-CONTINUING> (7,382,603)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,382,603)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
