<PAGE>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Amendment No. 4
to
FORM 10-SB
General Form For Registration of Securities
of Small Business Issuers Under Section 12(b)
or 12(g) of the Securities Act of 1934
----------------
CLINICOR, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0309093
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1717 WEST 6th STREET, SUITE 400, AUSTIN, TEXAS 78703
(Address of Principal Executive Office) (Zip Code)
(512) 344-3300
(Issuer's Telephone Number, Including Area Code)
----------------
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
================================================================================
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Clinicor, Inc. (together with its predecessor, described below, "Clinicor"
or the "Company") is a full service clinical research organization ("CRO")
serving the pharmaceutical, biotechnology and medical device industries. The
Company designs, manages and monitors clinical trials in North America and
provides clinical and product development services, including data management,
statistical and regulatory consultation services for its clients. The Company
generates substantially all of its revenue from the clinical testing of new
pharmaceutical, device and biotechnology products.
A predecessor company, also named Clinicor, Inc. (the "Predecessor
Company"), was formed as a Texas corporation in September 1992. On February 27,
1995, the Predecessor Company was merged into Pegasus Tax and Financial Planning
Services, Inc., a Nevada corporation which had been formed in December 1993.
The surviving Nevada corporation changed its name to Clinicor, Inc. References
herein to "Clinicor" or the "Company" denote the existing Nevada corporation and
the Predecessor Company. References herein to "Pegasus" denote the Nevada
corporation prior to the merger. Since the merger, the Company has not continued
to conduct any of the pre-merger operations of Pegasus.
The Company performs and manages clinical trials in locations throughout the
United States and Mexico through the use of its centralized patient recruiting
department and computer database system located in its facility in Austin,
Texas. In addition, the Company has designated three cities as Regional Research
Centers where it maintains full-time clinical management staff (Austin, Denver
and San Antonio).
The Company's principal executive offices are located at 1717 West 6th
Street, Suite 400, Austin, Texas 78703, and its telephone number is (512) 344-
3300.
BUSINESS
The Company designs, manages and monitors clinical trials throughout North
America and provides clinical and product development services, including data
management and statistical and regulatory consultation services for its clients.
In addition to these services, the Company directly controls study patient
recruitment and performance of clinical trials. Other CROs typically subcontract
these functions to individual investigative sites.
NEW PRODUCT DEVELOPMENT
Before a new pharmaceutical, biotechnology, medical device or diagnostic
product may be marketed, it generally must undergo extensive testing and
regulatory review to determine that it is safe and effective. This development
process consists of two stages, pre-clinical and clinical. In the pre-clinical
stage, the sponsor of the new product conducts laboratory analyses and animal
tests, generally over a one to three year period, to determine the basic
biological activity and chemical processes and safety of the product. Upon
successful completion of the pre-clinical phase, the product undergoes a series
of clinical tests in humans, including healthy volunteers as well as patients
with the targeted disease or condition. These tests are generally longer in
duration, at times averaging from two to six years. In the United States, pre-
clinical and clinical testing must comply with the requirements of Good Clinical
Practices ("GCP") and other standards promulgated by the Food and Drug
Administration ("FDA") and other federal and state governmental authorities. GCP
stipulates procedures which are designed to ensure the quality and integrity of
data obtained from clinical testing and to protect the rights and safety of
clinical subjects.
In the United States, a sponsor must file an Investigational New Drug
Application ("IND"), an Investigational Device Exemption ("IDE") or other filing
with the FDA before the commencement of human testing of an investigational
product. The filing includes pre-clinical testing results and sets forth the
sponsor's plans for conducting human clinical trials. The design of these plans,
also referred to as study "protocols," is critical to the success of the
development effort because the protocol must correctly anticipate the data and
results that the FDA will require before approving the product.
<PAGE>
Human trials usually start on a small scale to assess safety and then expand
to larger trials to test for both safety and efficacy. Trials are usually
grouped into four phases, with multiple trials generally conducted within each
phase.
Phase I. Phase I trials are usually conducted on healthy volunteers,
typically 20 to 80 persons, to develop basic safety data relating to toxicity,
metabolism, absorption and other pharmacological actions.
Phase II. Phase II trials are conducted on a relatively small number of
subjects, typically 100 to 200 patients, who suffer from the product's targeted
disease or condition. Phase II trials offer the first evidence of clinical
efficacy, as well as additional safety data.
Phase III. Phase III trials are typically conducted on a larger
population of several hundred to several thousand patients who suffer from the
targeted disease or condition. Phase III trials are designed to measure safety
and efficacy on a large scale as well as side effects. Before granting an
approval to market, the FDA generally requires completion of two pivotal, multi-
site Phase III trials to demonstrate and confirm safety and efficacy.
Phase IV. As a condition of granting marketing approval, the FDA may
require that a sponsor continue to conduct additional clinical trials, known as
Phase IV trials, to monitor long-term risks and benefits, study different dosage
levels, or evaluate different safety and efficacy parameters in target patient
populations. In addition, Phase IV trials may be necessary to support a
sponsor's promotional claims.
Clinical trials often represent the most expensive and time-consuming part
of the overall development process. The information generated during these
trials is critical for gaining marketing approval from the FDA or other
regulatory agencies. After the successful completion of Phase III trials, the
sponsor of a new product must submit a New Drug Application ("NDA") or other
application to the FDA. This application is a comprehensive filing that
includes, among other things, the results of all pre-clinical and clinical
studies, information about the product's composition, and the sponsor's plans
for producing, packaging and labelling the product.
A clinical trial is usually a scientific experiment to test the efficacy and
safety of an investigational product. It follows a detailed plan as documented
in the protocol. The investigational product is administered to patients who
meet specific inclusion/exclusion criteria. Typically, the investigational
product is compared to another approved product and/or a placebo. Usually,
neither the patient nor the physician investigator knows which patients receive
which substance, although that information is readily available if needed. The
protocol will specify when, how often and how much of the study product a
patient will receive, how often they will be examined by the investigator during
the study (i.e., the number and timing of patient visits) and what measurements
and assessments will be made and recorded at each patient visit. The resulting
data is recorded in source documents and transcribed into Case Report Forms
("CRFs"). The recorded data is monitored to verify its accuracy and consistency
with source documents. The data from the CRFs is entered into a computer
database for biostatistical analysis.
CLINICAL TRIAL MANAGEMENT MODEL
Traditionally, clinical trials have been managed by pharmaceutical
companies' in-house staffs of Clinical Research Associates ("CRAs") who in turn
subcontract (outsource) the actual performance of the trials to physician
investigators serving as investigational sites. The investigators enroll
qualified patients into studies from their practices one-by-one. Administrative
tasks are handled by a clinical coordinator, typically a nurse who has
additional duties within the physician's practice.
The function of CRAs is primarily to monitor compliance of the investigative
site with the protocol and adherence to GCP. If investigational sites fail to
produce qualified patients, they must be replaced
2
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with additional sites to reach overall and minimal per site patient recruitment
quotas in order to maintain statistical validity.
The major full-service CROs have organized themselves along the same lines
as pharmaceutical companies. They employ the same traditional methodology of
subcontracting the actual performance of the clinical trials to investigational
sites.
The Company's model removes the physician investigator as the primary source
of study patients. Rather than relying on the patient population of one
investigator in a particular city, the Company's approach is to recruit from all
of the potential study patients in an entire geographic area. Patients are
recruited via advertising, referral programs and other means. Potential
patients call the Company's centralized patient recruiting department where
trained personnel prescreen, schedule and capture relevant data on each patient
included in the Company's customized patient database system.
Whenever possible, the Company assembles a number of patients to enter a
study in group clinics which are generally scheduled on evenings and weekends.
This approach works particularly well for studies involving chronic medical
conditions. A group clinic may include from as few as ten to as many as 300
patients. The Company contracts with a physician to serve as the independent
investigator, and the Company staffs the clinic with experienced, part-time
Company employees who perform all of the study coordinator functions.
SERVICES
The Company's services include clinical trials management, clinical data
management, biostatistical analysis and product registration services. The
Company will provide these products separately or as an integrated, "turn-key"
package. Services from each of these categories can be utilized for the
development and preparation of a variety of regulatory filings, e.g., New Drug
Applications ("NDA"), Premarket Approval Applications ("PMA"), and Product
License Applications ("PLA").
Clinical Trials Management Services. The Company offers complete services
-----------------------------------
for the design, placement, performance, recruitment and management of clinical
trial programs. The Company has performed services in connection with trials in
many therapeutic areas. The Company has the ability to examine a product's
existing pre-clinical and clinical data for the purpose of designing protocols
for clinical trials in order to demonstrate the product's safety and efficacy in
the treatment of the targeted disease.
The Company manages every aspect of trials in Phases I through IV, including
design of operations manuals, identification and recruitment of trial
investigators, initiation of sites, recruitment of patients, site monitoring
visits to determine compliance with protocol procedures, adherence to GCP and
proper collection of data, data management, interpretation of trial results and
report preparation. The Company's current projects involve Phase I, II, III and
IV clinical trials.
The Company assists clients with one or more of the following steps of
clinical trials:
. Study Protocol. The protocol defines the disease and treatment the study
seeks to examine and the statistical tests that will be conducted. Accordingly,
the protocol defines: (i) the targeted patient population; (ii) the frequency
and type of laboratory and clinical measures that are to be recorded and
analyzed; (iii) the number of patients required to produce a statistically valid
result; (iv) the period of time over which the measurements must be recorded;
and (v) the frequency and dosage of drug or other product administration.
. Case Report Forms. Once the study protocol has been finalized, special
forms for recording study-specific data must be developed. These forms are
called Case Report Forms ("CRFs"). Study data are transcribed onto CRFs from
original source documents. The CRF for one patient in a given study may consist
of as many as 100 pages or more.
3
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. Site and Investigator Recruitment. The drug or other product is
administered to patients by investigators at hospitals, clinics or other
locations, referred to as sites. Potential investigators may be identified by
the sponsor or the CRO. The investigators are then solicited to participate in
the study. Generally, the Company locates properly qualified investigators who
contract directly with the Company. Most studies with which the Company is
involved are performed at Company-managed sites.
. Patient Enrollment. One of the Company's main competitive strengths is
its ability to quickly and efficiently recruit patients using mass marketing
techniques and a centralized patient management system. Patients are
prescreened for eligibility by trained personnel using an on-line computer
scheduling and database system which captures relevant data for each patient.
Prospective patients are required to review information about the study drug or
other product and possible side effects and sign an informed consent to record
their knowledge and acceptance of potential risks. Patients also undergo a
medical examination performed by the investigator to determine whether they meet
the requirements of the study protocol. Patients then receive the study drug or
other product and are examined by the investigator as specified by the study
protocol.
. Study Monitoring and Data Collection. As patients are examined and
tests are conducted in accordance with the study protocol, data are recorded on
source documents and laboratory reports and are then transcribed onto CRFs. The
data are collected from study sites by specially trained CRAs. CRAs visit sites
regularly to ensure that the CRFs are completed correctly and are consistent
with the underlying source documents and that all data specified in the protocol
are collected. The CRAs take completed CRFs to the study coordinating site,
where the CRFs are reviewed for consistency and accuracy before the information
is entered into an electronic database.
. Report Writing. The results of statistical analysis of data collected
during the trial, together with other clinical data, are included in a final
report generated for inclusion in regulatory documents.
. Medical Affairs. Throughout the course of a clinical trial, the Company
may provide various medical research and services, including medical monitoring
of clinical trials, interpretation of clinical trial results, and preparation of
clinical study reports.
Clinical Data Management and Biostatistical Services. The Company's data
----------------------------------------------------
management professionals assist in the design of protocols and CRFs, as well as
training manuals and training sessions for investigational staff, to ensure that
data are collected in an organized and consistent format. Databases are
designed according to the analytical specifications of the project and the
particular needs of the client. Prior to data entry, the Company's personnel
screen CRFs for errors, omissions and other deficiencies. The Company provides
clients with data abstraction, data review and coding, data entry, database
verification and editing, and problem data resolution.
The Company's biostatistics professionals provide biostatistical consulting,
database design, data analysis, statistical reporting, and assistance in all
phases of drug development. These professionals develop and review protocols,
design appropriate analysis plans and design report formats to address the
objectives of the study protocol as well as the client's individual objectives.
Working with the programming staff, biostatisticians perform appropriate
analyses and produce tables, graphs, listings and other applicable displays of
results according to the analysis plan. Biostatisticians assist clients before
panel hearings at the FDA.
These services are utilized by clients to process data that have previously
been collected by either the client itself or the Company as part of a distinct
phase in the drug development process. The Company believes that its data
management and biostatistical services capabilities can be utilized by a client
more effectively when packaged as part of its total clinical trials management
services. This permits a faster and less costly clinical trial process, because
the data are collected and analyzed more rapidly. The Company emphasizes its
"turn-key" approach in its marketing efforts.
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Product Registration Services. The Company provides comprehensive product
-----------------------------
registration services throughout the United States. The Company provides
regulatory strategy formulation, document preparation, and Good Manufacturing
Practice consultation. The Company also acts as liaison with the FDA and other
regulatory agencies. Although these services have not generated material
revenue to date, the Company offers them in order to provide a full range of
services for its clients.
The Company works closely with clients to devise regulatory strategies and
comprehensive product development programs. The Company's scientific and
regulatory affairs experts review existing published literature, assess the
scientific background of a product, assess the competitive and regulatory
environment, identify deficiencies and define the steps necessary to obtain
registration in the most expeditious manner. Through this service, the Company
helps its clients determine the feasibility of developing a particular product
or product line.
The Company's scientific and regulatory affairs professionals have
experience in the analysis, preparation and submission of FDA regulatory
documents covering a wide range of products, including drugs and over-the-
counter products. The Company also offers the preparation of regulatory
documentation for submission to regulatory authorities.
CLIENTS
The Company has performed or is currently performing studies for 22
different clients, including five of the 15 largest pharmaceutical companies in
the world. The Company's clients include pharmaceutical companies based in the
United States, Great Britain, Ireland, Japan, Mexico and Switzerland. All of
the Company's foreign-based clients have operations in the United States. The
Company's revenues have historically been derived primarily from services
performed in the United States. During the fourth quarter of 1995, the Company
began work on an estimated $400,000 study in Mexico which is still ongoing in
late 1996.
The Company derives a significant portion of its revenue from a relatively
limited number of projects or clients. Concentrations of business in the CRO
industry are typical, and the Company is likely to experience such
concentrations in the remainder of 1996 and future years. In 1994, three clients
each accounted for more than 10% of the Company's total revenue, or 37%, 32% and
24%, respectively. In 1995, four clients each accounted for more than 10% of the
Company's total revenue, or 27%, 19%, 12% and 11%, respectively. For the nine
months ended September 30, 1996, five clients each accounted for more than 10%
of the Company's total revenue, or 22.6%, 17.3%, 15.4%, 10.9% and 10.5%. The
Company's total revenue for 1994, 1995 and the nine months ended September 30,
1996, were provided from 7, 16 and 13 separate clients, respectively.
COMPETITION
The Company primarily competes against in-house departments of
pharmaceutical companies, other full service CROs, and, to a lesser extent,
universities and teaching hospitals. Some of these competitors have
substantially greater capital, technical and other resources than the Company.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, quality of contract
research, ability to organize and manage large-scale trials on a global basis,
ability to manage large, complex medical databases, ability to provide
statistical and regulatory services, ability to recruit investigators, ability
to integrate information technology with systems to improve the efficiency of
contract research, an international presence, financial viability and price.
The Company believes that it competes favorably in these areas with the
exception of a significant international presence.
The CRO industry is highly fragmented, with participants ranging from
several hundred small, limited-service providers to several large, full-service
CROs with global operations. Some of the largest CROs are Corning Lab Services,
Inc. (a subsidiary of Corning, Inc.),
5
<PAGE>
Quintiles Transnational Corporation, Parexel International Corporation,
Pharmaceutical Product Development, Inc. and ClinTrials Research, Inc. The
trend toward CRO industry consolidation has resulted in heightened competition
among the larger CROs for clients and acquisition candidates. In addition,
consolidation within the pharmaceutical industry as well as a trend toward the
concentration by pharmaceutical companies of outsourcing among fewer CROs has
led to heightened competition for CRO contracts.
GOVERNMENT REGULATION
The clinical investigation of new pharmaceutical, biotechnology and medical
device products is highly regulated by governmental agencies. The purpose of
federal regulations is to ensure that only those products which have been proven
to be safe and effective are made available to the public. The FDA has set
forth regulations and guidelines that pertain to applications to initiate trials
of products, approval and conduct of studies, report and record retention,
informed consent, applications for the approval of new products, and post-
marketing requirements. Pursuant to FDA regulations, CROs that assume
obligations of a drug sponsor are required to comply with applicable FDA
regulations and are subject to regulatory action for failure to comply with such
regulations. In the United States, the historical trend has been in the
direction of increased regulation by the FDA, although the FDA in the last three
years has made some modifications to expedite certain processes and recent
legislative initiatives have been proposed to accelerate that trend. The
Company believes that many pharmaceutical, biotechnology and medical device
companies do not have the staff and/or the available expertise to comply with
all of the regulations and standards, and this has contributed and will continue
to contribute to the growth of the CRO industry.
The services provided by the Company are ultimately subject to FDA
regulation in the United States and comparable agencies in other countries,
although the level of applicable regulation in other countries is generally less
comprehensive than regulation present in the United States. The Company is
obligated to comply with FDA regulations governing such activities as selecting
qualified investigators, obtaining required forms from investigators, recruiting
patients, verifying that patient informed consent is obtained, monitoring the
validity and accuracy of data, verifying drug/device accountability, and
instructing investigators to maintain records and reports. The Company must
also maintain records for each study for specified periods for inspection by the
study sponsor and the FDA. The FDA has the authority to audit the Company's
compliance with Federal regulations and guidelines, and if such audits document
that the Company has failed to adequately comply, it could have a material
adverse effect on the Company. In addition, the Company's failure to comply
with applicable regulations could possibly result in termination of ongoing
research or the disqualification of data, either of which could have a material
adverse effect on the Company, including, without limitation, damage to the
Company's reputation.
INTELLECTUAL PROPERTY
The Company has registered CLINICOR(R) as a service mark with the United
States Patent and Trademark Office.
EMPLOYEES
At September 30, 1996, the Company had 145 employees, 38 of which were full-
time.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Portions of this document, including portions of Management's Discussion and
Analysis of Financial Condition and Results of Operations, contain certain
"forward-looking" statements within the meaning of the federal securities laws.
In addition, the Company and its representatives may from time to time make oral
and other written forward-looking statements. The Company notes that a variety
of factors could cause the Company's actual results and experience to differ
materially from the anticipated results expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of The Company's business
include the following: whether the Company is able to effectively manage its
growth; whether the Company is able to maintain existing and future
relationships with its clients; market conditions in the pharmaceutical industry
generally; possible reforms in the health care industry; the possible
cancellation, delay or modification by sponsors of clinical trails being
conducted by the Company; and the possibility of greater-than-anticipated
competition .
OVERVIEW
The Company is a contract research organization ("CRO") providing Phase I
through Phase IV clinical trials management, monitoring, regulatory consulting
and data management services for the pharmaceutical, biotechnology and medical
device industries. Most of the Company's competitors provide study monitoring,
consulting and data management services. Clinicor provides these services in
addition to managing clinical trials, including recruitment of eligible
patients. The Company commenced operations in September 1992 and has achieved
its growth through internal development.
The Company's contracts for services generally vary from three months to
over one year in duration. A portion of the contract fee is typically required
to be paid when the contract is initiated, with the balance payable in
installments over the contract's duration. The installment payments are
typically performance-based, relating payment to previously negotiated events
such as patient enrollment, patient completion or delivery of databases.
Clients generally may terminate or delay the performance of a contract,
potentially causing periods of excess capacity and reductions in service revenue
and net income. Trials may be terminated or delayed for a variety of reasons,
including unexpected or undesired results, production problems resulting in
shortages of the product or delays in supplying the product, adverse patient
reaction to the product, or the client's decision to de-emphasize a particular
trial. If a trial is terminated, the contract generally provides for a short
continuation or wind-down period, as the Company performs required investigator
site closure and data retrieval. The Company's contracts generally require
clients to make all scheduled payments through the termination date; therefore,
the Company is typically entitled to all amounts owed for work performed through
the notice of termination and all costs associated with termination of the
study. In addition, contracts may require the payment of a separate, early
termination fee, the amount of which usually declines as the trial progresses.
Revenue from contracts is recognized on a percentage of completion basis as
work is performed. Contracts are generally based on a fixed price per patient
plus either fixed or variable fees for additional service components such as
monitoring, project management, advertising, travel, data management, consulting
and report writing. Payments received on contracts in excess of amounts earned
are recorded as deferred revenue.
The Company's backlog consists of anticipated service revenue from clinical
trials and other services that have not been completed. To qualify as "backlog,"
anticipated projects must be represented by contracts or letter agreements or
must be projects for which the Company has commenced a significant level of
effort based upon client commitment and approval of a written budget. Once work
commences, service revenue is recognized over the life of the contract. At
December 31, 1994 and 1995, the Company's backlog was approximately $5 million
and $10 million, respectively. The Company's backlog at September 30, 1995 and
1996 was approximately $10 million and $15 million, respectively. Included in
the September 30, 1995 and December 31, 1995 backlog balances is an approximate
$3 million contract that was scheduled to begin in June 1995, but which has been
postponed indefinitely by the sponsor. The contract is not included in the
September 30, 1996 backlog balance. The Company believes that its backlog as of
any date is not necessarily a meaningful predictor of future results, and no
assurances can be given that the Company will fully realize all of its backlog
as service revenue.
Clinical costs are direct expenses of performing studies and include
investigator fees, patient stipends, contractors' fees, laboratory costs,
advertising costs and other direct costs. Selling, general and administrative
expenses consist primarily of compensation and benefits for in-house study
management, selling, general and administrative personnel, professional
services, facility costs for the Company's corporate headquarters, equipment,
information systems and other overhead items.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items
included in the Company's audited statements of operations for the years ended
December 31, 1994 and 1995 and its unaudited statements of operations for the
nine months ended September 30, 1995 and 1996. The trends illustrated in the
following table may not be indicative of future results.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
----------------------------------------- ------------------------------------------------
1994 1995 1996 1995
------------------- -------------------- ------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service Revenue $2,301,455 100.0% $ 2,005,582 100.0% $2,441,788 100.0 % $1,398,006 100.0 %
---------- ----------- ---------- ----------
Operating costs and expenses:
Direct costs 1,683,424 73.2 1,790,861 89.3 1,545,598 63.3 1,135,286 81.2
Selling, general and administrative 866,979 37.7 1,303,437 65.0 1,357,904 55.6 823,791 58.9
Depreciation and amortization 49,191 2.1 60,217 3.0 100,551 4.1 42,421 3.0
---------- ----------- ---------- ----------
Total operating costs and expenses 2,599,594 113.0 3,154,515 157.3 3,004,053 123.0 2,001,498 143.1
---------- ----------- ---------- ----------
Loss from operations (298,139) -13.0 (1,148,933) -57.3 (562,265) -23.0 (603,492) -43.1
---------- ----------- ---------- ----------
Interest income (expense), net (21,496) -0.9 (28,293) -1.4 1,227 0.0 (20,414) -1.5
Loss from discontinued operations (32,500) -1.4 0 0.0 0 0.0 0 0.0
---------- ----------- ---------- ----------
Net loss $ (352,135) -15.3 $(1,177,226) -58.7 $ (561,038) -23.0 $ (623,906) -44.6
========== =========== ========== ==========
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended September 30, 1995
- -----------------------------------------------------------------------------------------
</TABLE>
Service revenue increased $1,044,000, or 75%, from $1,398,000 to $2,442,000
for the nine months ended September 30, 1995 and 1996, respectively. The
increase is attributable primarily to an increase in the volume and size of
clinical trials and, to a lesser extent, to an increase in data management and
consulting engagements. Service revenue is presented gross of reimbursable
costs. Reimbursable costs, such as payments made to investigators, travel and
certain other expenses generally billed to clients at cost, have been
included in direct costs.
Direct costs increased from $1,135,000 for the nine months ended September
30, 1995 to $1,546,000 for the nine months ended September 30, 1996, an increase
of $411,000 or 36%. These costs include compensation and related benefits for
project-related personnel and any other expenses directly related to contracts
including reimbursable costs. The dollar increase in direct costs is consistent
with the increase in service revenue. The lower percentage increase in direct
costs relative to the percentage increase in service revenue is primarily
attributable to an increase in the size and number of studies which yield a
higher net margin and also reflects more efficient utilization of project-
related resources.
Selling, general and administrative expense increased $534,000, or 65%, from
$824,000 for the nine months ended September 30, 1995, to $1,358,000 for the
nine months ended September 30, 1996. The increase is attributable to
approximately equal increases in administrative, marketing and finance personnel
and marketing costs. This increase was partially offset by a decrease in
non-recurring professional fees. The Company has historically added personnel in
excess of its current operating needs and has invested in business promotion
activities in order to build its client base and study contract backlog. It is
the Company's policy to expense such costs as they are incurred. Management
expects selling, general and administrative expenses to decrease in relation to
sales as the sales base increases and the Company's infrastructure becomes more
firmly established.
Depreciation and amortization expense increased $58,130, or, 137% from
$42,421 for the nine months ended September 30, 1995, to $100,551 for the nine
months ended September 30, 1996. This increase is attributable to the Company's
investment of $669,000 in property and equipment during the nine-month period
ended September 30, 1996. These additions were primarily made to the Company's
computerized information systems.
Net interest income (expense), net increased by $21,641, or 106%, from an
expense of $20,414 for the nine months ended September 30, 1995, to net income
of $1,227 for the nine months ended September 30, 1996. This increase is due
primarily to interest income the Company earned on short-term investments made
from proceeds of a preferred stock issuance in July 1996. See "Liquidity and
Capital Resources." Interest income is partially offset by interest expense on
notes from shareholders and capitalized lease obligations.
The Company did not record any income tax benefit from the losses incurred
in the first nine months of 1995 and 1996 due to the uncertainty of utilizing
these losses against future income.
The net loss was lower for the nine months ended September 30, 1996 as
compared to the same period in 1995 due to revenues growing faster than
expenses.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
- -------------------------------------------------------------------------
Service revenue decreased $295,000, or 13%, from $2,301,000 to $2,006,000
for the years ended December 31, 1994 and 1995, respectively. The decrease is
attributable to the indefinite postponement of a $3,000,000 study that was
originally scheduled to begin June 1995. This study has not
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been rescheduled by the sponsor. The Company incurred personnel and other
costs in preparation of this study and decided to maintain this level of
infrastructure to facilitate future expansion. Direct costs increased from
$1,683,000 for the year ended December 31, 1994 to $1,791,000 for the year ended
December 31, 1995, an increase of $108,000, or 6%. Direct costs, as a percentage
of service revenue, increased from 73.2% for the year ended December 31, 1994 to
89.3% for the year ended December 31, 1995.
Selling, general and administrative expense increased $436,000, or 50%, from
$867,000 for the year ended December 31, 1994 to $1,303,000 for the year ended
December 31, 1995. The increase is primarily attributable to increases in
professional fees and also reflects increases in marketing, personnel relocation
and investor relations expenses.
Depreciation and amortization expense increased $11,000, or 22%, from
$49,000 for the year ended December 31, 1994 to $60,000 for the year ended
December 31, 1995. The Company invested $55,000 in equipment and computer
systems for the year ended December 31, 1995 as compared to $143,000 for the
year ended December 31, 1994. These additions were primarily to the Company's
computerized information systems.
Interest expense increased $7,000, or 33%, from $21,000 for the year ended
December 31, 1994 to $28,000 for the year ended December 31, 1995. The increase
is due to interest incurred on loans from shareholders that were initiated in
the third quarter of 1995, partially offset by the continued reduction of
interest incurred due to the diminishing outstanding balances of capitalized
lease obligations.
The Company did not record any income tax benefit from the losses incurred
in 1995 and 1994 due to the uncertainty of utilizing these losses against future
income.
The net loss increased by $825,000 from 1994 to 1995. This increase arose
from the combined effects of lower revenues in 1995 and higher costs, primarily
selling, general and administrative expenses.
In connection with the February 27, 1995 merger with Pegasus, an inactive,
non-reporting, publicly held Nevada corporation, the Company recognized a loss
from discontinued operations of $32,500 as of December 31, 1994, to reflect
Pegasus' pre-merger results from discontinued operations for the year then
ended.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $25,133 for the year ended
December 31, 1994. Net cash used by operating activities was $1,536,243 for the
year ended December 31, 1995. Net cash used by operating activities was
$843,483 and $1,256,911 for the nine months ended September 30, 1995 and 1996,
respectively. Net cash used during the nine months ended September 30, 1996
resulted from an increase of approximately $300,000 in accounts receivable, as
well as increases in direct costs and selling, general and administrative
expenses associated with the growth in operations and backlog.
Since its inception, the Company has financed its operations and growth with
proceeds from private placements of equity securities, advances from
shareholders and borrowing arrangements under capital lease obligations and
lines of credit. Investing activities have consisted of capital expenditures,
primarily for leasehold improvements and computerized information systems and
also for medical and office equipment.
In February 1995, immediately prior to its merger with the Company, Pegasus
issued 750,000 shares of Common Stock for total proceeds of $750,000. Effective
September 15, 1995, the Company initiated a private placement offering, which
terminated on February 16, 1996. In connection with the offering, the Company
sold 573,400 Units consisting of shares of Common Stock and Warrants, for gross
proceeds of $1,433,500, which provided the Company net proceeds of $1,273,538
after deducting related offering expenses and commissions.
On July 15, 1996, the Company sold 3,500 shares of Preferred Stock to an
institutional investor for gross proceeds of $3,500,000, which provided the
Company net proceeds of approximately $3,100,000 after deducting related
issuance expenses of approximately $400,000. The Company believes its available
cash and cash equivalents will be sufficient to meet its foreseeable cash needs.
9
<PAGE>
In September 1996, the Company obtained a one-year $1,000,000 secured line
of credit with an independent financial institution of which $650,000 was
outstanding at September 30, 1996.
Although the Company is not engaged in any acquisition discussions at this
time, the Company will consider acquiring domestic and international businesses
offering services similar or complementary to those offered by the Company. Any
such acquisitions may require additional external financings, and in such event,
the Company may from time to time seek to obtain funds from public or private
issuances of equity or debt securities. There can be no assurances that the
Company will pursue acquisitions or that such financings for any such
acquisitions will be available on terms acceptable to the Company.
INCOME TAXES
Prior to the merger, Clinicor was an S Corporation, as defined by the
Internal Revenue Code ("Code"), for income tax reporting purposes. Pegasus was a
C Corporation, as defined by the Code. Subsequent to the merger, the Company
became a C Corporation for income tax reporting purposes. In accordance with the
Code, Clinicor's premerger accumulated net operating loss of approximately
$500,000 will not be available to the Company as a carry-forward to offset
future taxable income.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") issued by the Financial Accounting Standards Board ("FASB"), under which
deferred tax assets and liabilities are provided on differences between the
carrying amounts for financial reporting and the tax basis of assets and
liabilities for income tax purposes using the enacted tax rates.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized, if on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will not
be realized.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") issued by the FASB, is effective for financial statements for
fiscal years beginning after December 15, 1995. The standard establishes new
guidelines regarding when impairment losses on long-lived assets, which include
plant and equipment, certain identifiable intangible assets, and goodwill,
should be recognized and how impairment losses should be measured. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") issued by the FASB, is effective for specific
transactions entered into after December 15, 1995. The disclosure requirements
of SFAS 123 are effective for financial statements for fiscal years beginning no
later than December 15, 1995. The new standard established a fair value method
of accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from non-employees in exchange for equity
instruments. The Company does not expect adoption to have a material effect on
its financial position or results of operations.
ITEM 3. DESCRIPTION OF PROPERTY
In October 1996, in order to accommodate the growth in its business and
operations, the Company leased approximately 15,200 square feet for a five-year
term in Austin, Texas. The Company moved its corporate offices to this location
in December, 1996. In connection with this lease the Company has also exercised
a right of first refusal on an adjacent 6,200 square feet. Management intends to
sublease the space it formerly occupied through the remaining term, which
expires in 1998, and believes that it will be able to do so. The Company
believes it will not encounter any unusual difficulty obtaining additional
leased office space at acceptable terms and rates if required for future
expansion.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of October 21, 1996, information with
respect to the beneficial ownership of the Company's outstanding Common Stock by
(i) each director and executive officer of the Company, (ii) all directors and
executive officers of the Company as a group, and (iii) each shareholder who was
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding Common Stock. Pursuant to the beneficial ownership rules under the
Securities Exchange Act of 1934, as amended, each named person and all directors
and executive officers as a group are deemed to be the beneficial owners of
securities that may be acquired within 60 days of October 21, 1996 through the
exercise of options or warrants. Accordingly, the number of shares and
percentages set forth opposite each shareholder's name in the table below
assumes the exercise of all such options and warrants. However, the number of
shares of Common Stock issuable upon exercise by any given shareholder are not
included in calculating the percentage of Common Stock beneficially owned by any
other shareholder. Except as otherwise indicated, the persons or entities
listed below have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
10
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned Class
- ------------------- ------------------- -----------
<S> <C> <C>
The Oracle Group 2,353,033/(1)/ 36.7%
712 Fifth Avenue, 45th Floor
New York, New York 10019
Robert S. Sammis 1,007,950/(2)/ 24.6%
1717 West 6th St., #400
Austin, Texas 78703
O'Donnell Family Limited Partnership 828,400/(3)/ 20.3%
1717 West 6th St., #400
Austin, Texas 78703
Robert K. Williams, III 469,506/(4)/ 11.3%
153 Kingswood Circle
Danville, California 94506
Randolph J. Haag 273,881/(5)/ 6.5%
359 Jacaranda
Danville, California 94506
Thomas P. O'Donnell 307,950/(6)/ 7.5%
1717 West 6th St., #400
Austin, Texas 78703
Arthur P. Haag 153,000/(7)/ 3.7%
11747 Quail Creek Drive
Houston, Texas 77070
Robert M. Day, Ph.D. 10,000/(8)/ 0.2%
1717 West 6th St., #400
Austin, Texas 78703
Susan M. Georgen-Saad -0- 0%
1717 West 6th St., #400
Austin, Texas 78703
Stuart Weisbrod, Ph.D. 10,000 0.2%
712 Fifth Avenue, 45th Floor
New York, New York 10019
Zola P. Horovitz, Ph.D. -0- 0%
30 Philip Drive
Princeton, New Jersey 08540
All Directors and Executive Officers as 1,197,617/(9)/ 28.7%
a group (7 persons)
</TABLE>
11
<PAGE>
____________________________
(1) "The Oracle Group," as used herein, refers to the following funds: Oracle
Partners, L.P., Quasar International Partners C.V., Oracle Institutional
Partners, L.P. and GSAM Oracle Fund, Inc. The shares listed include
2,333,333 shares that are issuable to The Oracle Group pursuant to The
Oracle Group's option to convert 3,500 shares of 8% Convertible Preferred
Stock to the Company's Common Stock. Larry N. Feinberg is the Managing
General Partner of Oracle Partners, L.P. and Oracle Institutional Partners,
L.P. Oracle Investment Management, Inc., which is owned by Mr. Feinberg,
acts as the investment manager to Quasar International Partners C.V. and
GSAM Oracle Fund, Inc. Mr. Feinberg may be deemed to beneficially own the
shares owned by The Oracle Group.
(2) Mr. O'Donnell and Mr. Sammis have entered into agreements with each of
Drs. Dell, Ramsdell and Shulman, pursuant to which Messrs. Sammis and
O'Donnell are jointly entitled to direct the manner in which the aggregate
291,283 shares owned by Drs. Dell, Ramsdell and Shulman shall be voted.
Mr. Sammis may therefore be deemed to beneficially own these shares. Also
includes 16,667 shares issuable to Mr. Sammis pursuant to immediately
exercisable options.
(3) Ms. Kristina Breen O'Donnell is the sole officer and director of the
general partner of the O'Donnell Family Limited Partnership and has voting
and dispositive power with respect to the 828,400 shares owned by the
Partnership. Ms. O'Donnell may therefore be deemed to beneficially own
these shares.
(4) Includes (i) 109,400 shares held by Guarantee and Trust Co. FBO Robert K.
Williams III Sep/IRA, as to which Mr. Williams has voting and dispositive
power and (ii) 51,606 shares issuable to Mr. Williams pursuant to
immediately exercisable sales agent warrants.
(5) Includes (i) 50,000 shares issuable to Mr. Randolph J. Haag pursuant to
immediately exercisable options and (ii) 51,606 shares issuable to Mr. Haag
pursuant to immediately exercisable sales agent warrants.
(6) Mr. O'Donnell and Mr. Sammis have entered into agreements with each of
Drs. Dell, Ramsdell and Shulman, pursuant to which Messrs. Sammis and
O'Donnell are jointly entitled to direct the manner in which the aggregate
291,283 shares owned by Drs. Dell, Ramsdell and Shulman shall be voted.
Mr. O'Donnell may therefore be deemed to beneficially own these shares.
Also includes 16,667 shares issuable to Mr. O'Donnell pursuant to
immediately exercisable options.
(7) Includes 50,000 shares issuable to Mr. Arthur P. Haag pursuant to
immediately exercisable options.
(8) Includes 10,000 shares issuable to Dr. Robert M. Day pursuant to
immediately exercisable options.
(9) Includes (i) 291,283 shares owned by Drs. Dell, Ramsdell and Shulman, as
to which Messrs. Sammis and O'Donnell have voting power; (ii) 16,667 shares
issuable to Robert S. Sammis pursuant to immediately exercisable options;
(iii) 16,667 shares issuable to Thomas P. O'Donnell pursuant to immediately
exercisable options; (iv) 50,000 shares issuable to Arthur P. Haag pursuant
to immediately exercisable options; and (v) 10,000 shares issuable to Dr.
Robert M. Day pursuant to immediately exercisable options.
In any election of directors, the holders of the Preferred Stock, voting
separately as a class, are entitled to elect that number of directors as is
proportionate to their ownership interest in the Company, determined on an as-
converted basis. On an as-converted basis, the holders of the Preferred Stock
currently have a 36.3% interest in the Company, which interest may increase over
time as mandatory in-kind dividends are paid with respect to the Preferred
Stock. Upon any default in the payment of dividends on the Preferred Stock,
each director who has been elected by the holders of the Preferred Stock will be
entitled to two votes on all matters on which the directors are entitled to
vote, while each director elected by the holders of Common Stock shall continue
to have the right to cast one vote. Accordingly, a default in the payment of
dividends on the Preferred Stock could result in the directors who have been
elected by the holders of the Preferred Stock (currently Dr. Weisbrod and Dr.
Horovitz) having voting control with respect to matters presented to the Board.
12
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas P. O'Donnell 47 Chairman of the Board, President,
Chief Executive Officer, Director
Robert S. Sammis, MBA 44 Executive Vice President, Chief
Operating Officer, Secretary, Director
Arthur P. Haag 67 Director
Stuart T. Weisbrod, Ph.D. 42 Director
Zola P. Horovitz, Ph.D. 62 Director
Robert M. Day, Ph.D. 42 Vice President of Scientific Affairs
Susan M. Georgen-Saad, CPA 39 Vice President, Chief Financial Officer,
Treasurer
</TABLE>
All current directors hold office until the 1997 annual meeting of the
Company's shareholders and until their successors are duly elected and
qualified; thereafter, directors will be elected annually. The executive
officers are appointed annually by the Board of Directors and serve at the
discretion of the Board. No family relationships exist among any of the
directors and executive officers of the Company.
Thomas P. O'Donnell became Chairman of the Board in November 1996 and has
been the President, Chief Executive Officer and a director of the Company since
its inception. From March 1991 until September 1992, Mr. O'Donnell was the Chief
Executive Officer of another CRO, Barton Research, Inc. From 1987 until March
1991, Mr. O'Donnell was President of Biomedical Research Group, a CRO
specializing in analgesic studies. While President of Biomedical, Mr. O'Donnell
expanded its medical specialty areas into ophthalmics, gastrointestinal and
anti-infectives. From 1980 to 1987, Mr. O'Donnell was Chief Executive Officer of
SKO, Inc., a corporation with interests in manufacturing, transportation, and
office products. Prior to 1980, Mr. O'Donnell was a health care specialist and
manager with the public accounting firm of Arthur Andersen & Co. Mr. O'Donnell
holds a business degree from the University of Notre Dame. Mr. O'Donnell has
provided expert testimony before the Health Care Financing Administration of the
Department of Health and Human Services and has served on the Board of Trustees
of various hospitals and ambulatory surgical centers.
Robert S. Sammis has been the Company's Executive Vice President, Chief
Operating Officer, Secretary and a director since the Company's inception. From
March 1991 until September 1992, Mr. Sammis served as Director of Barton
Research, Inc., and from August 1991 until September 1992, he served as Barton's
Executive Vice President and Chief Operating Officer. From 1986 until August
1992, Mr. Sammis was engaged as a practicing CPA specializing in business
consultation. Mr. Sammis spent five years with Arthur Andersen & Co. where he
was an audit manager in the firm's health care practice. Mr. Sammis holds an
MBA degree from the University of Texas.
13
<PAGE>
Arthur P. Haag has been a director of the Company since February 1995 and,
until November 1996, served as its Chairman. Prior to the merger of Clinicor
and Pegasus, Mr. Haag was Chairman and Chief Executive Officer of Pegasus. Mr.
Haag is also currently President and CEO of Neutrex, Inc., a privately-held
Houston-located specialty chemical materials firm with which he has been
associated since 1992. From 1990 to 1992, Mr. Haag served as President and a
Director of Advanced Temperature Devices, Inc. Between 1986 and 1990, Mr. Haag
was co-founder and Chief Executive Officer of CytoDiagnostics, Inc. and
ElectroFusion, Inc. From 1982 until 1987, Mr. Haag was CEO of Catalyst
Resources, Inc., a subsidiary of Phillips Petroleum Company. He was President
of the Catalyst Division at Dart Industries, Inc. from 1970 to 1982. Prior to
1970, he was the founder and Chief Executive Officer of PureChem Corporation
which was subsequently sold to Dart Industries, Inc.
Stuart T. Weisbrod, Ph.D. joined the Company as a director in November 1996.
Since February 1995, Dr. Weisbrod has been a partner with Oracle Partners, L.P.,
a firm that invests in health care, bioscience and related industries. Prior to
that, he was a partner in the Harpel Advisory Company with responsibility for
the firm's health care and venture capital investment activities. From 1990 to
1993, Dr. Weisbrod served as a First Vice President at Merrill Lynch with
responsibility for investment research. From 1986 to 1990, he was a
biotechnology analyst with Prudential Bache. Dr. Weisbrod received his Ph.D. in
Biotechnology from Princeton University in 1980. From 1980 to 1982 he was an
American Cancer Society Postdoctoral Fellow at the Medical Research Council
Laboratory in Cambridge, England, followed by a second fellowship at Cold Spring
Harbor Laboratory. Dr. Weisbrod received an MBA from Columbia University in
1984.
Zola P. Horovitz, Ph.D. joined the Company as a director in November 1996.
Dr. Horovitz worked for the Bristol-Myers Squibb Corporation and one of its
predecessor entities, The Squibb Institute for Medical Research, for 35 years
until his retirement in 1994. Since his retirement, Dr. Horovitz has served as
a consultant to the biotechnology and pharmaceutical industries. Dr. Horovitz
received an M.S. in Pharmacology in 1958 and his Ph.D. in Pharmacology in 1960,
both from the University of Pittsburgh. Dr. Horovitz serves as a director of
Diacrin Inc., Biocryst Pharmaceuticals Inc., Synaptic Pharmaceutical Corp.,
Procept Inc., Magainin Pharmaceuticals, Inc., AVIGEN Inc. and Roberts
Pharmaceuticals Co. and several privately-held companies.
Robert M. Day, Ph.D., Vice President of Scientific Affairs, joined the
Company in June 1995. Dr. Day's experience includes the establishment of
complete clinical development programs and extensive interaction with the FDA.
Prior to joining Clinicor, Dr. Day was a Vice President of Clinical Research at
Arcturus Pharmaceutical Corporation. From 1992 to 1994 he was Associate Director
of Clinical Affairs at Dermik Laboratories (Rhone-Poulenc Rorer). From 1988 to
1992, Dr. Day was with Glaxo, Inc. where he served as Associate Director of
Clinical Research for Glaxo Dermatology. From 1984 to 1988, Dr. Day was with
Allergan, Inc. serving in the clinical research and development departments of
both the eyecare and dermatology units. He received his Ph.D. in Biological
Science in 1983 from the University of California, Irvine. Dr. Day received a
Bachelor of Science degree from Brown University where he graduated with Honors
in 1976. He is a co-inventor in a patent covering an antifungal/antiinflammatory
drug delivery system. Dr. Day is a current member of the Board of Trustees for
the National Psoriasis Foundation.
Susan M. Georgen-Saad, Vice President, Chief Financial Officer and
Treasurer, joined the Company in June 1996. Prior to joining the Company, Ms.
Georgen-Saad was Senior Vice President, Finance, for the Texas Workers'
Compensation Insurance Fund, a competitive insurance company with assets of $1.3
billion and annual revenue of over $600 million. From 1991 to 1994, she
maintained a professional practice as a financial services consultant. From
1984 to 1991, Ms. Georgen-Saad served as a Chief Financial and Chief Operating
Officer in the mortgage and financial services industries. Prior
14
<PAGE>
to that, she was with the audit division of KPMG Peat-Marwick from 1979 to 1984.
Ms. Georgen-Saad received a BBA in accounting from the University of Notre Dame,
and she is a licensed CPA in Texas.
CERTAIN LEGAL PROCEEDINGS
As was indicated above, Thomas P. O'Donnell was affiliated with SKO, Inc.
("SKO"), a privately owned company, from 1980 to 1987. As an officer and
principal shareholder of SKO, Mr. O'Donnell executed personal guarantees of
SKO's bank debt and other obligations. SKO suffered financial reversals,
largely as the result of the insolvency of its primary lender, and in 1991 Mr.
O'Donnell filed for protection under Chapter 11 of the United States Bankruptcy
Code. His bankruptcy case was later converted to a Chapter 7 liquidation
proceeding.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
for the year ended December 31, 1995, earned by or paid to the Company's Chief
Executive Officer and the other persons who were executive officers of the
Company in 1995 (the "named executive officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------- -------------
Awards
-------------
Securities
Other Annual Underlying All Other
Salary Compensation Options/(1)/ Compensation
Name and Principal Position ($) ($) (#) ($)
- --------------------------- ------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Thomas P. O'Donnell................ 90,000 0 150,000 1,523/(2)/
Chairman of the Board,
President and Chief
Executive Officer
Robert S. Sammis................... 90,000 0 150,000 1,523/(2)/
Executive Vice President, Chief
Operating Officer and Secretary
Robert M. Day, Ph.D................ 70,000 0 10,000 0
Vice President of Scientific
Affairs
</TABLE>
____________________________
(1) The table does not include options which have lapsed.
(2) The Company paid insurance premiums totalling $6,092 on term life
insurance policies on Mr. O'Donnell and Mr. Sammis. Each policy is in the
amount of $2,000,000, with $1,000,000 payable to the Company and $1,000,000
payable to a beneficiary designated by the officer.
STOCK OPTIONS
In December 1994, the Board of Directors and the shareholders approved the
1995 Employee and Consultant Stock Option Plan (the "Option Plan"), under which
options to purchase a maximum total of 2,000,000 shares of Common Stock may be
granted. Options granted under the Option Plan may be either "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-statutory stock options. Incentive stock options
may be granted to an employee of the Company, including officers and directors.
Non-statutory stock options may be granted
15
<PAGE>
to consultants as well as non-employee directors. The Option Plan is currently
administered by the Board of Directors, which has the authority to determine
optionees, the number of shares covered by each option, the type of option
(i.e., incentive or non-statutory), the times at which an option may be
exercised, the exercise price, the method of payment, and certain other option
terms. As of September 30, 1996, options representing the right to purchase
437,720 shares of Common Stock were outstanding under the Option Plan.
The exercise price of any option granted under the Option Plan may not, in
the case of an incentive stock option, be less than the fair market value of the
Common Stock at the time of grant, as determined by the Board of Directors.
There is no limit on the number of shares of Common Stock which may be granted
under an option, although the aggregate fair market value of the stock subject
to incentive stock options that become exercisable for the first time during any
one calendar year may not exceed $100,000 per optionee. Options may be granted
under the Option Plan for terms of up to ten years. Options are not transferable
other than upon death and may be exercised at various periods up to 90 days
after the death or termination of employment of the optionee to the extent the
option was then exercisable.
Pursuant to the Option Plan, the following named executive officers were
granted options in 1995 to purchase Common Stock of the Company in the amounts
and at the prices set forth in the chart below. All of the options shown are
incentive stock options. None of the options have been exercised.
<TABLE>
<CAPTION>
Number of Percent Of
Securities Total
Underlying Options
Options Granted to Exercise or
Granted/(1)/ Employees in Base Price Expiration
Name (#) Fiscal Year/(1)/ ($/Sh) Date
- ---- ------------------- ----------------- ------------ ----------
<S> <C> <C> <C> <C>
Thomas P. O'Donnell... 100,000/(2)/ 31% 1.25 2/27/2000
50,000/(3)/ 15% 1.10 8/22/2000
Robert S. Sammis...... 100,000/(2)/ 31% 1.25 2/27/2000
50,000/(3)/ 15% 1.10 8/22/2000
Robert M. Day, Ph.D... 10,000/(4)/ 3% 1.00 6/1/2001
</TABLE>
____________________________
(1) The table does not include options which have lapsed.
(2) The 100,000 share options held by Thomas P. O'Donnell and Robert S. Sammis
will vest in increments, subject to the Company's achieving certain
performance criteria. One-half of the options will vest at any time after
January 1, 1998 that the Company has achieved $12 million in service
revenue or $2 million in pre-tax earnings for the previous twelve-month
period. Options for the remaining shares will vest at any time after
January 1, 1999 that the Company has achieved $18 million in service
revenue or $3 million in pre-tax earnings for the previous twelve-month
period.
(3) These options vest over a three-year period in equal annual increments,
beginning on August 22, 1996.
(4) These options vested in full on June 1, 1996.
The following table sets forth information concerning the aggregate number
and value of unexercised options held by the named executive officers at
December 31, 1995. No options were exercised by the named executive officers
during the year ended December 31, 1995.
16
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options At In-The-Money Options At
Fiscal Year-End (#) Fiscal Year-End ($)
--------------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas P. O'Donnell... 0 150,000/(1)/ $0 $45,000
Robert S. Sammis...... 0 150,000/(1)/ 0 45,000
Robert M. Day, Ph.D... 0 10,000 0 5,000
</TABLE>
____________________________
(1) The table does not include options which have lapsed.
EMPLOYMENT AGREEMENTS
During 1996 Messrs. O'Donnell and Sammis each became parties to five-year
employment contracts with the Company, pursuant to which they are entitled to
salaries of $150,000 and $135,000 per year, respectively. The Company may
terminate either such agreement with or without cause; provided, however, if
employment is terminated without cause, then the executive in question is
entitled to receive a severance payment equal to two times the compensation
received from the Company in the 12 months prior to the date of termination. If
employment is terminated either voluntarily by the executive or by the Company
for cause, then no severance is payable; provided, however, that if the
executive terminates his employment following a material reduction in his level
of responsibility, then such termination shall be deemed to be termination
without cause by the Company, and the executive shall be entitled to the
severance payment described above. In any event, the executive in question is
bound by a noncompetition covenant until the earlier of (i) June 30, 1999 or
(ii) two years following termination of employment.
Dr. Day is party to a two-year employment agreement with the Company,
pursuant to which he is entitled to a salary of $120,000 annually. The Company
may terminate his employment with or without cause; provided, however, if
employment is terminated without cause, Dr. Day is entitled to continue to
receive his salary for either the unexpired portion of the two-year contract
period or six months, whichever period is greater.
DIRECTOR COMPENSATION
The Company reimburses directors for expenses incurred, if any, in attending
meetings of the Board of Directors. The Company does not pay director fees to
directors for their service on the Board. However, Arthur Haag and Zola
Horovitz are consultants to the Company, and each receives an annual retainer of
$18,000. In addition, for as long as he serves as a director and consultant to
the Company, Dr. Horovitz will receive annual options to purchase 5,000 shares
of Common Stock under the Option Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Merger. As is disclosed elsewhere herein, on February 27, 1995, Clinicor,
------
Inc., a Texas corporation (referred to herein as the "Predecessor Company"), was
merged into Pegasus Tax and Financial Planning Services, Inc. In connection
with the merger (the "Merger"), the Predecessor Company ceased to exist and
Pegasus, as the surviving entity, changed its name to Clinicor, Inc.
Immediately prior to the Merger, the principal shareholders of Pegasus included
Randolph J. Haag and Russell Armstrong. The principal shareholders of the
Predecessor Company were Patricia J. O'Donnell
17
<PAGE>
and Robert S. Sammis, who owned 48.0% and 37.5% of the Predecessor Company,
respectively. Patricia J. O'Donnell is the mother of Thomas P. O'Donnell.
Of the shares of the Predecessor Company that were outstanding prior to the
Merger, 6,000 and 4,000 of such shares had been issued to Patricia J. O'Donnell
and Robert S. Sammis, respectively, in September 1992 for a per share purchase
price of $0.10. On November 11, 1994, the Predecessor Company issued 687.5
shares of its Common Stock to Robert S. Sammis in consideration of personal
guarantees rendered by Mr. Sammis with respect to the Predecessor Company's
lease of office space, computer systems, office equipment, furniture and medical
equipment.
Immediately prior to the Merger, Pegasus sold an aggregate of 750,000 shares
of Common Stock at a purchase price of $1.00 per share to Randolph J. Haag,
Irawan Onggara and Russell Armstrong. Such individuals purchased 375,000,
187,500 and 187,500 shares of Common Stock of Pegasus, respectively.
In the Merger, each share of Pegasus common stock (a total of 1,421,000
shares) remained outstanding. Each of the Predecessor Company's 12,500 shares
of Common Stock was converted into 166.4 shares of the Company (a total of
2,080,000 shares), such that after the Merger the Company had a total of
3,501,000 shares outstanding.
Agreements Ancillary to Merger. In connection with the Merger, the parties
------------------------------
thereto agreed that Thomas P. O'Donnell, Robert S. Sammis and Arthur P. Haag
(the father of Randolph J. Haag) would serve as directors of the Company for a
two-year period from and after the Merger. The parties also entered into a
number of agreements, the most significant of which are briefly described below.
Unless otherwise indicated, all of such agreements were entered into on February
27, 1995.
The Company, Randolph J. Haag, Irawan Onggara and Russell Armstrong entered
into a Preemptive Rights Agreement, pursuant to which the Company granted to the
three named individuals a right of first refusal for a period of three years to
purchase a portion of all new securities issued by the Company. Such portion is
equal to their percentage ownership of the Company on the date of execution of
the agreement. Messrs. Haag, Onggara and Armstrong subsequently relinquished
all of their rights under the Preemptive Rights Agreement, as more fully
described below.
The Company and Randolph J. Haag entered into an Investment Banking Rights
Agreement, pursuant to which the Company granted to Mr. Haag a right of first
refusal for a period of three years to provide certain investment banking
services to the Company, on terms to be mutually agreed upon by the parties. No
amounts were paid to Mr. Haag under the agreement. The Investment Banking
Rights Agreement has been terminated, as discussed below.
In March 1996, Randolph Haag relinquished all rights under any and all
agreements to which he and the Company are parties in exchange for a cash
payment of $25,000 and a contractual grant of options to purchase 50,000 shares
at an exercise price of $1.00 per share. The option expires on February 28,
2001.
For due diligence services performed in connection with the Merger, Mr.
Arthur P. Haag, currently a director of the Company, received options to
purchase up to 25,000 shares of the Company's Common Stock at a purchase price
of $0.10 per share. Such options expire on February 27, 1998.
In anticipation of the Merger, Messrs. Sammis and O'Donnell entered into a
Voting and Pre-Merger Agreement with each of Steven J. Dell, M.D., William M.
Ramsdell, M.D. and David G. Shulman, M.D., who were shareholders of the
Predecessor Company. Pursuant to such agreements, each of the named physicians
agreed to vote their shares of Common Stock of the Company in such manner as may
be determined by Messrs. O'Donnell and Sammis. These agreements terminate upon
the closing
18
<PAGE>
of an underwritten public offering of the Company which results in aggregate net
proceeds to the Company of at least $5.0 million.
Private Placement Offering. From September 1995 to February 1996, the
--------------------------
Company engaged in a private placement offering (the "Private Offering") of
Units consisting of Common Stock and Warrants to purchase Common Stock. See
"Recent Sales of Unregistered Securities." The Units were offered through SJ
Capital, Inc. (the "Sales Agent"), which acted as the Company's sales agent.
Randolph J. Haag was affiliated with the Sales Agent at the time of the Private
Offering and received 103,212 Sales Agent Warrants and consulting and commission
fees of $76,478 from the Sales Agent in connection with the Private Offering.
See "Description of Securities--Warrants."
Indemnified Lawsuit. In connection with their separation from a previous
-------------------
employer and the formation of the Predecessor Company, Thomas P. O'Donnell and
Robert S. Sammis became involved in certain disputes with the previous employer
and one of its shareholders and creditors. These disputes culminated in the
previous employer's filing of a lawsuit against Mr. Sammis in which various
causes of action were alleged. The Company has agreed to indemnify Mr. Sammis
and Mr. O'Donnell in connection with their disputes with the previous employer
and to indemnify Mr. Sammis in connection with the lawsuit. As of October 31,
1996, the Company has incurred approximately $82,000 in fees in connection with
such lawsuit, of which approximately $68,500 has been paid. In the opinion of
the Company's management, the outcome of this lawsuit will not have a material
adverse effect on the financial position or results of operations of the
Company.
The indemnification arrangements referenced in the preceding paragraph are
reflected in corporate resolutions and in correspondence between the Company and
Mr. Sammis. Pursuant to such documentation, Mr. Sammis agrees that if it is
ultimately determined that indemnification is prohibited by law, he will
reimburse any amounts paid by the Company in connection with the indemnified
lawsuit. Section 78.751 of the Nevada General Corporation Law contains certain
limitations on a corporation's ability to indemnify directors and officers,
including, without limitation in the event that a final adjudication establishes
that the acts or omissions of such officer or director involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action.
Preferred Stock Sale. In July 1996, the Company issued 3,500 shares of
--------------------
Preferred Stock to Oracle Partners, L.P. and certain of its affiliates. See
"Recent Sales of Unregistered Securities." For information concerning the
conversion rate and other provisions of the Preferred Stock, see "Description of
Securities--Preferred Stock." In connection with the sale of the Preferred
Stock, the Company entered into a Settlement Agreement with Russell Armstrong,
Irawan Onggara and Century Financial Partners, Inc. ("CFP"). Pursuant to the
Settlement Agreement, Messrs. Armstrong and Onggara and CFP waived their
preemptive rights and certain other claims in connection with the issuance of
the Preferred Stock and waived all other rights and claims arising under the
Preemptive Rights Agreement in exchange for aggregate cash consideration of
$100,000.
Other Transactions. The Company has from time to time retained Future
------------------
Protocol, Inc., an Austin-based computer consulting firm of which Robert S.
Sammis is a shareholder and serves as a director, to perform certain services
for the Company. The total amount paid by the Company to Future Protocol, Inc.
was $1,130 during fiscal 1995 and $126,288 for the nine months ended September
30, 1996. Management believes that the terms of its arrangement with Future
Protocol, Inc. are as favorable to the Company as the terms that might be
obtained by contracting with an unrelated party. See Note 5 of Notes to
Financial Statements.
During 1995, Robert S. Sammis and Patricia J. O'Donnell advanced funds to
the Company to be used as working capital. The Company has executed two
unsecured promissory notes dated October 1, 1995 in the original principal
amount of $61,000 and $120,000 payable to Mr. Sammis and Mrs. O'Donnell,
respectively. As of October 31, 1996, such amounts remain outstanding. Each note
is payable upon demand and bears interest at 8.0% per annum. See Note 7 of Notes
to Financial Statements.
ITEM 8. LEGAL PROCEEDINGS
In October 1996, suit was filed against the Company in the State District
Court of Travis County, Texas, by Barton Research, Inc. ("Barton"), a CRO that
formerly employed Thomas P. O'Donnell and Robert S. Sammis. Barton had
previously filed suit against Mr. Sammis, charging Mr. Sammis with financial
improprieties and alleging that various actions of Mr. Sammis caused damage to
Barton. The Company has indemnified Mr. Sammis in connection with the suit (the
"Indemnified Lawsuit"). See "Certain Relationships and Related Transactions--
Indemnified Lawsuit." In the petition filed in October 1996, Barton joined
Clinicor in its lawsuit and alleged that Clinicor was established with the
intent to compete with and destroy Barton. The suit further alleges that
Clinicor conspired with Mr. Sammis to interfere with Barton's business contracts
and opportunities. Finally, the suit alleges that Clinicor is the real party in
interest in the Indemnified Lawsuit.
19
<PAGE>
Management has consulted with its trial counsel regarding the plaintiff's
claims. In the view of management, plaintiff's claims are without merit and will
not have a material adverse effect on the financial position or results of
operations of the Company.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has, since March 1995, traded on the Over-the-
Counter Bulletin Board ("OTCBB"). Set forth below for the fiscal quarters
indicated are the range of high and low bids of the Common Stock on the OTCBB.
<TABLE>
<CAPTION>
1995 1996
---------------- -----------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter 4-5/8 3 2-1/4 1-3/4
Second Quarter 4-1/4 2 4-5/8 1-7/8
Third Quarter 2-5/8 2 4 2-5/8
Fourth Quarter 3 1-3/4
</TABLE>
The foregoing quotations, which were obtained from Prophet Information Services,
Inc., reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
As of October 21, 1996, there were approximately 59 shareholders of record
of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The Company is
prohibited from paying dividends on its Common Stock without the consent of the
holders of at least two-thirds of the Company's Preferred Stock.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The Company has made the following sales of its Common Stock and Preferred
Stock since October 1993. None of the sales have involved the use of
underwriters. Issuances during the period prior to February 27, 1995 were made
by Pegasus.
<TABLE>
<CAPTION>
Amount of
Date of Sale Class of Securities Total
or Issuance Securities (Shares) Purchasers Consideration
- ------------------------- ---------- ----------- ------------------ --------------------
<S> <C> <C> <C> <C>
1. December 1993 Common 450,000 3 individuals services rendered
2. December 1993 Common 1,200,000 4 individuals $ 6,000.00
3. January 1994 Common 521,000 41 individuals $ 26,050.00
and entities
4. February 1995 Common 750,000 3 individuals $ 750,000.00
5. February 1995 Common 2,080,000 6 individuals securities exchanged
6. October 1995 through Common 573,400 28 individuals $1,433,500.00
February 1996 and entities
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Amount of
Date of Sale Class of Securities Total
or Issuance Securities (Shares) Purchasers Consideration
- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
7. May 1996 Common 12,000 1 entity services rendered
8. July 1996 Preferred 3,500 4 entities $3,500,000.00
</TABLE>
Sales pursuant to item 1 above were made in reliance upon Section 4(2) of
the Securities Act of 1933. The three individuals who purchased shares included
two persons who were officers and directors of the issuer and one person who
served as legal counsel to the issuer in connection with the issuer's
organization. Sales pursuant to item 1 were in consideration of services
rendered, which were valued by the Board of Directors at $450.00 in the
aggregate. Sales pursuant to item 2 were also made in reliance upon Section
4(2)of the Securities Act of 1933. Purchasers included four individuals, one of
whom was an officer and director of the issuer, one of whom was the mother-in-
law of an officer and director of the issuer, and two of whom were personal
friends of an officer and director of the issuer. A limited number of persons
were offered the opportunity to acquire shares of the issuer, and no general
advertising or solicitation was made in connection with the sales referred to in
items 1 and 2 above. Persons who acquired securities pursuant to the offerings
described in items 1 and 2 above received certificates with restrictive legends
indicating that the shares represented thereby had not been registered under the
Securities Act of 1933 and could not be assigned or transferred absent
registration of an exemption therefrom.
Sales pursuant to items 3 and 4 were made in reliance upon Section 3(b) of
the Securities Act of 1933 and Rule 504 thereunder. A Form D was timely filed
with respect to each such offering.
The issuance of shares pursuant to item 5 above was in connection with the
merger of the Company and the Predecessor Company. All of the persons who
received shares pursuant to item 5 were shareholders of the Predecessor Company
prior to the merger. Such individuals included one person who was an officer and
director of the issuer, three persons who were medical directors of the issuer,
and two persons who were relatives of either an officer and director or medical
director of the issuer. Each of such persons received stock certificates with
the same restrictive legend described above.
The transaction described in item 6 above also included the sale of
Warrants and the issuance of Sales Agent Warrants, as described elsewhere
herein. See "Description of Securities - Warrants" and Note 1 of Notes to
Financial Statements. Sales pursuant to item 6 were made in reliance upon
Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder. A Form D was
timely filed with respect to such offering. Purchasers in the offering included
eight unaccredited investors and 20 accredited investors. There was no general
solicitation or advertising involved in the offering, and all offerees received
extensive disclosure materials. Based upon questionnaires completed by the
investors, the issuer believes that each purchaser who was not an accredited
investor had sufficient knowledge and experience in financial and business
matters to evaluate the merits and risks of an investment in the Company. All
purchasers received stock certificates legended in the manner described above.
The sale pursuant to item 7 above was made in reliance upon Section 4(2) of
the Securities Act of 1933. Based upon representations made by the purchaser of
the stock, the Company believes that such purchaser has sufficient knowledge and
experience in financial and business matters to evaluate the merits and risks of
an investment in the Company. The purchaser received a stock certificate
legended in the manner described above.
Sales pursuant to item 8 above were made in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 thereunder. A Form D was timely filed
with respect thereto. The purchasers consisted of four investment funds, each of
which was accredited. Extensive due diligence was conducted in connection with
the sale by the purchasers and their legal counsel. Certificates representing
securities issued pursuant to item 8 bore restrictive legends, as described
above.
The Company has also granted options to purchase an aggregate of 604,679
shares of the Company's Common Stock, of which options to purchase 554,679 were
granted pursuant to the Option Plan. See "Executive Compensation--Stock Options"
and Note 1 of Notes to Financial Statements. Option grants under the Option Plan
were made in reliance upon Section 3(b) of the Securities Act of 1933 and Rule
701 thereunder. A contractual option to purchase 50,000 shares of Common Stock
was granted in reliance upon Section 4(2) of the Securities Act of 1933. Based
upon contractual representations made by the recipient of the option, the
Company believes that such recipient has sufficient knowledge and experience in
financial and business matters to evaluate the merits and risks of an investment
in the Company.
ITEM 11. DESCRIPTION OF SECURITIES
The Company is authorized to issue 75,000,000 shares of Common Stock and
5,181 shares of Preferred Stock. There are currently outstanding 4,086,400
shares of Common Stock and 3,500 shares of Preferred Stock. There are also
outstanding certain Warrants and Sales Agent Warrants, as well as options to
purchase 487,720 shares of Common Stock.
Common Stock. All 4,086,400 issued and outstanding shares of Common Stock
------------
are validly issued, fully paid and non-assessable. Holders of the Company's
Common Stock are entitled to receive dividends when and as declared by the
Company's Board of Directors out of the funds legally available therefor,
subject to the rights of holders of Preferred Stock, as set forth below.
Holders of Common Stock are entitled to one vote for each share held of record
on each matter submitted to a vote of shareholders. The shares of the Company's
Common Stock have no preemptive or conversion rights except as set forth herein,
nor redemption or sinking fund provisions, and are not liable for further call
or assessment. In the event of the liquidation, dissolution or winding-up of the
Company, each share of the Company's Common Stock is entitled to share pro rata
in any distribution of the Company's assets after payment of all liabilities,
subject to the rights of holders of Preferred Stock, as set forth below.
Preferred Stock. In accordance with the Company's Articles of
---------------
Incorporation, as amended, the Board of Directors is authorized to issue up to
5,181 shares of 8% Convertible Preferred Stock, without par value (the
"Preferred Stock"). There are currently outstanding 3,500 shares of the
Preferred Stock.
The Preferred Stock carries a liquidation preference of $1,000 per share.
The Preferred Stock provides for annual cumulative dividends, which for a five-
year period following issuance are payable in kind and which accrue at the rate
of 8% per annum. On the fifth anniversary of the date of issuance, the dividend
rate increases to 10% per annum, and the rate thereafter increases by an
additional 2% on each successive anniversary date. Dividends accruing after the
fifth anniversary date are payable in cash. The Preferred Stock is redeemable
at the option of the Company at any time after July 9, 1998; there is no
mandatory redemption. The Preferred Stock is convertible into that number of
shares of Common Stock of the Company as is equal to the liquidation preference
of the Preferred Stock being converted
21
<PAGE>
divided by a "conversion value," which is initially $1.50 and which is subject
to adjustment if certain events occur.
Each share of the Preferred Stock entitles the holder thereof to one vote in
all matters submitted to a vote of the shareholders of the Company, except for
the election of directors. In any election of directors, the holders of the
Preferred Stock, voting separately as a class, are entitled to elect that number
of directors, and to remove such directors, as is proportionate to their
ownership interest in the Company, determined on an as-converted basis. In the
event of any liquidation or dissolution of the Company, the holders of the
Preferred Stock will have a preferential right to assets in the amount of the
aggregate liquidation preference of the Preferred Stock. Upon any default in
the payment of dividends, each director who has been elected by the holders of
Preferred Stock will be entitled to two votes on all matters on which the
directors are entitled to vote, while each director elected by the holders of
Common Stock shall have the right to cast one vote.
The holders of the Preferred Stock have various other rights, including
registration rights, pursuant to the Company's Articles of Incorporation, as
amended, and pursuant to a Stock Purchase Agreement entered into with the
holders of the Preferred Stock.
Warrants. The Company issued 573,400 Warrants to investors in a recent
--------
private placement. Two Warrants entitle the holder thereof to purchase one
share of Common Stock for $1.00 per share, as adjusted for certain events.
Warrants are only exercisable during specified Window Periods, during which the
Company shall undertake good faith efforts to establish the availability of an
exemption from registration of the sale of the underlying Common Stock under
applicable federal and state securities laws. The exercise period for the
Warrants expires September 30, 1998 (the "Warrant Term"), subject to certain
rights of the Company to accelerate or delay such expiration. The Exercise
Price is subject to adjustment upon certain events such as stock splits, stock
dividends and similar transactions. The Warrant Term may be discontinued in
connection with certain mergers and other extraordinary transactions or after
the exercise of 50% of the Warrants upon notice by the Company to the warrant
holders of record. The Warrants are also subject to redemption by the Company
in certain events.
The Company also issued 114,680 Sales Agent Warrants to the firm that acted
as sales agent in the private placement. Upon exercise of a Sales Agent Warrant
at an exercise price of $2.50, the holder receives one share of the Company's
Common Stock and one Warrant to purchase Common Stock. Such Warrants are
substantially identical to the Warrants described above, but may be exercised
for a period of three years after issuance, subject to certain rights of the
Company to accelerate or delay expiration.
Subject to compliance with applicable securities laws and the provisions set
forth in a Registration Rights Agreement between the Company and the original
holders of the Warrants, Warrants are transferable. The holders of Warrants, as
such, are not entitled to vote, to receive dividends or to exercise any of the
rights of stock holders for any purpose. The Warrants may be transferred
separately from the Common Stock with which they were issued.
The Company may at any time and from time to time extend the Warrant Term or
reduce the exercise price, provided written notice of such extension or
reduction is given to the registered holders of the Warrants prior to the
expiration date then in effect.
Options. See "Stock Options" under Item 6 for a discussion of the 1995
-------
Employee and Consultant Stock Option Plan. There are currently 437,720 options
outstanding under the Option Plan. There is also outstanding a contractual
option to purchase 50,000 shares of the Company's Common Stock.
Transfer Agent. The Company's transfer agent for all securities is Pacific
--------------
Stock Transfer Company, P.O. Box 93385, Las Vegas, Nevada 89193-3385, (702) 361-
3033.
22
<PAGE>
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 78.751 and 78.752 of the Nevada General Corporation Law permit a
Nevada corporation, subject to certain conditions, to indemnify its present and
former directors, officers, employees and agents, and certain other persons who
are or were serving in similar capacities in other entities at the request of
the corporation, with respect to liability arising from their capacity as such;
to advance expenses to such persons; and to purchase and maintain insurance or
other arrangements on behalf of such persons.
Article IX of the Company's Articles of Incorporation, as amended, included
as Exhibit 3(a) hereto, limits the personal liability of a director or officer
------------
of the Company to the Company or the shareholders for damages for breach of
fiduciary duty to acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law. Current Nevada law expressly authorizes the
foregoing limitation on liability.
Article X of the Company's Articles of Incorporation, as amended, included
as Exhibit 3(a) hereto, and Article VII of the Company's Amended and Restated
------------
Bylaws, included as Exhibit 3(b) hereto, essentially provide for officers,
------------
directors, employees and agents to be indemnified, and to receive reimbursement
of reasonable expenses incurred in advance of the final disposition of a
proceeding, to the maximum extent permitted by Nevada law.
In June 1996, the Company obtained a liability policy which insures its
officers and directors against loss arising from claims by reason of their legal
liability for acts as officers and directors, subject to limitations and
conditions set forth in the policy. The policy provides coverage of up to
$1,000,000 per claim with a maximum of $1,000,000 per policy period.
ITEM 13. FINANCIAL STATEMENTS
The index to the Company's Financial Statements appears under Item 15 of the
Form 10-SB.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 2, 1996, the Company dismissed BDO Seidman, LLP as its
independent public accountant and retained Price Waterhouse LLP. Neither of BDO
Seidman's reports on the Company's financial statements for the past two years
contained an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope or accounting principles. The decision to change
accountants was approved by the Company's Board of Directors. There were no
disagreements with BDO Seidman on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to BDO Seidman's satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
report.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following financial statements of the Company are filed as part of
this report:
Report of BDO Seidman, LLP, Independent Certified Public Accountants F-1
Balance Sheets - December 31, 1995 and September 30, 1996 (unaudited) F-2
Statements of Operations - Years ended December 31, 1994 and 1995
and Nine Months ended September 30, 1995 and 1996 (unaudited) F-3
Statements of Shareholders' Equity - December 31, 1993, 1994 and 1995
and Nine Months Ended September 30, 1996 (unaudited) F-4
Statements of Cash Flows - Years ended December 31, 1994 and 1995
and Nine Months ended September 30, 1995 and 1996 (unaudited) F-5
Notes to Financial Statements F-6
23
<PAGE>
(b) Exhibits
2 Not applicable
3(a) Articles of Incorporation, as amended*
3(b) Amended and Restated Bylaws*
4(a) Stock Purchase Agreement dated as of July 15, 1996 between the
registrant and Oracle Partners, L.P., Quasar International Partners,
C.V., Oracle Institutional Partners, L.P. and GSAM Oracle Fund, Inc.*
4(b) Certificate of Amendment of Certificate of Incorporation of the
registrant, incorporated herein by reference to Exhibit 3(a)*
4(c) Amended and Restated Bylaws of the registrant, incorporated herein by
reference to Exhibit 3(b)*
4(d) Terms of Warrants issued by the registrant*
4(e) Registration Rights Agreement effective December 1, 1995 by and among
the registrant and certain individuals and entities*
4(f) Sales Agent Warrant dated May 20, 1996 issued to SJ Capital, Inc.*
4(g) Preemptive Rights Agreement effective February 27, 1995 among the
registrant and Randolph Haag, Russell Armstrong and Irawan Onggara*
4(h) Settlement Agreement dated as of July 8, 1996 between the registrant
and Russell Armstrong, Irawan Onggara and Century Financial Partners,
Inc.*
7 Not applicable
9 Not applicable
10(a) Voting and Pre-Merger Agreement dated February 14, 1995 among the
registrant, Thomas P. O'Donnell, Robert S. Sammis and Steven J. Dell,
M.D.*
10(b) Voting and Pre-Merger Agreement dated February 14, 1995 among the
registrant, Thomas P. O'Donnell, Robert S. Sammis and William M.
Ramsdell, M.D.*
10(c) Voting and Pre-Merger Agreement dated February 14, 1995 among the
registrant, Thomas P. O'Donnell, Robert S. Sammis and David Shulman,
M.D.*
10(d) Sales Agent Agreement effective September 15, 1995 between the
registrant and SJ Capital, Inc.*
______________
*Previously filed.
24
<PAGE>
10(e) Agreement and Plan of Merger effective February 27, 1995 between
Pegasus Tax and Financial Planning Services, Inc., Randolph Haag,
Russell Armstrong, Clinicor, Inc., Robert S. Sammis and Thomas P.
O'Donnell*
10(f) Covenant Not to Compete Agreement effective February 27, 1995 among
the registrant, Thomas P. O'Donnell and Robert S. Sammis*
10(g) Statement Regarding Employee Proprietary Information and Inventions
Agreement dated February 27, 1995 between the registrant and Thomas P.
O'Donnell*
10(h) Statement Regarding Employee Proprietary Information and Inventions
Agreement dated February 27, 1995 between the registrant and Robert S.
Sammis*
10(i) Agreement dated March 5, 1996 between the registrant and Randolph J.
Haag*
10(j) Option Agreement dated March 5, 1996 between the registrant and
Randolph J. Haag*
10(k) Clinicor, Inc. 1995 Employee and Consultant Stock Option Plan*
10(l) Stock Option Agreement dated February 27, 1995 between the registrant
and Thomas P. O'Donnell*
10(m) Stock Option Agreement dated February 27, 1995 between the registrant
and Robert S. Sammis*
10(n) Employment Agreement dated July 15, 1996 between the registrant and
Thomas P. O'Donnell*
10(o) Employment Agreement dated July 15, 1996 between the registrant and
Robert S. Sammis*
10(p) Employment Agreement dated May 1, 1995 between the registrant and
Robert M. Day*
10(q) Unsecured Note dated October 1, 1995 executed by the registrant and
payable to Robert Sammis*
10(r) Unsecured Note dated October 1, 1995 executed by the registrant and
payable to Patricia J. O'Donnell*
10(s) Letter Agreement dated August 21, 1996 between the registrant and
Zola P. Horovitz*
10(t) Lease dated October 23, 1996 between the registrant and Lake Austin
Commons, Ltd.*
11 Not applicable
14 Not applicable
16 Letter on Change in Certifying Accountant*
21 Not applicable
24 Not applicable
27 Financial Data Schedule*
_________________
*Previously filed.
25
<PAGE>
28 Not applicable
99 Not applicable
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this amendment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLINICOR, INC.
Date February 19, 1997 By /s/ Susan M. Georgen-Saad
________________________ _________________________________
Susan M. Georgen-Saad
Vice President, Chief
Financial Officer and Treasurer
26
<PAGE>
Independent Auditors' Report
Clinicor, Inc.
Board of Directors
Austin, Texas
We have audited the accompanying balance sheet of Clinicor, Inc. (the "Company")
as of December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for each of the two years ended December 31, 1994 and
1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clinicor, Inc. at December 31,
1995, and the results of its operations and cash flows for each of the two years
ended December 31, 1994 and 1995 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Austin, Texas
April 18, 1996, except for
Note 2 which is as of July 16, 1996
F-1
<PAGE>
CLINICOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
==============================================================================================================================
September 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ ------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $ 267,281 $ 2,529,687
Accounts receivable (Notes 4 and 5) 633,540 1,041,961
Prepaid and other current assets 7,570 31,554
----------- -----------
Total current assets 908,391 3,603,202
Equipment and computer systems, net (Note 6) 192,897 764,447
Other assets, net 6,445 257,752
----------- -----------
TOTAL ASSETS $ 1,107,733 $ 4,625,401
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases (Note 7) $ 25,751 $ 13,295
Accounts payable 180,301 283,876
Accrued study costs 315,000 49,050
Accrued liabilities 133,239 34,760
Accrued payroll and payroll taxes (Note 8) 168,990 75,825
Line of credit (Note 3) - 650,000
Deferred revenue 45,000 35,000
Dividends payable - 59,889
Notes payable to stockholders (Note 8) 181,000 181,000
----------- -----------
Total current liabilities 1,049,281 1,382,695
Obligations under capital leases, less current portion (Note 7) 35,167 18,498
----------- -----------
Total liabilities 1,084,448 1,401,193
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 1 and 2):
Common stock 3,939 4,086
Convertible preferred stock - 3,500,000
Additional paid-in capital 1,788,499 2,050,313
----------- -----------
Contributed capital 1,792,438 5,554,399
Accumulated deficit (1,769,153) (2,330,191)
----------- -----------
Total stockholders' equity 23,285 3,224,208
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,107,733 $ 4,625,401
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. F-2
<PAGE>
CLINICOR, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
===================================================================================================================================
YEARS ENDED DECEMBER 31, 9 MONTHS ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1995 1996
1994 1995 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Service Revenue $ 2,301,455 $ 2,005,582 $ 1,398,006 $ 2,441,788
Operating costs and expenses
Direct costs 1,683,424 1,790,861 1,135,286 1,545,598
Selling, general and administrative 866,979 1,303,437 823,791 1,357,904
Depreciation and amortization 49,191 60,217 42,421 100,551
----------- ----------- ----------- -----------
Total operating costs and expenses 2,599,594 3,154,515 2,001,498 3,004,053
----------- ----------- ----------- -----------
Loss from operations (298,139) (1,148,933) (603,492) (562,265)
Other income and expenses
Interest income - - - 26,672
Interest expense 21,496 28,293 20,414 25,445
----------- ----------- ----------- -----------
Other income and expenses (21,496) (28,293) (20,414) 1,227
Loss from continuing operations (319,635) (1,177,226) (623,906) (561,038)
Loss from disposal of assets of
discontinued operations (32,500) - - -
----------- ----------- ----------- -----------
NET LOSS $ (352,135) $(1,177,226) $ (623,906) $ (561,038)
=========== =========== =========== ===========
PER SHARE AMOUNTS
Loss from continuing operations $ (0.15) $ (0.36) $ (0.20) $ (0.14)
Loss from discontinued operations
(0.02) 0.00 0.00 0.00
----------- ----------- ----------- -----------
Net loss $ (0.17) $ (0.36) $ (0.20) $ (0.14)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK 2,094,406 3,262,690 3,143,875 4,042,638
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. F-3
<PAGE>
CLINICOR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
===================================================================================================================================
CONVERTIBLE ADDITIONAL
COMMON STOCK PREFERRED PAID-IN
SHARES* AMOUNT STOCK** CAPITAL DEFICIT TOTAL
----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 1,661,810 $ 2,831 $ -- $ 4,800 $ (239,792) $ (232,161)
Net loss -- -- -- (352,135) (352,135)
Common stock issued by Pegasus Tax and
Financial Planning Services, Inc. 521,000 521 25,529 -- 26,050
Common stock issued by Clinicor, Inc. 690 69 -- -- 69
----------- ----------- ---------- ----------- ----------- -----------
Balance at December 31, 1994 2,183,500 3,421 -- 30,329 (591,927) (558,177)
Net loss -- -- -- (1,177,226) (1,177,226)
Common stock issued on February 27,
1995 (Note 1) 750,000 750 749,250 -- 750,000
Common stock retired on February 27,
1995 (Note 1) (1,500,000) (1,500) 1,500 -- --
Conversion of common stock in
connection with the February 27,
1995 merger (Note 1):
Common stock retired (12,500) (1,250) 1,250 -- --
Common stock issued 2,080,000 2,080 (2,080) -- --
Stock options granted February 27,
1995 (Note 1) -- -- 45,000 -- 45,000
Common stock issued in connection
with the Company's private placement
dated September 15, 1995 (Note 1) 438,000 438 963,250 -- 963,688
----------- ----------- ---------- ----------- ----------- -----------
Balance at December 31, 1995 3,939,000 3,939 -- 1,788,499 (1,769,153) 23,285
Net loss (unaudited) -- -- -- -- (561,038) (561,038)
Common stock issued in connection
with the Company's private placement
dated September 15, 1995 (Note 1)
(unaudited) 135,400 135 -- 309,715 -- 309,850
Common stock issued on May 20, 1996 12,000 12 -- 11,988 -- 12,000
(unaudited)
Convertible preferred stock issued
on July 15, 1996 (Note 2)** (unaudited) -- -- 3,500,000 -- -- 3,500,000
Dividends payable on convertible
preferred stock (unaudited) -- -- -- (59,889) -- (59,889)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 (unaudited) 4,086,400 $ 4,086 $ 3,500,000 $ 2,050,313 $(2,330,191) $ 3,224,208
=========== =========== =========== =========== =========== ===========
* $.001 par, 75,000,000 shares authorized.
** 3,500 Shares of convertible preferred stock, no par value, issued for total consideration of $3.5 million.
</TABLE>
The accompanying notes are an integral part of these financial statements. F-4
<PAGE>
CLINICOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===================================================================================================================================
YEARS ENDED DECEMBER 31, 9 MONTHS ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996
1994 1995 (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (352,135) $(1,177,226) $ (623,906) $ (561,038)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 49,191 60,217 42,420 100,551
Compensatory stock - 45,000 45,000 -
Changes in current assets and liabilities:
Accounts receivable 53,114 (306,803) (7,235) (408,421)
Prepaid expenses and other assets (3,666) 546 853 (23,984)
Accounts payable 124,729 (319,558) (190,736) 103,575
Accrued study costs - 189,297 (64,056) (265,950)
Accrued liabilities 212,680 (52,837) (691) (98,479)
Accrued payroll and payroll taxes - (19,879) (45,132) (93,165)
Deferred revenue - 45,000 - (10,000)
Billings in excess of costs and estimated earnings (58,780) - - -
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities 25,133 (1,536,243) (843,483) (1,256,911)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (50,462) (54,964) (44,020) (668,641)
Decrease in other assets 989 - - -
----------- ----------- ----------- -----------
Cash used in investing activities (49,473) (54,964) (44,020) (668,641)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Payments on capital leases (41,785) (50,125) (32,825) (19,106)
Proceeds from notes payable to stockholders - 181,000 170,000 -
Deferred issuance costs - - - (264,786)
Net proceeds from issuing common stock 26,119 1,713,688 750,000 321,850
Net proceeds from issuing preferred stock - - - 3,500,000
Proceeds from line of credit - - - 650,000
Proceeds from short-term notes, net 27,267 - - -
----------- ----------- ----------- -----------
Cash provided by financing activities 11,601 1,844,563 887,175 4,187,958
----------- ----------- ----------- -----------
Net increase (decrease) in cash (12,739) 253,356 (328) 2,262,406
Cash and cash equivalents at beginning of period 26,664 13,925 13,925 267,281
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 13,925 $ 267,281 $ 13,597 $ 2,529,687
=========== =========== =========== ===========
Interest paid $ 21,496 $ 23,556 $ 20,415 $ 14,585
=========== =========== =========== ===========
Non-cash financing activities:
Capital lease obligations entered into $ 92,509 $ - $ - $ -
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. F-5
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
(a) Description of operations
-------------------------
Clinicor, Inc. ("Clinicor") is a contract research organization serving
companies in the pharmaceutical, biotechnology and medical device
industries. Clinicor manages, monitors and performs clinical trials which
are studies of investigational drugs and medical devices performed with
human patients to support Sponsors' applications to the Food and Drug
Administration.
(b) Summary of significant accounting policies
------------------------------------------
BASIS OF PRESENTATION
Clinicor follows the accrual basis of accounting. The accompanying
financial statements have been prepared in conformity with generally
accepted accounting principles.
On February 27, 1995, Clinicor was merged into a non-reporting publicly
held, inactive Nevada corporation ("Pegasus") in a reverse merger
transaction which has been accounted for in a manner similar to a "pooling
of interests." The surviving corporation assumed the name Clinicor, Inc.
(the "Company"). Accordingly, the Company's financial statements include
the accounts of Pegasus at cost basis for the entire period presented.
Pegasus had no results of operations in 1995.
START-UP EXPENSES
During its first three years of operation, the Company incurred significant
start-up expenses in the form of salaries, advertising to recruit patients,
travel and other general and administrative costs. These expenses were
necessary to build the Company's capacity to perform multiple study
contracts simultaneously and to perform individual, multiple-site study
contracts in excess of $1 million. All start-up costs have been expensed as
they were incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of funds invested in short-term
interest bearing accounts. The Company considers all highly liquid
investments purchased with initial maturities of three months or less to be
cash equivalents.
Included in cash and cash equivalents at September 30, 1996 is a $1 million
certificate of deposit pledged as collateral for the $1 million revolving
line of credit discussed in footnote 3.
REVENUE AND EXPENSE RECOGNITION; AND ACCOUNTS RECEIVABLE AND ACCRUED STUDY
COSTS
Revenue is recognized based upon the percentage of completion of each
study. Losses on a given study are recognized when determined
probable. Study contracts generally provide for payments based upon the
achievement of defined benchmarks. Accordingly, accounts receivable include
accrued revenues which are not billable as of the balance sheet date
because a defined benchmark has not been completely achieved (Note 4).
Deferred revenue represents amounts of payments received in excess of
revenue recognized. Direct costs are direct expenses of performing studies,
including compensation and related benefits for project personnel,
investigator fees, patient stipends, laboratories, advertising, labor and
other clinical costs. Direct costs incurred but unpaid are recorded as
accrued study costs. The reported amount of accounts receivable and accrued
study costs require management to make estimates that could differ from
actual results.
F-6
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated on the double-declining
balance method and the straight-line method over the estimated useful lives
of the assets ranging from five to seven years. Repair and maintenance
costs are charged to expense as incurred.
NET LOSS PER COMMON SHARE
Net loss per common share has been calculated by dividing the Company's net
loss by the weighted average number of shares of the Company's outstanding
common stock.
INCOME TAXES
Prior to the merger, Clinicor was an S Corporation, as defined by the
Internal Revenue Code ("Code"), for income tax reporting purposes. Pegasus
was a C Corporation, as defined by the Code. Subsequent to the merger, the
Company is a C Corporation for income tax reporting purposes. In accordance
with the Code, Clinicor's premerger accumulated net operating loss of
approximately $500,000 will not be available to the Company as a carry-
forward to offset future taxable income.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109") issued by the Financial Accounting Standards Board ("FASB"),
under which deferred tax assets and liabilities are provided on differences
between financial reporting and taxable income using the enacted tax rates.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized, if on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121") issued by the FASB, is effective for financial statements
for fiscal years beginning after December 15, 1995. The standard
establishes new guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment, certain identifiable intangible
assets, and goodwill, should be recognized and how impairment losses should
be measured. The Company does not expect adoption to have a material effect
on its financial position or results of operations.
F-7
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") issued by the FASB, is effective for
specific transactions entered into after December 15, 1995. The disclosure
requirements of SFAS 123 are effective for financial statements for fiscal
years beginning no later than December 15, 1995. The new standard
established a fair value method of accounting for stock-based compensation
plans and for transactions in which an entity acquires goods or services
from non-employees in exchange for equity instruments. The Company does not
expect adoption to have a material effect on its financial position or
results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial statements, as defined by Statement of Accounting
Standards No. 107, "Disclosure of Information about Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with Concentration of
Credit Risk" ("SFAS 107"), include cash and cash equivalents, accounts
receivable, and amounts due under accounts payable, capital leases and
notes payable. These financial instruments are accounted for on a
historical basis which, due to the nature of these financial instruments,
approximates fair value.
INTERIM FINANCIAL INFORMATION
The financial data at September 30, 1996, and for the nine months ended
September 30, 1995 and 1996 is unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at
such dates and the operating results and cash flows for those periods.
Results for interim periods are not necessarily indicative of results to be
expected for the entire year.
COMMON STOCK
The authorized capital stock of the Company consists of 75,000,000 shares
of common stock with par value per share of $0.001. At the time of the
merger, Pegasus had 1,421,000 shares of common stock issued and
outstanding, of which 750,000 were issued immediately prior to the merger
for total proceeds of $750,000. In connection with the merger, Clinicor
shareholders converted 100% of Clinicor's 12,500 issued and outstanding
shares of common stock into 2,080,000 new shares of the surviving
corporation's common stock, and the surviving corporation changed its name
to Clinicor. Immediately subsequent to the merger, the Company had
3,501,000 shares of common stock issued and outstanding.
Effective September 15, 1995, the Company initiated a private placement
offering ("Offering") whereby Units were offered for sale to qualified
investors at $2.50 per Unit. Each Unit provides the purchaser one share of
the Company's common stock and one Warrant which enables Warrant holders
the right to purchase one share of the Company's common stock for every two
Warrants exercised at a price of $1.00 per share. In addition, the Sales
Agent for the Offering received Sales Agent Warrants equal to 20% of the
number of Units sold. Each Sales Agent Warrant provides the holder the
right to buy one Unit (as described above) at an exercise price of $2.50
per Unit.
The Offering was terminated on February 16, 1996. In connection with the
Offering, the Company sold 573,400 Units for gross proceeds of $1,433,500,
which provided the Company net proceeds of $1,273,538 after deducting
Offering expenses of $45,282 and commissions of $114,680, as shown in the
following table:
F-8
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Net Commission
Units Proceeds and Expenses Proceeds
------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold prior to
December 31, 1995 438,000 $1,095,000 $131,312 $ 963,688
Units sold after
December 31, 1995 135,400 338,500 28,650 309,850
------- ---------- -------- ----------
Total units sold in
the offering 573,400 $1,433,500 $159,962 $1,273,538
======= ========== ======== ==========
</TABLE>
At December 31, 1995, after giving effect to the sale of 438,000 Units, the
Company had 3,939,000 shares of common stock issued and outstanding.
Warrants and Sales Agent Warrants issued in connection with the Offering
were as follows at December 31, 1995:
<TABLE>
<CAPTION>
Common Aggregate
Share Exercise
Number Equivalents Price
------ ----------- ---------
<S> <C> <C> <C>
Warrants 438,000 219,000 $1.00
Sales Agent Warrants 87,600 131,400 2.00
-------
350,400
=======
</TABLE>
At February 16, 1996, following termination of the Offering, after giving
effect to the sale of 573,400 Units, the Company had 4,074,400 shares of
common stock issued and outstanding.
The exercise period for the Warrants expires September 30, 1998, subject to
certain rights of the Company to accelerate or delay such expiration. The
exercise period for the Warrants underlying the Sales Agent Warrants
expires three years after the date of issuance of the Warrants.
Total Warrants and Sales Agent Warrants issued in connection with the
Offering were as follows at February 16, 1996:
<TABLE>
<CAPTION>
Common Aggregate
Share Exercise
Number Equivalents Price
--------- ----------- ---------
<S> <C> <C> <C>
Warrants 573,400 286,700 $1.00
Sales Agent Warrants 114,680 172,020 2.00
-------
458,720
=======
</TABLE>
F-9
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In December 1994, the Company and the shareholders approved the 1995
Employee and Consultant Stock Option Plan (the "Option Plan"), under which
options to purchase a maximum total of 2,000,000 shares of common stock may
be granted. The exercise price of options granted under the Option Plan is
generally the fair market value of the common stock at the time of grant.
The terms of each option (including duration of the options, which is
typically 5 to 10 years, and provisions as to vesting) are determined by
the Board of Directors at the time of grant and are set forth in an option
agreement between the Company and the optionee. At December 31, 1995, the
Company had total outstanding options as follows:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price
--------- --------
<S> <C>
212,720 $ 1.25
100,000 1.10
65,000 1.00
50,000 .10
-------
427,720
=======
</TABLE>
The 50,000 options granted at $0.10 per share resulted in $45,000 in
compensation being recorded in 1995. At December 31, 1995, options to
purchase 55,000 shares had vested. Of the 212,720 options with an exercise
price of $1.25 per share, 108,481 of these options vest anytime after
January 1, 1998, if for any previous twelve-month period the Company
achieves revenues of $12 million or pre-tax earnings of $2 million. The
remaining 104,239 of these options vest anytime after January 1, 1999, if
for any previous twelve-month period the Company achieves revenues of $18
million or pre-tax earnings of $3 million.
F-10
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 2 - SUBSEQUENT EVENT
- -------------------------
PREFERRED STOCK
On July 15, 1996, the Company issued to Oracle Partners, L.P. and certain
affiliates 3,500 shares of convertible preferred stock, no par value (the
"Preferred Stock"), for total consideration of $3.5 million. The Preferred
Stock carries a liquidation preference of $1,000 per share. The Preferred
Stock provides for annual cumulative dividends, which for a five-year
period following issuance are payable in kind and which accrue at the rate
of 8% per annum. On the fifth anniversary of the date of issuance, the
dividend rate increases to 10% per annum, and the rate thereafter increases
by an additional 2% on each successive anniversary date. Dividends accruing
after the fifth anniversary date are payable in cash.
The Preferred Stock is redeemable at the option of the Company at any time
after July 9, 1998; there is no mandatory redemption. The Preferred Stock
is convertible into that number of shares of Common Stock of the Company as
is equal to the liquidation preference of the Preferred Stock being
converted divided by a "conversion value," which is initially $1.50 and
which is subject to adjustment if certain events occur.
The holders of the Preferred Stock have various rights, including
registration rights, pursuant to the Company's Articles of Incorporation,
as amended, and pursuant to a Stock Purchase Agreement entered into with
the holders of the Preferred Stock.
NOTE 3 - LINE OF CREDIT
- -----------------------
At September 30, 1996, the Company had a $1 million secured revolving line of
credit with a bank. Interest on the line accrues at the rate the bank offers on
certificates of deposit for a similar term and amount, plus 150 basis points.
The line matures on October 11, 1996, and is collateralized by a $1 million
certificate of deposit. The Company has drawn down $650,000 on this line of
credit as of September 30, 1996.
NOTE 4 - SIGNIFICANT CLIENTS
- ----------------------------
The Company has had up to four clients who each accounted for more than 10% of
the Company's revenues. Revenues from up to four clients aggregated
approximately $1,396,000 and $2,142,000 for the years ended December 31, 1995
and 1994, respectively.
NOTE 5 - ACCOUNTS RECEIVABLE
- ----------------------------
The allocation of accounts receivable between billed and unbilled study revenues
consisted of the following:
<TABLE>
<CAPTION>
December September
31, 1995 30, 1996
----------- -------------
<S> <C> <C>
Billed Receivables $ 383,906 $ 837,769
Unbilled Receivables 249,634 204,192
----------- -------------
$ 633,540 $ 1,041,961
=========== =============
</TABLE>
F-11
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------
Equipment and computer systems, office equipment, leasehold improvements, and
medical equipment consist of the following:
<TABLE>
<CAPTION>
December
31, 1995
----------
<S> <C>
Computer systems $ 153,504
Office equipment 98,164
Medical equipment 57,717
----------
309,385
Less accumulated
depreciation and amortization 116,488
----------
$ 192,897
==========
</TABLE>
Depreciation expense was $56,534 and $45,509 for the years ended December 31,
1995 and 1994, respectively.
Net equipment and computer systems at September 30, 1996 include a prepayment
of $273,000 for leasehold improvements which will be completed by December 31,
1996.
NOTE 7 - CAPITAL LEASES
- -----------------------
The Company leases certain equipment under capital lease agreements. The net
book value of the Company's equipment acquired under capital lease agreements
was approximately $108,000 (net of accumulated amortization of $63,000) at
December 31, 1995.
The following schedule represents future minimum lease payments together with
the present value of the net minimum lease payments at December 31, 1995.
F-12
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
December
31, 1995
--------
<S> <C>
1996 $32,290
1997 18,647
1998 17,403
1999 5,198
-------
Total minimum lease payments 73,538
Less amount representing interest 12,620
-------
Present value of net minimum lease payments 60,918
Less current portion of capital lease
obligations 25,751
-------
$35,167
=======
</TABLE>
NOTE 8 - OTHER LIABILITIES
- --------------------------
Other liabilities include short-term borrowings to be repaid to an officer of
the Company as part of his compensation package. The Company is expected to pay
these amounts within the next fiscal year. Included in accrued payroll at
December 31, 1995, is $130,000 due to officers who are also directors of the
Company who elected to defer payments.
Certain stockholders, including an officer and director, advanced $181,000 to
the Company in 1995 under the terms of unsecured demand notes payable to the
stockholders. The notes bear interest at 8%, and at December 31, 1995,
accrued interest payable in connection with these notes
totaled $4,737.
NOTE 9 - INCOME TAXES
- ---------------------
At December 31, 1995, the Company had a deferred tax asset of approximately
$320,000 (representing the tax effect of the Company's tax net operating loss
carryforward of approximately $1,300,000), which was offset by recognition of a
valuation allowance in that amount since the Company could not determine that it
was more likely than not it would be realized.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company has indemnified an individual serving as an officer and director
with respect to expenses and liabilities in connection with a lawsuit brought
against the officer/director by a former employer. The Company is also
advancing litigation expenses with respect to a third party claim by the
officer/director against the majority shareholder of the former employer. The
officer/director has agreed to turn over to the Company any award or recovery of
expenses received in connection with these actions. In the opinion of the
Company's management, the outcome of these lawsuits will not have a material
adverse effect on the financial position or results of operations of the
Company.
F-13
<PAGE>
CLINICOR, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company leases certain facilities under noncancelable operating leases with
initial terms of one year or more. Future minimum lease payments in the
aggregate consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
December
31, 1995
--------
<S> <C>
1996 $ 74,322
1997 76,184
1998 23,395
1999 -
2000 -
2001 -
--------
$173,901
========
</TABLE>
Rental expense was $71,000 and $65,500 for the years ended December 31, 1995 and
1994, respectively.
NOTE 11 - CONCENTRATION OF CREDIT RISK
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Financial investments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of trade accounts receivable.
The majority of the Company's customer base are large pharmaceutical companies.
Although the Company is directly affected by the well being of the
pharmaceutical industry, management does not believe significant credit risks
existed at September 30, 1996.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
F-14