-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LufAIAKXXD76gAzcSae0guZySXi7RXFRaJM2T044XZRGD73bsO/tG42DC3nSvT8H P/xlST3tzKuPSzfNfemw0A== 0001021408-00-001331.txt : 20000331 0001021408-00-001331.hdr.sgml : 20000331 ACCESSION NUMBER: 0001021408-00-001331 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLINICOR INC CENTRAL INDEX KEY: 0000941818 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 880309093 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-21721 FILM NUMBER: 587058 BUSINESS ADDRESS: STREET 1: 1717 WEST SIXTH STREET SUITE 400 CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5123443300 MAIL ADDRESS: STREET 1: 1717 WEST SIXTH STREET SUITE 400 CITY: AUSTIN STATE: TX ZIP: 78703 10KSB 1 FORM 10-K ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-KSB (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 [_] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-21721 -------------------- 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 Sixth Street, Suite 400, Austin, Texas 78703 (Address of Principal Executive Offices) (Zip Code) (512) 344-3300 (Issuer's Telephone Number, Including Area Code) -------------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value (Title of Class) -------------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [_] Issuer's gross revenue for fiscal year ended December 31, 1999: $14,780,184. As of March 22, 2000, the aggregate market value of the common stock held by non-affiliates of the Registrant, computed by reference to the last quoted price at which such stock was sold on such date as reported on the Over-the-Counter Bulletin Board was $2,391,353. As of March 22, 2000, 4,169,734 shares of the Issuer's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 9, 10, 11 and 12) hereof. Transitional Small Business Disclosure Format (check one): Yes [_] No [X] ================================================================================ TABLE OF CONTENTS Page ---- PART I Item 1. Description of Business...................................... 3 Item 2. Description of Property...................................... 12 Item 3. Legal Proceedings............................................ 12 Item 4. Submission of Matters to a Vote of Security Holders.......... 13 PART II Item 5. Market For Common Equity and Related Shareholder Matters..... 13 Item 6. Management's Discussion and Analysis of Results of Operations and Financial Condition...................................... 14 Item 7. Financial Statements......................................... 18 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................... 18 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act... 18 Item 10. Executive Compensation....................................... 19 Item 11. Security Ownership of Certain Beneficial Owners and Management................................................... 19 Item 12. Certain Relationships and Related Transactions............... 19 Item 13. Exhibits List and Reports on Form 8-K........................ 19 Signatures................................................... 24 Audited Financial Statements.................................F-1 2 PART I Item 1. Description of Business General Clinicor, Inc. (together with its predecessor, described below, "Clinicor" or the "Company") is a fully-integrated contract research organization ("CRO") serving the pharmaceutical, biotechnology and medical device industries. The Company designs, manages and monitors clinical trials in North America and Europe and provides integrated clinical and product development services, including project management, patient recruitment, data management, biostatistical analysis, medical affairs, regulatory affairs, quality assurance and other consultation services for its clients. The Company generates substantially all of its revenue from services related to the clinical testing of new pharmaceutical, biotechnology and medical device products. The Company, a Nevada corporation, was formed in December 1993. A predecessor company, also named Clinicor, Inc. (the "Predecessor Company"), was formed as a Texas corporation in September 1992 and merged into the Nevada corporation in February 1995. References herein to "Clinicor" or the "Company" denote the existing Nevada corporation and the Predecessor Company. The Company performs and manages clinical trials in North America from its corporate headquarters in Austin, Texas. The Company's European operations are headquartered in offices in Windsor, England. 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 in North America and Europe and provides clinical and product development services, including project management, patient recruitment, data management, biostatistical analysis, medical affairs, regulatory affairs, quality assurance and other consultation services for its clients. The Company provides centralized patient recruitment services on a nationwide basis using its patient recruiting department and computer database system located in Austin, Texas. In the CRO industry, this service is typically an ancillary one, offered outside of the standard CRO services model by investigative sites or site management organizations ("SMOs"). Clinicor is one of a small number of CROs that has integrated this service into its services model. 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 clinical 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. 3 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. 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. Trials may be performed at single or multiple sites. 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 post-submission 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, expanded indications or comparative trials. 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 completion of Phase III trials, the sponsor of a new product must submit a New Drug Application ("NDA") or other approval to market 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 formulating, producing, packaging and labelling the product. A clinical trial is a scientific experiment to test the efficacy and safety of an investigational product in accordance with 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 frequency 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. 4 Services The Company's services include clinical trials management, patient recruitment, clinical data management, biostatistical analysis, medical affairs, regulatory affairs, quality assurance and other consultation services. The Company will provide these services separately or as an integrated package. Services from each of these categories can be utilized for the development and preparation of a variety of regulatory filings. Clinical Trials Management Services. The Company offers complete services for the design, placement, performance, patient recruitment, monitoring 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, biostatistical analysis, interpretation of trial results and report preparation. The Company's current projects involve Phase I, II, III and IV clinical trials. The Company does not own or maintain a Phase I facility for the confinement of study subjects. 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 significant 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 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. . Site and Investigator Recruitment. The drug or other product is administered to patients by investigators at hospitals, academic centers, 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. . Patient Recruitment and 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. The clinical trial's success depends upon the rapid recruitment of patients that meet all of the trial criteria. Patients are prescreened for eligibility by 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. 5 . Study Monitoring and Data Collection. As patients are examined and tests are conducted in accordance with the study protocol, patient information is recorded in the patient chart. Data is then transcribed to CRFs. CRAs visit sites regularly to ensure that regulatory requirements are being met and the protocol is followed. The CRFs are reviewed for accuracy and consistency with the underlying source documents. The completed CRFs are retrieved and are entered into an electronic database. . Quality Assurance. The Company can provide quality assurance and audit services to its sponsors. These services involve auditing all aspects of the clinical trial process for regulatory compliance with FDA rules, regulations and guidelines. Internal audits of regulatory files are performed regularly, as are internal systems audits. . Medical Writing. The results of biostatistical 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 and research services, including medical monitoring of clinical trials, reporting of serious adverse events, 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 and plans, database design, data analysis, biostatistical 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 is collected and analyzed more rapidly. The Company emphasizes this data management and biostatistical integration as a "turn-key" approach in its marketing efforts. Product Registration Services. The Company provides comprehensive product registration services in the United States and Europe. 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, 6 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 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. Information Systems The Company is committed to continuing its investment in information technology designed to expedite the flow of information to its employees and clients in order to improve the speed and quality of clinical drug development and to manage its internal resources. The Company's operations are managed via an Oracle database platform residing on a Sun Unix server. Oracle based applications encompass all critical aspects of the Company's business, such as patient recruitment and management, clinical trial management, data management, time management and finance. The Company is focusing on the future integration of its Oracle applications in order to move to an Internet driven business-to- business information technology model. The Oracle platform is web-enabled which allows the Company to gather clinical study information through web applications and deliver information to clinical staff and clients through web-enabled, enterprise-wide application tools. The Company introduced its first such product, CorDat@ in June 1999, and is continuing improvements to CorDat@ through future enhancements and version releases. The Company believes that its Internet information strategy helps to differentiate the Company from its competitors. The Company's information technology staff is responsible for technology procurement, end-user support, applications development and network management. The Company's information technology systems have been specifically chosen for their ability to meet current and future functionality requirements and scalability to accommodate the future demands of a multi-office, multi-country and multi-currency environment. Marketing and Business Development The marketing strategy of Clinicor consists of differentiating and positioning the Company in the U.S. and European markets, and promoting its CRO services to the pharmaceutical, biotechnology and medical device industries. The Company seeks to maintain and expand upon its excellent sponsor service reputation amongst its core and loyal client base. A launch strategy was implemented in 1998 and 1999 for the introduction of a new image as well as a new clinical trial management system (CTMS) service offering, CorDat@. Clinicor created a brand identification strategy with the launch of CorDat@, an integrated enterprise-wide software solution. CorDat@ pulls together real-time clinical project management, patient recruitment, clinical data management, budget and financial information through a web-enabled tool. Seasonality strategies are used for advertising media. Service and pricing strategies will be introduced to expand Clinicor's services and to establish various premier service offerings. The primary promotional emphasis will be on media communications through industry journals, magazines, Internet tools and direct mail, with secondary emphasis on trade shows and public relations efforts. The marketing strategy emphasizes a sales plan to target accounts to penetrate various markets as well as entrench some niche/specialty areas such as patient recruitment, therapeutic areas of experience and accounts utilizing Oracle Clinical software. Clinicor's strategic objective is to develop new clients and retain its existing clients by providing high quality, comprehensive CRO services and to promote long-term relationships with all of its sponsors. 7 Clients The Company has performed studies for 40 different clients during the past three years, including eight of the 25 largest pharmaceutical companies representing the largest new drug pipelines in the world. 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. 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 1999 and future years. In 1999, one client accounted for more than 10% of the Company's total revenue, or 53%. In 1998, four clients each accounted for more than 10% of the Company's total revenue, or 36%, 13%, 12% and 10% respectively. The Company's total revenues for 1999 and 1998 were provided from 24 and 28 separate clients, respectively. Competition The Company primarily competes against other full service CROs, smaller niche CROs, and, to a lesser extent, SMOs and academic centers. 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 databases, ability to provide biostatistical analysis and regulatory services, ability to respond rapidly to requests for proposals, ability to recruit investigators, ability to rapidly recruit patients, ability to integrate information technology with systems to improve the efficiency of contract research, financial viability and price. The Company believes that it competes favorably in these areas, except that it does not have a significant international presence necessary to perform large scale European and global trials. 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 Quintiles Transnational Corporation, Covance, Inc., Parexel International Corporation, Pharmaceutical Product Development, Inc., Kendle International, Inc. and ICON plc. The trend toward consolidation in the CRO and pharmaceutical industries has resulted in heightened competition among the larger CROs for clients and acquisition candidates. Intellectual Property The Company has registered CLINICOR(R), and has filed an application to register CorDat@, as service marks with the United States Patent and Trademark Office. Employees At December 31, 1999, the Company had approximately 73 full-time employees. Government Regulation The clinical investigation of new pharmaceutical, biotechnology and medical device products is highly regulated by governmental agencies. The purpose of these 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 these regulations, CROs that assume obligations of a drug sponsor are required to comply with applicable regulations and are subject to regulatory action 8 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 four years has made some modifications to expedite certain processes and recent legislative initiatives have been proposed to accelerate that trend. 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 can be 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. Risk Factors Portions of this report 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 factors set forth below. Operating History; Unprofitability. The Company was organized in September 1992. As of December 31, 1999 the Company had an accumulated deficit of $9,380,377 and had reported net losses since its organization, including net losses of $2,340,535, $1,941,202 and $1,114,421 for the years ended December 31, 1997, 1998 and 1999, respectively. There can be no assurance that the Company will be able to operate profitably in the future. See the discussion in the remainder of this Item 1, below. Loss or Delay of Clinical Research Contracts. Clients of the Company generally have the right to terminate a clinical research contract upon 60 to 90 days notice, potentially causing periods of excess capacity and reductions in service revenue and net income. Contracts may be terminated for various reasons, including unexpected or undesired results, inadequate patient enrollment or investigator recruitment, production problems resulting in shortages of the drug, adverse patient reactions to the drug, or the client's decision to de-emphasize a particular trial. Clinical trials may often be delayed for similar reasons. The loss or delay of a large contract or the simultaneous loss or delay of multiple contracts could result in unplanned periods of excess capacity, thereby materially and adversely affecting the Company's backlog, revenue and profitability. In most instances, if a contract is terminated, the Company is entitled to receive revenue earned to date. However, in the case of fixed-price contracts, the Company bears the risk of cost overruns. See "Description of Business--Clients" and the discussion in the remainder of this Item 1, below. Dependence on Certain Industries and Clients. The Company provides services primarily to the pharmaceutical, medical device and biotechnology industries. Accordingly, the Company's service revenue is substantially dependent on these industries' expenditures on research and development. Although these expenditures are large, the number of potential CRO clients is relatively limited, and concentrations of business in the CRO industry are not uncommon. In fiscal 1999, the Company's top 9 client accounted for 53% of the Company's revenue. In fiscal 1998, the Company's top four clients accounted for 71% of the Company's revenue. The Company is likely to continue to derive a substantial portion of its revenue from a relatively limited number of major projects or clients. The loss of business from a significant client could have a material adverse effect on the Company. Additionally, the Company's operations could be materially and adversely affected by, among other factors, any economic downturn in the pharmaceutical, medical device or biotechnology industries, any decrease in their research and development expenditures, or a change in the governmental regulations pursuant to which these industries operate. Furthermore, management believes that the Company has benefited to date from the increasing tendency of pharmaceutical, medical device and biotechnology companies to outsource the performance and analysis of clinical research projects to independent outside organizations. A reversal or slowing of this trend could have a material adverse effect on the Company. See "Description of Business--Clients." Impact of Government Regulation; Compliance with Regulatory Standards. The market for the Company's services depends upon the comprehensive government regulation of the drug development process. In the United States, the historical trend has been in the direction of continued or increased regulation by the FDA and other governmental agencies, although the FDA recently announced regulatory changes intended to streamline the approval process for biotechnology products by applying the same standards as are in effect for conventional drugs. Changes in regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could materially and adversely affect the demand for the services offered by the Company. In addition, failure on the part of the Company to comply with applicable regulations could result in the termination of ongoing research or the disqualification of data, either of which could have a material and adverse affect on the Company, including damage to the Company's reputation in the CRO industry. See "Description of Business--Government Regulation." Competition; Industry Consolidation. The CRO industry is not capital intensive and the financial costs of entry into this industry are relatively low. However, barriers to entry for full-service CROs are significant. The industry, therefore, is highly fragmented with many small, niche providers in addition to several medium-sized CROs and a few large, full-service CROs with global operations. Clinicor competes primarily against other CROs, SMOs, and academic centers, many of which have substantially greater financial and other resources than the Company. CROs generally compete on the basis of previous experience, medical and scientific expertise in specific therapeutic areas, the quality of contract research, the ability to organize and manage large-scale trials on a global basis, the ability to manage large and complex medical databases, the ability to provide biostatistical analysis and regulatory services, the ability to recruit investigators, the ability to respond rapidly to requests for proposals, the ability to integrate information technology with systems to improve the efficiency of contract research, an international presence with strategically located facilities, financial viability and price. There can be no assurance that the Company will be able to compete favorably in these areas. Competitive pressures have resulted in an increasing consolidation of the CRO industry, which is likely to result in heightened competition among the larger CROs for both clients and acquisition candidates. In addition, consolidation within the CRO and pharmaceutical industries as well as a trend by pharmaceutical companies to outsource among fewer CROs, to build their own in-house clinical staffs, and to develop preferred provider relationships has led to heightened competition for CRO contracts. Increased competition may lead to price and other forms of competition that may materially and adversely affect the Company's business. See "Description of Business-- Competition." Fluctuation in Quarterly Operating Results; Potential Volatility of Stock Price. The Company's quarterly operating results have fluctuated as a result of factors such as client delays in implementing particular clinical trials and the costs associated with start-up operations. Because a high percentage of the Company's operating costs are relatively fixed while revenue recognition is subject to fluctuation, minor variations in the timing of contracts or the progress of clinical trials may cause significant variations in quarterly operating results. Results of one quarter are not necessarily indicative of results for future 10 quarters. In addition, the market price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, changes in earnings estimates by analysts, market conditions in the industry, prospects of health care reform, changes in government regulation and general economic conditions. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have been unrelated to the operating performance of particular companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. Investors in the Company's Common Stock must be willing to bear the risk of such fluctuations in earnings and stock price. Potential Liability from Operations. Clinical trials involve the testing of approved and experimental drugs on human volunteers pursuant to study protocols. Such testing involves a risk of liability for personal injury or death to participants due to, among other reasons, possible unforeseen adverse reactions or side effects. The Company may be subject to claims in the event of personal injury or death of persons participating in clinical trials. The Company does not provide health care services directly to patients. Additionally, the Company, on behalf of its clients, contracts with physicians who render professional services, including the administration of the substance being tested, to trial participants. As a result, the Company may be subject to claims arising from professional malpractice of such physicians. The Company believes that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements, including the role of institutional review boards ("IRBs") and the need to obtain each patient's informed consent. The FDA requires each human clinical trial to be reviewed and approved by the IRB at each study site. An IRB is an independent committee that includes both medical and non-medical personnel and is obligated to protect the interests of patients enrolled in the trial. The IRB monitors the protocol and measures designed to protect patients, such as the requirement to obtain informed consent. The Company attempts to manage its liability risk through contractual indemnification provisions with clients and its physician investigators. The contractual indemnifications generally do not protect the Company against certain of its own actions such as negligence. The contractual arrangements are subject to negotiation with clients, and the terms and scope of such indemnification vary from client to client and from trial to trial. Although most of the Company's clients are large, well-capitalized companies, the financial performance of these indemnities is not secured. Therefore, the Company bears the risk that the indemnifying party may not have the financial ability to fulfill its indemnification obligations. The financial position of the Company could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with an uninsured or inadequately insured claim that is beyond the scope of an indemnity provision or where the indemnifying party does not fulfill its indemnification obligations. The Company currently maintains an errors and omissions professional liability insurance policy. There can be no assurance that this insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to the Company. The Company has not experienced any claims to date arising out of any clinical trial managed or monitored by it. Potential Adverse Impact of Health Care Reform. In the last several years, several comprehensive health care reform proposals have been introduced in the U.S. Congress. The intent of the proposals was, generally, to expand health care coverage for the uninsured and control growing health care costs. While none of the proposals were adopted, health care reform may again be addressed by the U.S. Congress. Implementation of government health care reform may adversely affect research and development expenditures by pharmaceutical and biotechnology companies, resulting in a decrease of the business opportunities available to the Company. See "Description of Business--Clients." Management is unable to predict the likelihood of health care reform proposals being enacted into law or the effect such law would have on the Company. 11 Dependence on Personnel. The Company relies on a number of key executives, including Robert S. Sammis, its President, James W. Clark, Jr., its Vice President of Finance, Secretary, Treasurer and Chief Financial Officer, Rosina Maar, M.D., its Vice President of Operations and Chief Operating Officer, and Susan Krivacic, its Senior Vice President of Marketing and Business Development. The loss of the services of any of the Company's key executives could have a material adverse effect on the Company. The Company's performance also depends on its ability to attract and retain qualified professional, scientific and technical operating staff. See "Description of Business--Services." The level of competition among employers for skilled technical and scientific personnel, particularly those with M.D., Ph.D. or equivalent degrees and with significant years of experience in the CRO industry, is high. There can be no assurance the Company will be able to continue to attract and retain sufficient numbers of qualified personnel. Management of Business Expansion; Need for Improved Systems; Expansion of Foreign Operations. Since the Company was organized, its business and operations have experienced substantial expansion. The Company believes that such expansion places a strain on operational, human and financial resources. In order to manage such expansion, the Company must continue to improve on its operating, administrative and information systems, accurately predict its future personnel and resource needs to meet client contract commitments, track the progress of ongoing client projects and attract and retain qualified management, professional, scientific and technical operating personnel. Expansion of foreign operations also may involve the additional risks of adjusting to differences in foreign business practices, hiring and retaining qualified personnel, and overcoming language and cultural barriers. Failure of the Company to meet the demands of and to manage expansion of its business and operations could have a material adverse effect on the Company's business. Risks Associated with Future Acquisitions. The Company has not made any acquisitions to date but intends to review acquisition opportunities in 2000. If the Company were to make one or more acquisitions, these acquisitions would involve numerous risks, such as the difficulties and expenses that would be incurred in connection with the acquisition and the subsequent assimilation of the operations and services of the acquired companies and the diversion of management's attention from other business concerns. Preferred Stock Provisions. The Company's organizational documents authorize its Board of Directors to issue shares of new series of Preferred Stock without the approval of holders of its Common Stock. The issuance of additional series of Preferred Stock could grant preferential rights with respect to the Company's earnings and assets to the holders of such Preferred Stock and could otherwise adversely affect the rights and powers, including voting rights, of other shareholders. Moreover, the issuance of Preferred Stock could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, other securities of the Company. Accordingly, these Preferred Stock provisions could limit the price that investors would be willing to pay for the Company's Common Stock. Item 2. Description of Property The Company leases approximately 21,634 square feet in Austin, Texas. 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. The Company also has a short term lease of office space in Windsor, England. Item 3. Legal Proceedings None 12 Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. 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:
1998 1999 ------------------------------------- -------------------------------------- High Low High Low ----------------- ------------------ ------------------ ------------------ First Quarter 4-7/8 3-1/8 1-1/2 9/16 Second Quarter 3-3/8 1-1/4 1-3/16 5/8 Third Quarter 1-7/8 9/16 1.01 9/16 Fourth Quarter 1-7/16 5/16 11/16 3/8
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 December 31, 1999, there were 44 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 the Company's Preferred Stock. The Company has made the following sales of its Common Stock and Preferred Stock during the fiscal year ended December 31, 1999. None of the sales have involved the use of underwriters.
Amount of Date of Sale Class of Securities Total or Issuance Securities (Shares) Purchasers Consideration - --------------------- ------------------ ------------- --------------- ------------------ 1. June 1999 Class A Preferred 170 4 entities dividend 2. December 1999 Class A Preferred 180 4 entities dividend
The issuances described in items 1 and 2 above were scheduled dividends on the Company's outstanding shares of Class A Convertible Preferred Stock. The Class A Convertible Preferred Stock terms provide for semi-annual dividends, which are payable in kind at the rate of 8% per annum. The Company does not believe that payment of these dividends constitutes a separate sale and believes that, to the extent the issuance may be deemed to be a sale, it is exempt pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder. Certificates representing securities issued in payment of the dividends bore 13 restrictive legends. For a description of the terms of the Class A Convertible Preferred Stock, see Note 7 of Notes to Financial Statements. Item 6. Management's Discussion and Analysis of Results of Operations and Financial Condition Overview The Company is a fully integrated contract research organization ("CRO") serving the pharmaceutical, biotechnology and medical device industries ("sponsors"). The Company designs, manages and monitors clinical trials in North America and Europe and provides integrated clinical and product development services, including patient recruitment, data management, biostatistical analysis, regulatory affairs, quality assurance and other consultation services for its sponsors. The Company generates substantially all of its revenue from services related to the clinical testing of new pharmaceutical, biotechnology, and medical device products. The Company's contracts for services generally vary from a few months to several years 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 based on performance or the achievement of milestones, relating payment to previously negotiated events such as patient enrollment, patient completion or delivery of databases, or periodic, based on personnel fees and actual expenses, typically billed on a monthly basis. In accordance with the terms of the Company's contracts, sponsors may terminate or delay the performance of a contract, potentially causing the Company to experience 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 sponsor'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 manages required investigator obligations through the termination date. 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 as work is performed. Some contracts contain 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. Other contracts are time and materials based. Payments received on contracts in excess of amounts earned are recorded as deferred revenue. The Company's gross revenue backlog consists of anticipated service revenue from clinical trials and other services that have not been completed and that generally specify completion dates within 24 months. 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 sponsor commitment and approval of a written budget. Once work commences, service revenue is recognized over the life of the contract. The Company's net service revenue backlog was approximately $4.0 million at December 31, 1999, as compared to approximately $4.4 million at December 31, 1998. In recent months, the Company has discerned a trend toward new contract authorizations that represent higher average net service revenues to be earned over longer periods of time than in the past. As of February 29, 2000, net service revenue backlog was approximately $6.1 million. The Company believes that its backlog at any given date is not necessarily a meaningful predictor of future results, and no assurances can be given that the Company will fully realize its entire backlog as service revenue. The Company believes that its backlog at any given date is not necessarily a meaningful predictor of future results, and no assurances can be given that the Company will fully realize its entire backlog as service revenue. 14 Reimbursable costs can include patient stipends, investigator grants, Institutional Review Board fees, laboratory fees, medical supplies, patient recruitment advertising, travel and consulting fees. Reimbursable costs that are paid to the Company directly by the client, and for which the Company does not bear the risk of economic loss, are deducted from gross service revenue in accordance with CRO industry practice. Direct costs include project personnel costs and related allocated overhead costs such as rent, supplies, postage, express delivery and telecommunications, as well as study-related costs not reimbursed by clients. Selling, general and administrative expenses consist primarily of compensation and benefits for marketing and administrative personnel, professional services, facility costs, and other allocated overhead items. Results of Operations Year ended December 31, 1999 compared to the year ended December 31, 1998 - ------------------------------------------------------------------------- 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, 1999 and 1998, and the percentage of net service revenue for each item. Any results or trends illustrated in the following table may not be indicative of future results or trends.
- ------------------------------------------------------------------------------------------------------ For the year ended December 31, - ------------------------------------------------------------------------------------------------------ 1999 1998 ------------ ------------ Gross revenue $ 14,780,184 $ 11,553,901 Reimbursable costs 7,156,951 4,235,221 ------------ ------------ Net service revenue 7,623,233 100.0% 7,318,680 100.0% Operating costs and expenses: Direct costs 4,857,689 63.7% 5,584,810 76.3% Selling, general and administrative 3,281,877 43.1% 3,255,331 44.4% Depreciation and amortization 450,541 5.9% 435,846 6.0% ------------ ------------ Total operating costs and expenses 8,590,107 112.7% 9,275,987 126.7% ------------ ------------ Loss from operations (966,874) -12.7% (1,957,307) -26.7% Net interest income (expense) (147,547) -1.9% 16,105 0.2% ------------ ------------ Net loss $ (1,114,421) -14.6% $ (1,941,202) -26.5% ============ ============
Net service revenue increased approximately $305,000, or 4%. The increase is primarily attributable to an increase in the volume and size of clinical trials. Direct costs decreased approximately $727,000, or 13%. Most of the decrease in direct costs is due to reductions of full-time staff and related overhead. As a percentage of net service revenues, direct costs were approximately 64% for 1999 and 76% for 1998. Selling, general and administrative expenses increased approximately $27,000 or 1%. Selling, general and administrative expenses were approximately 43% of net service revenue for 1999, as compared to 45% for 1998. Depreciation and amortization expenses increased approximately $15,000 or 3%. Depreciation expense was approximately 6.0% of net service revenues in both 1999 and 1998. 15 Interest income decreased by approximately $80,000 during 1999. Interest expense increased by approximately $100,000. This increase is due to higher interest costs incurred in 1999 related to borrowing on increased levels of accounts receivable. The Company recorded no income tax benefit as a result of the net operating losses for the years ended December 31, 1999 and 1998, due to the uncertainty that the loss carry forwards will be utilized. Liquidity and Capital Resources Since its inception, the Company has financed its operations and internal growth with proceeds from private placements of equity securities, advances from shareholders and borrowing arrangements under capital leases and lines of credit. Investing activities have consisted of capital expenditures, primarily for leasehold improvements, information systems, furniture and office equipment. Typically, cash flows from contracts include a payment at the time a contract commences and the balance in installments over the contract's duration, in some cases on a milestone completion basis. Consequently, cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. The Company's cash flow is influenced by changes in levels of accounts receivable, net of amounts billed representing unearned revenue. Accounts receivable increased to approximately $3,300,000 at December 31, 1999 from approximately $2,270,000 at December 31, 1998. The increase of approximately $1,000,000 is a result of the timing of payments by sponsors. Deferred or unearned revenue decreased by approximately $165,000 during 1999. Cash collections from clinical study contracts for 1999 totaled approximately $13,682,000 as compared with $11,240,000 for 1998. Net cash flow used in operating activities was approximately $736,000 for 1999, as compared to approximately $1,372,000 in 1998. The improvement of approximately $636,000 is primarily the result of a lower net loss in 1999. Net cash decreased by approximately $992,000 during 1999. This decrease is primarily due to continued operating losses and the payment of $317,500 in preferred stock dividends on the Class B preferred stock. Investing activities are attributable to purchases of property and equipment and were approximately $116,000 in 1999 as compared to approximately $40,000 in 1998. In addition, the Company utilized operating and capital leases in 1999 to provide approximately $340,600 of property and equipment additions as compared to $636,000 in 1998. During 1999 and 1998, the Company installed an Oracle database and three separate Oracle software applications on a Unix network server to support project management, patient recruitment, data management and accounting departments. The Oracle database and application platforms are expected to improve operational efficiency, customer communication of clinical study data, and support future growth. Financing activities consist of net borrowings under the Company's $2.5 million revolving working capital line of credit. At December 31, 1999, there was approximately $950,000 in outstanding borrowings. The line of credit provides a borrowing base primarily determined as a percentage of billed accounts receivable up to a maximum borrowing amount of $2,500,000. Pursuant to its Class B preferred stock agreement, the Company paid dividends of $317,500 and accrued $300,000 for suspended dividend payments during the twelve months ended December 31, 1999. The Company suspended cash dividend payments in August 1999 in order to maintain adequate working capital to fund its operations. The Company has missed a total of three quarterly dividends payable to the Class B preferred stockholder, representing aggregate payments of $450,000. The Company's Articles of Incorporation provide that, in the event that the Company misses a total of six consecutive quarterly 16 dividend payments or fails to pay cumulative dividends of $900,000 or more ("Class B Nonpayment Event"), then the holders of the Class A and B preferred stock may assume voting control of the Board of Directors of the Company. The Company intends to assess its ability to pay preferred dividends on an ongoing basis. There can be no assurance that future dividend payments will be made. Management believes that its existing capital resources, together with cash flows from operations and borrowing capacity under its working capital line of credit, will be sufficient to fund its operations in 2000, if new business development occurs in accordance with the Company's business plan. Should anticipated growth in contract backlog levels and net service revenue not occur as expected during the remainder of 2000 or should the trend toward new authorizations for contracts to be performed over longer periods of time continue, the Company will be required to seek additional external financing. Such external financing might be in the form of public or private issuances of equity or debt securities or bank financing. In addition, the Company may acquire in the future businesses to expand its contract backlog and to enhance its therapeutic expertise. Any such acquisition would also require additional external financing. There can be no assurance that such financing for either of the purposes described above will be available on terms acceptable to the Company. Year 2000 Information systems are an integral part of the services the Company provides. Since many computer and software systems were designed to handle dates with just two digits to represent the year applicable to a transaction, these systems may not operate properly when the last two digits of the year become "00". For example, on January 1, 2000, these systems may interpret "00" as the year 1900 not 2000. If the computer equipment and software used in the operation of the Company do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company began its assessment of the Year 2000 issue from an internal perspective in late 1997. The Company decided to change its information technology ("IT") systems including those relating to clinical operations, data management operations and financial operations, to Year 2000 compliant software applications on an Oracle database platform in the first quarter of 1998. These new systems were implemented to improve management's control of the organization and increase operating efficiency. The installation of these software systems was substantially completed by December 31, 1998, and they are currently in production. The Company estimates that it has spent approximately $750,000 on its hardware and software systems to accommodate the Oracle database and related software applications. These expenditures were primarily financed through operating and capital leases. The Company has also reviewed and tested its non-IT systems such as fax machines and telephone systems without experiencing any material failures. The Company performed an integrated systems test on August 21, 1999 to assure itself that all IT and non-IT systems will be fully capable of handling the Year 2000 issue. That test was successful and the Company's systems were Year 2000 ready on September 1, 1999. In addition, certain Sponsor companies successfully audited the Company's Year 2000 readiness plan. Since January 1, 2000, the Company has not encountered any material Year 2000 issues. The Company has also not experienced any third party supplier or client issues. The Company is alert to potential Year 2000 issues that may arise in the future, but believes that there will be no material impact on operations, liquidity or financial condition. 17 Information About Forward-Looking Statements Certain statements made in Management's Discussion and Analysis of Results of Operations and Financial Condition, including specific statements concerning anticipated growth in contract backlog levels and net service revenues, may constitute "forward-looking" statements within the meaning of the federal securities laws. A variety of factors could cause the Company's actual results and experience to differ materially from results anticipated by management. Among the risks and uncertainties that could affect the Company's operations and performance are matters affecting the timing of clinical trials being conducted by the Company, including possible decisions by sponsors to suspend or alter the timing or scope of clinical trials and those other risks and uncertainties included in the "Risk Factors" discussed in Item 1 above. Item 7. Financial Statements Index to Financial Statements: Page ---- Report of PricewaterhouseCoopers LLP, Independent Accountants F-1 Balance Sheet - December 31, 1999 and 1998 F-2 Statement of Operations - Years ended December 31, 1999 and 1998 F-3 Statement of Shareholders' Equity - December 31, 1999 and 1998 F-4 Statement of Cash Flows - Years ended December 31, 1999 and 1998 F-5 Notes to Financial Statements F-6 - F-17 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None PART III The Company plans to file with the Securities and Exchange Commission a definitive proxy statement for its 2000 Annual Meeting of Shareholders (the "Proxy Statement") not later than April 29, 2000, and certain information included therein is incorporated herein by reference. Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act The information regarding the Company's directors and executive officers required by this Item is incorporated by reference to the sections in the Company's Proxy Statement entitled "Election of Directors" and "Management." The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 by the directors, executive officers and beneficial owners of more than 10% of the Common Stock of the 18 Company required by this Item is incorporated by reference to the section in the Company's Proxy Statement entitled "Compliance Under Section 16(a) of the Securities Exchange Act of 1934." Item 10. Executive Compensation The information regarding compensation of directors and executive officers of the Company required by this Item is incorporated by reference to the section in the Company's Proxy Statement entitled "Executive Compensation." Item 11. Security Ownership of Certain Beneficial Owners and Management The information regarding security ownership of certain beneficial owners and management required by this Item is incorporated herein by reference to the section in the Company's Proxy Statement entitled "Ownership of Common Stock and Preferred Stock." Item 12. Certain Relationships and Related Transactions None Item 13. Exhibits List and Reports on Form 8-K (a) Exhibits. 2 Not applicable 3(a) Articles of Incorporation, as previously amended (incorporated herein by reference to Exhibit 3(a) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997, Exhibit 3(a) to the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998 and Exhibit 3(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on August 13, 1998) 3(b) Amended and Restated Bylaws, as amended (incorporated herein by reference to Exhibit 3(b) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997 and Exhibit 3(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on August 13, 1997) 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. (incorporated herein by reference to Exhibit 4(a) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 4(b) Articles of Incorporation of the registrant, as amended, incorporated herein by reference to Exhibit 3(a) 19 4(c) Amended and Restated Bylaws of the registrant, as amended, incorporated herein by reference to Exhibit 3(b) 4(d) Terms of Warrants issued by the registrant (incorporated herein by reference to Exhibit 4(d) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 4(e) Sales Agent Warrant dated May 20, 1996 issued to SJ Capital, Inc. (incorporated herein by reference to Exhibit 4(f) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 4(f) Warrant to purchase shares of the registrant's common stock issued to Oracle Partners, L.P. on July 1, 1997 (incorporated herein by reference to Exhibit 4(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on August 13, 1997) 4(g) Preferred Stock Purchase Agreement dated November 7, 1997 between the registrant and Sirrom Capital Corporation d/b/a Tandem Capital (incorporated herein by reference to Exhibit 4(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on November 14, 1997) 4(h) Registration Rights Agreement dated as of November 25, 1997 between the registrant and Sirrom Capital Corporation d/b/a Tandem Capital (incorporated herein by reference to Exhibit 4(h)filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 4(i) Amended and Restated Registration Rights Agreement dated as of November 25, 1997 between the registrant, Oracle Partners, L.P., Quasar International Partners, C.V., Oracle Institutional Partners, L.P. and GSAM Oracle Fund, Inc. (incorporated herein by reference to Exhibit 4(i) filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 4(j) Lock-Up Agreement dated as of November 25, 1997 between the registrant, O'Donnell Family Limited Partnership, Messrs. Robert S. Sammis and Thomas P. O'Donnell, Oracle Partners, L.P., Quasar International Partners, C.V., Oracle Institutional Partners, L.P., GSAM Oracle Fund, Inc. and Sirrom Capital Corporation d/b/a Tandem Capital (incorporated herein by reference to Exhibit 4(j)filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 4(k) Warrant to purchase shares of the registrant's common stock issued to The Robinson-Humphrey Company, LLC on November 25, 1997 (incorporated herein by reference to Exhibit 4(k) filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 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. (incorporated herein by reference to Exhibit 10(a) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 20 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. (incorporated herein by reference to Exhibit 10(b) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 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. (incorporated herein by reference to Exhibit 10(c) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(d) Sales Agent Agreement effective September 15, 1995 between the registrant and SJ Capital, Inc. (incorporated herein by reference to Exhibit 10(d) filed with the Registration Statement on Form 10- SB, as amended, declared effective January 13, 1997) 10(e) Option Agreement dated March 5, 1996 between the registrant and Randolph J. Haag (incorporated herein by reference to Exhibit 10(j) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(f) Stock Option Agreement dated February 27, 1995 between the registrant and Robert S. Sammis (incorporated herein by reference to Exhibit 10(m) filed with the Registration Statement on Form 10- SB, as amended, declared effective January 13, 1997) 10(g) Employment Agreement dated July 15, 1996 between the registrant and Robert S. Sammis (incorporated herein by reference to Exhibit 10(o) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(h) Unsecured Note dated October 1, 1995 executed by the registrant and payable to Robert Sammis (incorporated herein by reference to Exhibit 10(q) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(i) Letter Agreement dated August 21, 1996 between the registrant and Zola P. Horovitz (incorporated herein by reference to Exhibit 10(s) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(j) Lease dated October 23, 1996 between the registrant and Lake Austin Commons, Ltd. (incorporated herein by reference to Exhibit 10(t) filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 10(k) First Amendment to Office Lease Agreement dated November 21, 1996 between the registrant and Lake Austin Commons, Ltd. (incorporated herein by reference to Exhibit 10(u) to the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on April 15, 1997) 10(l) Agreement Regarding Option Grant effective January 1, 1997 between the registrant and Robert S. Sammis (incorporated herein by reference to Exhibit 10(x) to the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on April 15, 1997) 21 10(m) Stock Option Agreement dated May 12, 1997 between the registrant and James W. Clark, Jr. (incorporated herein by reference to Exhibit 10(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on August 13, 1997) 10(n) Employment Agreement effective June 1, 1997 between the registrant and James W. Clark, Jr. (incorporated herein by reference to Exhibit 10(a) to the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on November 14, 1997) 10(o) Loan and Security Agreement effective December 19, 1997 between the registrant and NationsCredit Commercial Corporation, through its NationsCredit Commercial Funding Division (incorporated herein by reference to Exhibit 10(o) filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 10(p) Employment Agreement effective March 17, 1998 between the registrant and Susan Krivacic (incorporated herein by reference to Exhibit 10(o) filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 10(q) Amended and Restated 1995 Director, Employee and Consultant Stock Option Plan (incorporated herein by reference to Exhibit 10(q) filed with the registrant's Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 30, 1998) 10(r) Employment Agreement effective February 16, 1999 between the registrant and Rosina Maar, M.D. (incorporated herein by reference to Exhibit 10(r) filed with the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on May 14, 1999) 10(s) Letter Agreement dated July 29, 1999 by and between the Company and Finova Mezzanine Capital, Inc. (incorporated herein by reference to Exhibit 10(s) filed with the registrant's Quarterly Report on Form 10-QSB as filed with the Securities and Exchange Commission on August 13, 1999) 11 Not applicable 13 Not applicable 16 Letter on Change in Certifying Accountant (incorporated herein by reference to Exhibit 16 filed with the Registration Statement on Form 10-SB, as amended, declared effective January 13, 1997) 18 Not applicable 21 Not applicable 22 Not applicable 23 Not applicable 22 24 Not applicable 27 Financial Data Schedule 99 Not applicable (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this report. 23 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLINICOR, INC. Date March 29, 2000 By /s/ Robert S. Sammis ----------------------------------------- Robert S. Sammis President, Principal Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert S. Sammis President, Principal Executive March 29, 2000 - ------------------------------------ Officer, Director (Robert S. Sammis) /s/ James W. Clark, Jr. Vice President of Finance, March 29, 2000 - ------------------------------------ Principal Financial Officer, (James W. Clark, Jr.) Secretary, Treasurer, Director /s/ Rosina Maar, M.D. Vice President of Operations, March 29, 2000 - ------------------------------------ Director (Rosina Maar, M.D..) /s/ Joel D. Liffmann Director March 29, 2000 - ------------------------------------ (Joel D. Liffmann) /s/ Zola P. Horovitz, M.D. Director March 29, 2000 - ------------------------------------ (Zola P. Horovitz, Ph.D.)
24 Report of Independent Accountants To the Board of Directors and Stockholders of Clinicor, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Clinicor, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP February 25, 2000 F-1 Clinicor, Inc. Balance Sheet - --------------------------------------------------------------------------------
December 31, December 31, 1999 1998 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 673,370 $ 1,665,672 Accounts receivable, net 3,306,653 2,272,376 Prepaid and other current assets 350,037 352,337 ------------ ------------ Total current assets 4,330,060 4,290,385 Property and equipment, net 1,083,927 1,097,441 Other assets, net 8,013 1,717 ------------ ------------ Total assets $ 5,422,000 $ 5,389,543 ============ ============ Liabilities and shareholders' equity Current liabilities: Current portion of obligations under capital leases $ 453,259 $ 307,796 Accounts payable and accrued liabilities 2,422,548 1,313,911 Dividends payable 400,778 100,725 Line of credit 948,586 416,624 Deferred revenue 825,061 989,540 ------------ ------------ Total current liabilities 5,050,232 3,128,596 Obligations under capital leases, less current portion 144,975 324,376 ------------ ------------ Total liabilities 5,195,207 3,452,972 Shareholders' equity: Class A convertible preferred stock, no par value, 5,181 shares authorized 4,603 and 4,253 shares issued and outstanding, respectively, at liquidation value 4,603,000 4,253,000 Class B convertible preferred stock, no par value, 50,000 shares authorized, issued and outstanding, at liquidation value 5,000,000 5,000,000 Common stock, $0.001 par value, 75,000,000 shares authorized, 4,169,734 and 4,169,734 shares issued and outstanding, respectively 4,170 4,170 Additional paid-in capital - 718,683 Deferred compensation - (22,196) Accumulated deficit (9,380,377) (8,017,086) ------------ ------------ Total shareholders' equity 226,793 1,936,571 ------------ ------------ Total liabilities and shareholders' equity $ 5,422,000 $ 5,390,543 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 Clinicor, Inc. Statement of Operations - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------- 1999 1998 ------------ ------------ Service revenue: Gross revenue $ 14,780,184 $ 11,553,901 Reimbursable costs 7,156,951 4,235,221 ------------ ------------ Net service revenue 7,623,233 7,318,680 Operating costs and expenses: Direct costs 4,857,689 5,584,810 Selling, general and administrative 3,281,877 3,255,331 Depreciation and amortization 450,541 435,846 ------------ ------------ Total operating costs and expenses 8,590,107 9,275,987 ------------ ------------ Loss from operations (966,874) (1,957,307) Other income and expenses: Interest income 64,154 144,619 Interest expense (228,147) (128,514) Other, net 16,446 - ------------ ------------ Other income (expense) (147,547) 16,105 ------------ ------------ Net loss $ (1,114,421) $ (1,941,202) ============ ============ Net loss $ (1,114,421) $ (1,941,202) Preferred stock dividends and conversion discount (967,553) (923,437) ------------ ------------ Net loss applicable to common stock $ (2,081,974) $ (2,864,639) ------------ ------------ Basic/diluted earnings (loss) per share $ (0.50) $ (0.69) ============ ============ Weighted average common shares outstanding 4,169,734 4,150,761 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 Clinicor, Inc. Statement of Shareholders' Equity - --------------------------------------------------------------------------------
Class A Class B Additional Convertible Convertible Common Stock Paid-in Deferred Accumulated Preferred Preferred Shares Amount Capital Compensation Deficit Total ---------- ---------- --------- ------ ---------- -------- ----------- ----------- Balance at December 31, 1997 $3,931,000 $5,000,000 4,086,400 $4,086 $1,875,536 $(66,892) $(6,075,884) $ 4,666,846 Common stock issued - - 83,334 84 41,584 - - 41,668 Amortization of deferred compensation - - - - - 22,196 - 22,196 Net loss - - - - - - (1,941,202) (1,941,202) Cash dividends on preferred stock - - - - (600,000) - - (600,000) Stock dividends on preferred stock 323,000 - - - (323,437) - - (437) Stock option compensation adjustment (see note 7) - - - - (275,000) 22,500 - (252,500) ---------- ---------- --------- ------ ---------- -------- ----------- ----------- Balance at December 31, 1998 $4,253,000 $5,000,000 4,169,734 $4,170 $ 718,683 $(22,196) $(8,017,086) $ 1,936,571 ========== ========== ========= ====== ========== ======== =========== =========== Common stock issued - - - - - - - 0 Amortization of deferred compensation - - - - - 22,196 - 22,196 Net loss - - - - - - (1,114,421) (1,114,421) Cash dividends on preferred stock - - - - (317,500) - - (317,500) Stock dividends on preferred stock 350,000 - - - (350,053) - - (53) Accrued dividends on preferred stock - - - - (51,130) - (248,870) (300,000) ---------- ---------- --------- ------ ---------- -------- ----------- ----------- Balance at December 31, 1999 $4,603,000 $5,000,000 4,169,734 $4,170 $ (0) $ 0 $(9,380,377) $ 226,793 ========== ========== ========= ====== ========== ======== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 Clinicor, Inc. Statement of Cash Flows - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------- 1999 1998 ------------ ------------ Operating activities: Net loss $ (1,114,421) $ (1,941,202) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 450,541 435,846 Stock option compensation (benefit) expense 22,196 (230,309) Net changes in assets and liabilities: Accounts receivable (1,034,277) 200,553 Prepaid expenses and other assets (3,996) (96,558) Accounts payable and accrued liabilities 1,108,637 322,909 Deferred revenue (164,479) (63,610) ------------ ------------ Net cash used in operating activities (735,799) (1,372,371) ------------ ------------ Investing activities: Purchases of property and equipment (115,977) (39,592) ------------ ------------ Financing activities: Payments on capital leases (354,988) (74,172) Net proceeds from issuing common stock - 41,668 Preferred dividends paid (317,500) (561,667) Net borrowing under line of credit 531,962 416,624 ------------ ------------ Net used in financing activities (140,526) (177,547) ------------ ------------ Net decrease in cash and cash equivalents (992,302) (1,589,510) Cash and cash equivalents at beginning of year 1,665,672 3,255,182 ------------ ------------ Cash and cash equivalents at end of year $ 673,370 $ 1,665,672 ============ ============ Supplemental cash flow disclosures: Interest paid $ 228,147 $ 128,514 ============ ============ Non-cash financing activities: Stock dividends on preferred stock $ 350,000 $ 323,000 ============ ============ Preferred stock dividends accrued $ 300,000 $ - ============ ============ Capital lease obligations $ 321,050 $ 592,240 ============ ============
The accompanying notes are an integral part of these financial statements. F-5 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note l - Organization and Summary of Significant Accounting Policies - -------------------------------------------------------------------- Description of Business Clinicor, Inc. ("Clinicor" or the "Company") 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 and other governmental authorities. The Company operates in one business segment. Use of 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. 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. Concentration of Credit Risk 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 cash and cash equivalents and trade accounts receivable. Excess cash is invested in high quality, short-term liquid money instruments issued by highly-rated financial institutions. The majority of the Company's customer base consists of large pharmaceutical and biotechnology companies. Although the Company is directly affected by the well being of the pharmaceutical industry, management does not believe significant credit risks existed at December 31, 1999. Property and Equipment Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets ranging from three to five years. Repair and maintenance costs are charged to expense as incurred. F-6 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Revenue Recognition Fixed price contract revenue is recognized using the percentage of completion method based upon the ratio of services provided to date compared to total services to be provided under each contract. Revenue from other contracts is recognized as the services are provided. Losses on contracts, if any, are accrued when they become probable. Study contracts generally provide for payments based upon the achievement of defined benchmarks. Deferred revenue represents amounts invoiced prior to rendering the related services, while unbilled revenue represents the billing value of services rendered prior to being invoiced. Substantially all the deferred revenue and unbilled revenue will be earned and billed, respectively, within one year. Direct Costs Direct costs are direct expenses of performing studies, including compensation and related benefits for project personnel, investigator fees, patient stipends, laboratories, advertising, labor, other clinical costs, and allocated overhead expenses. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") under which deferred tax assets and liabilities are provided on differences between carrying value for financial reporting purposes and tax bases of assets and liabilities using the enacted tax rates. 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. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments, including cash and cash equivalents and trade accounts receivable and payable and debt approximate fair values. Comparative Information Certain amounts related to the prior year have been reclassified to conform to the current year presentation. F-7 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 2 Accounts Receivable - --------------------------- Accounts receivable consisted of the following at December 31: 1999 1998 ---- ---- Billed $2,255,332 $1,276,671 Unbilled 1,071,321 1,015,705 Allowance for doubtful accounts (20,000) (20,000) ---------- ---------- $3,306,653 $2,272,376 ========== ========== Note 3 Property and Equipment - ------------------------------ Property and equipment consisted of the following at December 31: 1999 1998 ---- ---- Computer systems $1,091,459 $1,017,481 Leasehold improvements 421,596 421,596 Office equipment 391,383 436,053 Medical equipment 28,261 28,261 ---------- ---------- 1,932,699 1,903,391 Less accumulated depreciation and amortization 848,772 805,950 ---------- ---------- $1,083,927 $1,097,441 ========== ========== Depreciation expense was $450,541 and $435,846 for the years ended December 31, 1999 and 1998, respectively. Included in the December 31, 1999 and 1998 balances of equipment are $894,650 and $627,500, respectively, of assets acquired under capital leases. Accumulated depreciation of these assets was $209,600 and $115,500 at December 31, 1999 and 1998, respectively, and depreciation expense was $141,200 and $46,500 respectively, for the years ended December 31, 1999 and 1998. F-8 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 4 Accounts Payable and Accrued Liabilities - ------------------------------------------------ Accounts payable and accrued liabilities consisted of the following at December 31: 1999 1998 ---- ---- Accounts payable trade $ 653,850 $1,111,371 Accrued investigators 1,572,235 77,872 Accrued other 196,463 124,668 ---------- ---------- $2,422,548 $1,313,911 ========== ========== Note 5 Line of Credit - ---------------------- The Company has a $2.5 million secured revolving credit facility with a national banking institution which expires on December 19, 2001. Availability under the line of credit is primarily based upon 85% of billed accounts receivable, less current borrowings, and remaining availability approximated $1,551,400 at December 31, 1999. The line of credit is repaid with the proceeds from collections of accounts receivable; therefore, the line of credit is classified as a current liability. The interest rate at December 31, 1999 on this credit facility was 10.75%. Interest expense for this credit facility was $166,400 and $110,300 for the years ended December 31, 1999 and 1998, respectively. Note 6 Commitments and Contingencies - ------------------------------------- The Company leases office space, computers and other equipment under non- cancelable operating and capital lease agreements. These leases have expiration dates ranging from 2000 through 2002. Rent expense under operating leases totaled $425,100 and $439,500 for the years ended December 31, 1999 and 1998, respectively. F-9 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Future minimum lease payments under all leases as of December 31, 1999 are as follows: Capital Operating Leases Leases ------- --------- 2000 $ 499,297 $ 558,911 2001 147,154 446,722 2002 7,880 -- 2003 and thereafter -- -- --------- ---------- Total minimum lease payment $ 654,331 $1,005,633 ========== Less amounts representing interest (56,097) --------- Present value of net minimum lease payments 598,234 Less current portion of capital lease obligations (453,259) --------- Obligations under capital leases $ 144,975 ========= Note 7 Capital Stock - --------------------- Class A Preferred Stock On July 15, 1996, the Company issued to Oracle Partners, L.P. and certain affiliates 3,500 shares of convertible Class A preferred stock, no par value (the "Class A Preferred Stock"), for total consideration of $3,500,000, which provided the Company net proceeds of $3,180,177 after deducting offering costs of $319,823. Included in these offering costs was $125,000 of expense to cancel certain preemptive rights held by three shareholders. The Class A Preferred Stock carries a liquidation preference of $1,000 per share. The Class A 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. Through 1999, the Company issued Class A Preferred Stock dividends of 1,103 shares. The Class A Preferred Stock is redeemable at the option of the Company at any time after July 15, 1998; there is no mandatory redemption. The Class A Preferred Stock is convertible into that number of shares of common stock of the Company as is equal to the liquidation preference of the Class A Preferred Stock being converted, divided by a "conversion value", which is initially $1.50 and which is subject to adjustment if certain events occur. No such events had occurred as of December 31, 1999. F-10 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Class B Preferred Stock On November 25, 1997, the Company issued to Tandem Capital, a division of Sirrom Capital Corporation, 50,000 shares of Class B Convertible Preferred Stock, no par value ("Class B Preferred Stock"), for total consideration of $5,000,000, which provided the Company net proceeds of $4,637,132 after deducting offering costs of $362,868. The Class B Preferred Stock carries a liquidation preference of $100 per share. The Class B Preferred Stock provides for annual cumulative dividends of $12 per share payable quarterly. The annual dividend rate of $12 per share will be increased by $2 per share beginning on the fifth anniversary of the issuance and subsequently every six months thereafter. The Class B Preferred Stock cannot be redeemed during the first year of issuance unless the Company has first offered to redeem all the Class A Preferred Stock. After the first year and prior to the fifth anniversary of the original issue date, the Company may redeem the Class B Preferred Stock, as long as the average bid price of common stock exceeds $6.00 per share for each of the immediately preceding 20 consecutive trading days. The Class B Preferred Stock is convertible at any time into that number of shares of common stock of the Company as is equal to the liquidation preference divided by the conversion price which is initially set at $3.00 per share The conversion price was reduced to $2.75 per share as of December 31, 1998, pursuant to the agreement. The conversion price is subject to future adjustments if certain events occur. The holders of the Class A and B Preferred Stock have various additional rights, including registration rights, pursuant to the Company's Articles of Incorporation, as amended, and pursuant to various agreements entered into with the holders of the Class A and B Preferred Stock. During 1999, the Company paid approximately $317,500 and accrued $300,000 in dividends to Class B Preferred stockholders. The Company suspended cash dividend payments in August 1999 in order to maintain adequate working capital to fund its operations. The Company has missed a total of three quarterly dividends payable to the Class B preferred stockholder, representing aggregate payments of $450,000. The Company's Articles of Incorporation provide that, in the event that the Company misses a total of six consecutive quarterly dividend payments or fails to pay cumulative dividends of $900,000 or more ("Class B Nonpayment Event"), then the holders of the Class A and B preferred stock may assume voting control of the Board of Directors of the Company. The Company intends to assess its ability to pay preferred dividends on an ongoing basis. There can be no assurance that future dividend payments will be made. Stock Option Plan In December 1994, the Company and the shareholders approved the 1995 Directors, Employees and Consultants Stock Option Plan (the "Option Plan"), which provides for the grant of both incentive and non-qualified stock options to directors, employees and certain other persons affiliated with the Company. The stock options granted under the Option Plan are generally granted at the fair value of the common stock on the date of the 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, 1999 and 1998, the Company had reserved 2,000,000 shares of common stock under the Option Plan. F-11 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- The Company has adopted the disclosure only provision of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" and has elected to continue to apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for the Option Plan. Accordingly, no compensation expense has been recognized for option grants made at fair value and containing fixed vesting terms. The Company has recorded deferred compensation equal to the fair value of fixed option grants made to individuals other than employees and directors and fixed option grants to employees made below fair value, as well as performance based stock option grants. Amortization of deferred compensation, which is being charged against income over the vesting period of the options, totaled $22,196 and $22,196 in 1999 and 1998, respectively. During 1998, the Company reversed previously recognized compensation expense of $252,000 resulting from employees' forfeiture of unvested stock options. Of the 1,569,220 options outstanding at December 31, 1999, 100,000 have performance based vesting provisions which allow these options to vest anytime after January 1, 2000, if for any previous twelve-month period the Company achieves revenues of $18 million or pre-tax earnings of $3 million. In early 1997, the vesting provisions of these options were modified such that all options not previously vested will vest on February 27, 2000. Had compensation cost of all stock option grants been determined based on their fair value at the grant date consistent with the method prescribed by SFAS No. 123, the Company's pro forma net loss and loss per share would have been as follows: For the Year Ended For the Year Ended December 31, 1999 December 31, 1998 ------------------ ------------------ Net loss applicable As reported $(2,081,974) $(2,864,639) to common stock Pro forma $(2,496,140) $(3,939,392) Net loss applicable to common stock As reported $ (0.50) $ (0.69) per share Pro forma $ (0.60) $ (0.95) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999 and 1998, respectively; dividend yield of zero for both years; expected volatility of 50% and 70%; risk-free interest rate of 5.5% and 5.75%; and respective estimated lives of 5 years. On May 18, 1998, the Board of Directors approved a proposal to reprice outstanding employee stock options with exercise prices in excess of the fair market value, except those shares held by outside directors of the Company. A total of 787,500 options with an average exercise price of $4.43 were repriced at $2.75 per share. At the time of the repricing, the fair market value of the Company's stock was $2.00 per share. F-12 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- The following table summarizes the status of option grants outstanding at December 31: 1999 1998 ------------------ ----------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price --------- -------- --------- -------- Outstanding, beginning of year 1,079,620 $2.43 1,188,220 $3.25 Granted 619,500 $1.28 288,500 $2.69 Exercised (-) $ - (83,334) $ .50 Canceled (129,900) $2.55 (313,766) $2.32 --------- --------- Outstanding, end of year 1,569,220 $1.97 1,079,620 $2.43 --------- --------- Options exercisable at year end 622,620 $1.99 422,620 $1.93 Weighted-average fair value of options granted during year $.50 $1.24 The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding Options Exercisable ---------------------------------------------------------- Weighted- Average Remaining Range of Contractual Weighted- Weighted- Exercise Prices Number Life Average Price Number Average Price ---------------------------------------------------------- (Years) $1.00 to $1.25 455,000 4.99 $1.10 175,000 $1.07 $1.25 to $2.00 400,220 4.47 $1.46 164,720 $1.40 $2.75 686,500 4.91 $2.75 255,400 $2.75 $4.00 to 4.25 27,500 2.40 $4.16 27,500 $4.16 --------- ------- 1,569,220 622,620 ========= ======= F-13 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 8 Income Taxes - -------------------- The difference between the tax expense (benefit) derived by applying the Federal statutory income tax rate to the Company's net losses and the expense (benefit) recognized is as follows:
For the Year For the Year Ended Ended December 31, December 31, 1999 1998 ------------- ------------- Benefit derived by applying the Federal statutory income rate to net losses before income taxes $(378,903) $(660,009) Permanent differences and other 18,891 106,813 Change in valuation allowance 360,012 766,822 --------- --------- Income tax expense (benefit) $ - $ - ========= =========
The components of the net deferred tax asset are:
For the Year For the Year Ended Ended December 31, December 31, 1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 2,678,598 $ 2,280,140 Fixed Assets 26,257 35,463 Accrued Wages - 29,750 Other 19,766 19,256 Valuation allowance (2,724,621) (2,364,609) ----------- ----------- Net deferred tax asset (liability) $ - $ - =========== ===========
The Company's net operating loss carryforward totaling $7,878,228 at December 31, 1999 expires in varying amounts through 2019. Under section 382 of the Internal Revenue Code, changes in ownership exceeding certain levels can result in an annual limitation on losses and tax credit carryforwards. Such limitation may limit the Company's ability to fully utilize its carryforwards prior to expiration. F-14 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 9 Earnings per Share - -------------------------- Basic EPS is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares and common share equivalents outstanding (if dilutive), during each period. The number of common share equivalents outstanding is computed using the treasury stock method. The following is a reconciliation of the basic per share computations: For the year ended December 31, ------------------------------- 1999 1998 ------------------------------- Loss from continuing operations $(1,114,421) $(1,941,202) Less-Preferred stock dividends-Class A Preferred (350,053) (323,437) Preferred stock dividends-Class B Preferred (317,500) (600,000) Accrued stock dividends on Class B Preferred (300,000) ----------- ----------- Loss applicable to common shareholders $(2,081,974) $(2,864,639) =========== =========== Shares used in computing basic earnings per share 4,169,734 4,150,761 Loss per share Basic/Diluted $ (0.50) $ (0.69) =========== =========== At December 31, 1999, potentially dilutive securities, which are excluded from the EPS computation as they would have an anti-dilutive effect, consisted of stock options convertible into 1,569,220 shares of common stock; Series A convertible preferred stock convertible into 3,068,667 shares of common stock; Series B convertible preferred stock convertible into 1,818,182 shares of common stock; and warrants convertible into 489,411 shares of common stock. F-15 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 10 Segment Information and Significant Clients - ---------------------------------------------------- In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement supercedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. It also requires disclosures about products and services, geographic areas and major customers. Management has chosen to organize the Company by geographic areas, and as a result has determined that it has one reportable segment. All selling and administrative expenses, interest income, interest expense, depreciation and amortization are recorded in the United States. In addition, all identifiable assets are located in the United States. During the years ended December 31, 1999 and 1998, the Company's international revenues were primarily attributable to one client. Following are the Company's international sales by geographic area (in thousands): For the Year Ended December 31, --------------------------- 1999 1998 ------------ ------------ Net Service Revenues: United States $7,017 92% $6,601 90% United Kingdom 606 8% 718 10% ------ ------ $7,623 100% $7,319 100% ====== ====== The Company has had up to four clients who each accounted for more than 10% of the Company's revenues in a given year as follows: 1999 1998 ------------------ Client A 53.1% 35.9% Client B 4.2% 12.8% Client C 8.0% 12.3% Client D -% 10.0% Additionally, at December 31, 1999 and 1998, certain clients had accounts receivable and unbilled revenue balances with the Company which represented the following amounts of total net accounts receivable and unbilled revenues: 1999 1998 ------------------ Client A 76.0% 33.0% Client B -% 25.0% F-16 Clinicor, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Note 11- Employee Benefit Plans - ------------------------------- Employee 401(K) Plan The Company's 401(k) Savings and Retirement Plan, effective January 1, 1996, is a defined contribution retirement plan as described in Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan is intended to be qualified under Section 401 (a) of the Code. All full time employees of the Company are eligible to participate in the 401(k) Plan after approximately 90 days of employment. The 401(k) Plan provides that each participant make elective contributions up to 15% of his or her compensation, subject to statutory limits. The Company amended its plan, effective May 1, 1998, to provide for employee matching contributions of 20% of the first 5% of participating employee contributions. The Company made matching contributions of $25,440 and $19,900 for 1999 and 1998, respectively. Employee Stock Purchase Plan In November 1998, the Company established an employee stock purchase plan. The employees may make elective payroll deductions for the purchase of the Company's stock. The Company disburses these payroll deductions once per month to a brokerage firm, which purchases the Company stock in the stock market. The Company pays all brokerage commissions which totalled $1,049 for 1999 and $29 for 1998, respectively. F-17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CLINICOR, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999, AND FOR THE 3- AND 12-MONTH PERIODS ENDED DECEMBER 31, 1999, AND THE ACCOMPANYING NOTES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 12-MOS DEC-31-1999 DEC-31-1999 SEP-01-1999 JAN-01-1999 DEC-31-1999 DEC-31-1999 673,370 673,370 0 0 3,306,653 3,306,653 20,000 20,000 0 0 4,338,073 4,338,073 1,932,699 1,932,699 848,772 848,772 5,422,000 5,422,000 5,050,232 5,050,232 144,975 144,975 4,170 4,170 0 0 9,603,000 9,603,000 (9,380,377) (9,380,377) 5,422,000 5,422,000 3,514,849 14,780,184 3,514,849 14,780,184 1,305,518 4,857,689 2,150,812 8,590,107 0 0 0 0 58,952 147,547 (191,928) (1,114,421) 0 0 (191,928) (1,114,421) 0 0 0 0 0 0 (191,928) (1,114,421) (0.09) (0.50) (0.09) (0.50) Consists of capitalized lease obligations, excluding current portions. Net interest expense is net of interest revenue.
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