1
EXHIBIT 13
ClinTrials Research Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except for per share amounts)
1993 1994 1995 1996 1997
-------- ------- ------- -------- ---------
STATEMENT OF OPERATIONS
Revenue:
Service revenue $ 49,939 $67,763 $86,217 $123,703 $ 125,687
Less subcontractor costs 14,655 24,889 28,371 28,984 22,697
-------- ------- ------- -------- ---------
Net service revenue 35,284 42,874 57,846 94,719 102,990
Operating costs and expenses:
Direct costs 21,121 25,324 34,850 56,510 69,279
Selling, general and administrative
expenses 10,239 12,111 15,209 25,852 37,982
Depreciation and amortization 1,691 1,937 2,287 3,916 5,485
Restructuring charge -- -- -- -- 1,650
-------- ------- ------- -------- ---------
Income (loss) from operations 2,233 3,502 5,500 8,441 (11,406)
Other income (expense) (255) 497 665 972 1,204
-------- ------- ------- -------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 1,978 3,999 6,165 9,413 (10,202)
Provision (benefit) for income taxes 1,180 1,846 2,564 2,988 (3,806)
-------- ------- ------- -------- ---------
Income (loss) before cumulative
effect of accounting change $ 798 $ 2,153 $ 3,601 $ 6,425 $ (6,396)
======== ======= ======= ======== =========
Net income (loss) $ 1,041 $ 2,153 $ 3,601 $ 6,425 $ (6,396)
======== ======= ======= ======== =========
Basic Earnings per Share:
Income (loss) before cumulative effect
of accounting change $ 0.08 $ 0.16 $ 0.27 $ 0.42 $ (0.35)
======== ======= ======= ======== =========
Net income (loss) $ 0.10 $ 0.16 $ 0.27 $ 0.42 $ (0.35)
======== ======= ======= ======== =========
Weighted average common shares
outstanding for computation 9,989 13,109 13,497 15,447 18,156
Diluted Earnings per Share:
Income (loss) before cumulative effect
of accounting change $ 0.08 $ 0.16 $ 0.26 $ 0.40 $ (0.35)
======== ======= ======= ======== =========
Net income (loss) $ 0.10 $ 0.16 $ 0.26 $ 0.40 $ (0.35)
======== ======= ======= ======== =========
Weighted average common and dilutive
common equivalent shares outstanding 10,379 13,500 13,882 15,927 18,156
BALANCE SHEET DATA (END OF
PERIOD)
Cash, cash equivalents, and held-to-
maturity securities $ 22,130 $21,045 $17,031 $ 38,134 $ 28,275
Working capital 12,088 14,044 16,867 51,925 44,641
Total assets 47,318 49,680 58,626 157,223 144,979
Stockholders' equity 24,409 26,717 30,951 125,020 115,778
Note: Prior period amounts have been restated to give retroactive effect to
the 1997 merger with Ovation, which was accounted for as a pooling of
interests.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's Annual Report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import. Such statements include
statements concerning the Company's ability to obtain new business and to
accurately estimate the timing of recognition of revenue in the backlog due to
variability in size, scope and duration of projects, regulatory delays, study
results which lead to reductions or cancellations of projects, other decisions
totally within the control of its clients and its ability to immediately affect
the level of operating expenses, as well as statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations. Such statements are subject to various
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in such forward-looking statements because of a
number of factors, including those identified in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this Annual Report and the Risk Factors section included in Part I, Item 1 of
the Company's Form 10-K for the year ended December 31, 1997. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that such statements included in this
Annual Report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved. The forward-looking statements are made as of the date of this Annual
Report and the Company assumes no obligation to update such statements or to
update the reasons that actual results could differ from those projected in the
forward-looking statements.
OVERVIEW
The Company is a full-service contract research organization ("CRO") serving the
pharmaceutical, biotechnology and medical device industries. The Company
designs, monitors and manages preclinical and clinical trials, provides clinical
data management and biostatistical services and offers product registration and
pharmacoeconomic services throughout the United States, Canada and Europe. The
Company generates substantially all of its revenue from the preclinical and
clinical testing of new pharmaceutical and biotechnology products.
The Company's contracts are typically fixed-price, multi-year contracts that
usually require a portion of the contract amount to be paid at or near the time
the trial is initiated. The Company generally bills its clients upon the
completion of negotiated performance requirements and, to a lesser extent, on a
date certain basis. The Company's contracts generally may be terminated with or
without cause. In the event of termination, the Company is typically entitled to
all sums owed for work performed through the notice of termination and all costs
associated with termination of the study. In addition, at times some of the
Company's contracts provide for an early termination fee, the amount of which
usually declines as the trial progresses. Termination or delay in the
performance of a contract may occur for various reasons, including, but not
limited to, unexpected or undesired results, inadequate patient enrollment or
investigator recruitment, production problems resulting in shortages of the
drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is recognized on a percentage of completion basis as work
is performed. Revenue is affected by the mix of trials conducted and the degree
to which labor and facilities are utilized. The Company routinely subcontracts
with third party investigators in connection with multi-site clinical trials and
with other third party service providers for laboratory analysis and other
specialized services. These costs are passed through to clients and, in
accordance with industry practice, are included in service revenue.
Subcontractor services may vary significantly from contract to contract;
therefore, changes in gross service revenue may not be indicative of trends in
revenue growth. Accordingly, the Company views net service revenue, which
consists of service revenue less subcontractor costs, as its primary measure of
revenue growth. The Company has had, and will continue to have, certain clients
from which at least 10% of the Company's overall revenue is generated over
multiple contracts. Such concentrations of business are not uncommon within the
CRO industry.
Since it is common for clients to authorize projects and the Company to commence
providing services before a contract is signed, the Company believes reported
backlog should consist of anticipated net revenue from uncompleted projects
which have been authorized by a client, through a written contract or otherwise.
At December 31, 1997, backlog was approximately $101.3 million, as compared to
approximately $140.7 million at December 31, 1996. The Company believes that
backlog is not a consistent indicator of future results because backlog can be
affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years. Additionally, projects
may be terminated by the client or delayed by regulatory authorities for many
reasons, including unexpected test results. Moreover, the scope of a project can
change during the course of a study.
The Company's core European operation consists of offices in Maidenhead, United
Kingdom and Brussels, Belgium. The Company expanded its ability to perform
international clinical trials by opening offices in Australia, Chile, France,
and Israel in 1996 and Italy and Scotland in 1997. The Company has made
significant investments in the marketing
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and infrastructure of its core European operations; however, net revenue has not
sufficiently grown to cover the increased expense levels and in the fourth
quarter of 1997 the Company decided to reduce its general and administrative
workforce (see restructuring charge discussion below). The Company is focused on
generating new business while controlling its cost structure.
Contracts between the Company's subsidiaries (primarily in Canada and to a
lesser extent in the United Kingdom) and their clients may be denominated in a
currency other than the local currency of the subsidiary. Because substantially
all of the subsidiaries' expenses are paid in the local currency of the
subsidiary, such subsidiaries' earnings related to these contracts could be
affected by fluctuations in exchange rates. Generally, the Company attempts to
contractually limit its future foreign exchange risks with its clients. In
addition, the Company may use future foreign exchange contracts to hedge the
risk of changes in foreign currency exchange rates associated with contracts in
which the expenses for providing services are incurred in one currency and paid
for by the client in another currency. The Company's subsidiaries located
outside the United States generated approximately 50% of its net revenue for the
year ended December 31, 1997. More than half of the non U.S. revenue was
generated by the Company's Canadian subsidiary. Therefore, fluctuations in
exchange rates may have a material effect on the earnings of the Company.
The Company's consolidated financial statements are denominated in U.S. dollars
and, accordingly, changes in the exchange rates between the Company's
subsidiaries' local currency and the U.S. dollar will affect the translation of
such subsidiaries' financial results into U.S. dollars for purposes of reporting
the Company's consolidated financial results. Translation adjustments are
reported as a separate section of stockholders' equity. Such adjustments may in
the future be material to the Company's financial statements.
ACQUISITION OF BIO-RESEARCH LABORATORIES LTD. AND MERGER WITH OVATION
On July 31, 1996, the Company purchased, for $65.0 million in cash, all of the
assets and assumed certain liabilities of Bio-Research Laboratories Ltd. of
Montreal, Quebec ("Bio-Research"). Bio-Research is a leading contract research
organization which provides services to clients in the pharmaceutical,
biotechnology, chemical and medical device industries. Bio-Research designs and
conducts preclinical trials, based primarily upon animal models, that produce
the data required to assess and evaluate efficacy in and potential risks to
humans. The acquisition was financed with the proceeds of a public offering of
4,485,000 shares of the Company's common stock at $20.00 per share on July 24,
1996 (as adjusted for the Company's three-for-two stock split). Net proceeds to
the Company from the offering were approximately $84.9 million, $65.0 million of
which was used to fund the acquisition. The operations of Bio-Research are
included in the Company's results of operations from the date of the
acquisition.
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its Common Stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying consolidated financial
statements give retroactive effect to the merger and include the combined
operations of the Company and Ovation.
RESTRUCTURING CHARGE
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company recorded a $1.6 million restructuring charge for costs to be
incurred in reducing its administrative workforce, primarily in Europe. At
December 31, 1997, the entire $1.6 million restructuring charge is included in
accrued expenses as no termination benefits were paid as of year end. The
restructuring charge primarily represents the termination benefits and costs for
the reduction of approximately 35 administrative employees to be completed in
1998.
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RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net loss for the year ended December 31, 1997 was $6.4 million, or $0.35 diluted
loss per share, compared to net income in the same period of 1996 of $6.4
million or $0.40 diluted earnings per share. Excluding the restructuring charge,
the net loss for fiscal 1997 was $5.2 million or $0.29 diluted loss per share.
This decrease is primarily attributable to the cancellations of contracts,
aggregating approximately $37 million in backlog, which occurred in the fourth
quarter of 1996 and first quarter of 1997 and the underperformance of the
European operations. The decrease in backlog left the Company with unbillable
resources related to those projects as well as a higher level of direct costs
and selling, general and administrative expenses incurred to cover the expected
higher revenue levels. None of the cancellations were related to service or
quality problems. Backlog of future net revenue was $101.3 million (391
contracts from 108 clients) at December 31, 1997, compared to $102.1 million
(407 contracts from 113 clients) at March 31, 1997 (following the contract
cancellations). Due to the mix of contracts in backlog and the underperformance
of the European operations, revenue recognized in 1997 was not sufficient to
cover expenses and the Company incurred a loss for fiscal 1997. The Company is
focusing its business development strategy on growing its core clinical
business.
The Canadian dollar was weaker in fiscal 1997 than in fiscal 1996 in relation to
the U.S. dollar, while the British pound was stronger in relation to the U.S.
dollar. Excluding the effect of the changes in the average exchange rates from
1996 to 1997, the Company's diluted loss per share would have been $0.26
(excluding the restructuring charge) as compared to the $0.29 reported.
Net service revenue increased 8.7% to $103.0 million in fiscal 1997 from $94.7
million in fiscal 1996. Excluding revenue recognized related to Bio-Research
(acquired July 31, 1996), net service revenue decreased 18.4%. This decrease
resulted primarily from the cancellations of contracts previously discussed.
Direct costs increased 22.6% to $69.3 million in fiscal 1997 from $56.5 million
in fiscal 1996. Costs in 1997 include a full year of Bio-Research's operations.
Direct costs increased as a percentage of net service revenue to 67.3% from
59.7% due to unbillable resources resulting from the previously discussed
project cancellations and underperformance of the European operations. Direct
costs are based on the mix of contracts in progress and as a percentage of net
revenue may fluctuate from period to period dependent upon the mix of contracts
in the backlog. In addition, direct costs will fluctuate due to changes in labor
and facility utilization.
Selling, general and administrative costs increased 46.9% to $38.0 million in
fiscal 1997 from $25.9 million in fiscal 1996. Costs in 1997 include a full year
of Bio-Research's operations. Selling, general and administrative costs
increased as a percentage of net service revenue to 36.9% from 27.3%. The
increase as a percentage of net revenue is primarily attributable to lower
levels of revenue resulting from project cancellations and underperformance of
the European operations. Selling, general and administrative costs, which
primarily includes compensation for administrative employees and costs related
to facilities, information technology and marketing, are relatively fixed in the
near term while revenue is subject to fluctuation, therefore, minor variations
in the timing of contracts or the progress of clinical trials (both delays and
accelerations) may cause significant variations in quarterly operating results.
In addition, the Company has incurred and will continue to incur costs related
to expanded infrastructure required to open new offices or expand existing
offices as described previously.
Depreciation and amortization expense increased 40.1% to $5.5 million in 1997
compared to $3.9 million in 1996. This increase is primarily attributable to
amortization of goodwill and depreciation of property, plant and equipment
incurred in the acquisition of Bio-Research.
Interest income, net of interest expense, increased to $1,204,000 in 1997 from
$972,000 in 1996.
The Company's benefit for income taxes was $3.8 million in fiscal 1997 as
compared to a provision of $3.0 million in fiscal 1996. The effective tax
benefit rate in 1997 was 37.3% compared to an effective tax rate of 31.7% in
1996.
5
This increase in the effective rate is primarily the result of research and
development tax credits generated by the Company's Canadian subsidiary partially
offset by the unrecognized tax benefit associated with foreign net operating
losses. Other significant items that create the difference between the Company's
federal statutory and effective tax rates are state and local taxes, tax-exempt
interest income and nondeductible amortization of goodwill. The Company, in
general, will not record a tax asset related to a foreign jurisdiction for
losses incurred in its foreign operations until such time, if any, that it has
three years of profits in the applicable jurisdiction. However, the Company will
recognize a tax benefit for losses incurred in its foreign operations as the
subsidiary generates taxable income to the extent of the cumulative losses.
Year ended December 31, 1996 compared with year ended December 31, 1995
Net service revenue increased 63.7% to $94.7 million in 1996 from $57.8 million
in 1995. Excluding $13.8 million of revenue recognized in 1996 related to
Bio-Research, net service revenue increased 40.0%. This increase resulted
primarily from an increase in the number of contracts under management and in
the number of clients served. The backlog at December 31, 1996 was $140.7
million, representing 402 contracts from 114 clients, as compared to $90.2
million at December 31, 1995, representing 152 contracts from 43 clients.
Direct costs increased 62.2% to $56.5 million in 1996 from $34.9 million in
1995, and declined as a percentage of net service revenue to 59.7% from 60.2%.
Direct costs, as a percentage of net revenue, may fluctuate from one period to
the next based on the mix of contracts in the backlog as of any given date. In
addition, direct costs may fluctuate due to changes in labor and facility
utilization resulting from the growth the Company has experienced.
Selling, general and administrative costs increased 70.0% to $25.9 million in
1996 from $15.2 million in 1995, and increased as a percentage of net service
revenue to 27.3% from 26.3%. The increase as a percentage of net revenue is
primarily attributable to the inclusion of Bio-Research. Selling, general and
administrative costs, which primarily includes compensation for administrative
employees, facilities costs, and marketing costs, are relatively fixed in the
near term and generally will increase at a lower rate than revenue. In addition,
the Company has incurred and will continue to incur costs related to expanded
infrastructure required to open new offices as described previously.
Depreciation and amortization expense increased 71.2% to $3.9 million in 1996
from $2.3 million in 1995, primarily due to the Company's preclinical
operations.
Interest income, net of interest expense, increased to $972,000 in 1996 from
$665,000 in 1995.
Consolidated income before income taxes increased to $9.4 million in 1996 from
$6.2 million in 1995. The provision for income taxes was $3.0 million in 1996 as
compared to $2.6 million in 1995 resulting in effective tax rates of 31.7% and
41.6%, respectively. The significant items that create the difference between
the Company's federal statutory and effective tax rates are state and local
taxes, research and development tax credits generated by the Company's Canadian
subsidiary, tax-exempt interest income, nondeductible amortization of goodwill,
and foreign net operating losses not previously recognized. The Company, in
general, will not record a tax asset for losses incurred in its foreign
operations until such time, if any, that it has three years of profits in the
applicable jurisdiction. However, the Company will recognize a tax benefit for
losses incurred in its foreign operations as the subsidiary generates taxable
income to the extent of the cumulative losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and long-term
basis are the payment of salaries, office rent and travel expenses, as well as
capital expenditures. The Company has historically financed these expenditures,
as well as acquisitions, with cash flow from operations, issuances of equity
securities and borrowings under its Credit Facilities as defined below. The
Company utilizes its working capital to finance these expenditures pending
receipt of its receivables. Contract receipts from the Company's clients vary
according to the terms of each contract.
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The Company's contracts usually require a portion of the contract amount to be
paid at or near the time the trial is initiated. Payments are generally received
upon the completion of negotiated performance requirements and, to a lesser
extent, on a date certain basis throughout the life of the contract. Cash
receipts do not correspond to costs incurred and revenue recognition (which is
based on cost-to-cost type of percentage of completion accounting). Therefore,
the Company's cash flow is influenced by the interaction of changes in
receivables and advance billings. The Company typically receives a low volume of
large-dollar cash receipts.
The Company has experienced a trend, which it expects will continue, in which
clients place less emphasis on prepayments and greater emphasis on negotiated
performance requirements. This trend has increased, and may continue to
increase, days sales outstanding in accounts receivable. This trend could have
an impact on the Company's ability to maintain its current level of working
capital. The number of days sales outstanding in accounts receivable was 117
days at December 31, 1997, compared to 90 days at December 31, 1996. The number
of days sales outstanding in accounts receivable net of advance billings was 82
days at December 31, 1997 compared to 52 days at December 31, 1996. The increase
is primarily due to the change in payment methodology discussed above as well as
a reduction in revenue resulting from the previously discussed contract
cancellations.
The Company had cash and cash equivalents of $28.3 million at December 31, 1997
as compared to $38.1 million at December 31, 1996.
During the year ended December 31, 1997, net cash used by operating activities
totaled $2.5 million, primarily due to a decrease in advance billings of $4.3
million, an increase in net tax receivables of $2.7 million, and a decrease in
net payables to investigators of $0.4 million, which was partially offset by a
decrease in accounts receivable of $1.2 million and an increase in accounts
payable and accrued expenses of $3.5 million.
Cash used in investing activities of $7.0 million during fiscal 1997 consisted
principally of capital expenditures. Capital expenditures have primarily been
made for computer system additions and upgrades, personal computer equipment and
expenditures on facility improvements. Annual capital expenditures were $3.8
million in 1995, $7.3 million in 1996 and $7.0 million in 1997. Capital
expenditures are estimated to be approximately $12.0 million in 1998, of which
approximately $2.1 million relates to leasehold improvements to be paid when the
Company moves into its new leased space in Cary, North Carolina.
Subsequent to December 31, 1997, the Company replaced its $10.0 million domestic
credit facility with a $15.0 million domestic credit facility which has
expansion capabilities to $40.0 million. Credit availability under the Company's
new domestic line of credit and its foreign line of credit (the "Credit
Facilities") totals approximately $18.5 million. There were no borrowings
outstanding under the lines of credit at December 31, 1997. Commitment
availability at December 31, 1997 has been reduced by issued letters of credit
of approximately $0.75 million. The lines are collateralized by certain of the
Company's assets and amounts outstanding would bear interest at a fluctuating
rate based either on the respective banks' prime interest rate or the London
Interbank Offered Rate ("LIBOR"), as elected by the Company. Borrowings
available under the lines of credit are subject to certain financial and
operating covenants.
The Company expects to continue expanding its operations through internal growth
and strategic acquisitions. The Company expects such activities will be funded
from existing cash and cash equivalents, cash flow from operations, and
available borrowings under its Credit Facilities. The Company estimates that
such sources of cash will be sufficient to fund the Company's current
operations, including expansions of its foreign operations, although some
pressure on cash reserves is expected over the course of the next several
months. There may be acquisition or other growth opportunities which require
additional external financing, and the Company may from time to time seek to
obtain additional funds from public or private issuances of equity or debt
securities. There can be no assurances that such financings will be available on
terms acceptable to the Company.
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QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate as a result of factors
such as delays experienced in implementing or completing particular clinical
trials and termination of clinical trials, the costs associated with integrating
acquired operations, foreign exchange fluctuations, as well as the costs
associated with opening new offices. Since a high percentage of the Company's
operating costs are relatively fixed while revenue is subject to fluctuation,
minor variations in the timing of contracts or the progress of clinical trials
(both delays and accelerations) may cause significant variations in quarterly
operating results. Results of one quarter are not necessarily indicative of
results for the next quarter.
IMPACT OF ACCOUNTING STANDARDS
The Company adopted Financial Accounting Standards Board Statement No. 128,
Earnings per Share ("SFAS No. 128") on December 31, 1997. SFAS No. 128 requires
presentation of both Basic Earnings per Share ("Basic EPS") and Diluted Earnings
per Share ("Diluted EPS"). Basic EPS is based on the weighted average number of
shares of common stock outstanding during the year, while Diluted EPS also
includes the dilutive effect of the Company's stock options. Prior period
earnings per share amounts have been restated to present Basic EPS and Diluted
EPS.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of certain computer programs being written
using two digits rather than four digits to define the applicable year. This
software recognizes a date using "00" as the year 1900 rather than 2000 which
could result in system failures, miscalculations, etc. Based upon a recent
assessment, the Company has determined certain software programs and computer
hardware will be modified or replaced as part of its on-going capital
expenditure program so that such programs are Year 2000 compliant. The cost
associated with these modifications and/or replacement is not expected to be
material to the Company. However, there can be no guarantee that the software of
outside vendors on which the Company's systems rely will be timely converted.
EXCHANGE RATE FLUCTUATIONS
The Company conducts business in several foreign countries and as a result
exposure exists to potentially adverse movement in foreign currency rates. The
Company uses foreign exchange contracts to hedge the risk of changes in foreign
currency exchange rates associated with contracts in which the expenses for
providing services are incurred in one currency and paid for by the client in
another currency. The objective of these contracts is to reduce the effect of
foreign exchange rate fluctuations on the Company's operating results.
INCOME TAXES
The Company's financial statements do not reflect U.S. or additional foreign
taxes on the possible distribution of undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Should the
Company determine the need to distribute these undistributed earnings of
foreign subsidiaries, it would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to various
countries.
8
ClinTrials Research Inc.
CONSOLIDATED BALANCE SHEETS
(All dollar amounts are expressed in thousands)
DECEMBER 31
-------------------------
1996 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 38,134 $ 28,275
Accounts receivable 34,908 33,725
Advance payments to investigators 549 939
Income taxes receivable 2,546 3,167
Deferred income taxes 2,361 2,511
Other current assets 3,028 2,531
--------- ---------
Total current assets 81,526 71,148
Property, plant and equipment:
Land, buildings and leasehold improvements 17,448 16,825
Equipment 20,567 25,625
Furniture and fixtures 4,429 5,347
--------- ---------
42,444 47,797
Less accumulated depreciation and amortization 8,321 13,025
--------- ---------
34,123 34,772
Other assets:
Excess of purchase price over net assets acquired 41,493 38,687
Other assets 81 372
--------- ---------
41,574 39,059
--------- ---------
$ 157,223 $ 144,979
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,470 $ 6,839
Advance billings 14,797 10,468
Payables to investigators 1,336 1,278
Accrued expenses 4,712 7,739
Income taxes payable 2,286 183
--------- ---------
Total current liabilities 29,601 26,507
Deferred income taxes 2,602 2,694
Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value--1,000,000
shares authorized; no shares
issued or outstanding -- --
Common Stock, $.01 par value--50,000,000
shares authorized; issued and
outstanding 18,114,258 and 18,181,765
shares in 1996 and 1997, respectively 181 182
Additional paid-in capital 126,773 127,160
Retained earnings (deficit) (2,917) (9,313)
Cumulative foreign currency translation
adjustments 983 (2,251)
--------- ---------
Total stockholders' equity 125,020 115,778
--------- ---------
$ 157,223 $ 144,979
========= =========
See accompanying notes to consolidated financial statements.
9
ClinTrials Research Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts are expressed in thousands, except for earnings per share)
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1996 1997
-------- --------- ---------
Revenue:
Service revenue $ 86,217 $ 123,703 $ 125,687
Less subcontractor costs 28,371 28,984 22,697
-------- --------- ---------
Net service revenue 57,846 94,719 102,990
Operating costs and expenses:
Direct costs 34,850 56,510 69,279
Selling, general and administrative
expenses 15,209 25,852 37,982
Depreciation and amortization 2,287 3,916 5,485
Restructuring charge -- -- 1,650
-------- --------- ---------
Income (loss) from operations 5,500 8,441 (11,406)
Other income (expense):
Interest income 744 1,032 1,232
Interest expense (79) (60) (28)
-------- --------- ---------
665 972 1,204
-------- --------- ---------
Income (loss) before income taxes 6,165 9,413 (10,202)
Provision (benefit) for income taxes 2,564 2,988 (3,806)
-------- --------- ---------
Net income (loss) $ 3,601 $ 6,425 $ (6,396)
======== ========= =========
Earnings (loss) per share:
Basic $ 0.27 $ 0.42 $ (0.35)
Diluted $ 0.26 $ 0.40 $ (0.35)
Number of shares and common stock equivalents
used in computing earnings (loss) per share:
Basic 13,497 15,447 18,156
Diluted 13,882 15,927 18,156
See accompanying notes to consolidated financial statements.
10
ClinTrials Research Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts are expressed in thousands)
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,601 $ 6,425 $ (6,396)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization of property,
plant and equipment 1,660 3,278 4,999
Amortization of other assets 627 900 1,326
Deferred income taxes (141) (1,636) (58)
Loss on disposal/write-down of fixed assets -- -- 322
Other 69 -- 7
Changes in operating assets and liabilities:
Accounts receivable (7,790) (3,988) 1,183
Advance billings 7,814 (6,985) (4,329)
Payables to investigators (2,697) (2,154) (58)
Accounts payable and accrued expenses (241) 2,690 3,470
Advance payments to investigators (3,579) 3,383 (390)
Income taxes (212) (860) (2,724)
Other assets and liabilities 98 (953) 141
-------- -------- --------
Net cash provided by (used in) operating activities (791) 100 (2,507)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (3,787) (7,318) (6,962)
Acquisition of business, net of cash acquired -- (59,047) --
Purchases of held-to-maturity securities (4,006) -- --
Maturities of held-to-maturity securities 6,554 1,524 --
-------- -------- --------
Net cash used in investing activities (1,239) (64,841) (6,962)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of Common Stock 658 86,766 381
-------- -------- --------
Net cash provided by financing activities 658 86,766 381
Effect of exchange rate changes on cash (25) 602 (771)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (1,397) 22,627 (9,859)
Cash and cash equivalents at beginning of year 16,904 15,507 38,134
-------- -------- --------
Cash and cash equivalents at end of year $ 15,507 $ 38,134 $ 28,275
======== ======== ========
Supplemental cash flow information:
Interest paid $ 39 $ 28 $ 16
======== ======== ========
Income tax payments (receipts) $ 2,589 $ 1,543 $ (1,024)
======== ======== ========
Equipment purchased included in accounts payable $ 66 $ 507 $ 611
======== ======== ========
See accompanying notes to consolidated financial statements.
11
ClinTrials Research Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(All dollar amounts are expressed in thousands)
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL RETAINED CURRENCY
--------------------- PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS TOTAL
---------- ------ -------- -------- ----------- ---------
Balance at January 1, 1995 13,368,990 $133 $ 39,397 $(12,943) $ 130 $ 26,717
Exercise of stock options 125,187 1 347 -- -- 348
Tax benefit from exercise
of stock options -- -- 310 -- -- 310
Foreign currency translation
adjustments -- -- -- -- (25) (25)
Net income -- -- -- 3,601 -- 3,601
---------- ---- -------- -------- ------- ---------
Balance at December 31, 1995 13,494,177 134 40,054 (9,342) 105 30,951
Secondary offering, net of
cash offering costs 4,485,000 45 84,856 -- -- 84,901
Exercise of stock options 135,081 2 356 -- -- 358
Tax benefit from exercise
of stock options -- -- 1,507 -- -- 1,507
Foreign currency translation
adjustments -- -- -- -- 878 878
Net income -- -- -- 6,425 -- 6,425
---------- ---- -------- -------- ------- ---------
Balance at December 31, 1996 18,114,258 181 126,773 (2,917) 983 125,020
Exercise of stock options 67,507 1 380 -- -- 381
Foreign currency translation
adjustments -- -- -- -- (3,234) (3,234)
Net loss -- -- -- (6,396) -- (6,396)
Other -- -- 7 -- -- 7
---------- ---- -------- -------- ------- ---------
Balance at December 31, 1997 18,181,765 $182 $127,160 $ (9,313) $(2,251) $ 115,778
========== ==== ======== ======== ======= =========
See accompanying notes to consolidated financial statements.
12
ClinTrials Research Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Years Ended December 31, 1995, 1996 and 1997)
1. ORGANIZATION
ClinTrials Research Inc. (the "Company") is a full service contract research
organization serving the pharmaceutical, biotechnology and medical device
industries. The Company designs, monitors and manages preclinical and clinical
trials, provides data management and biostatistical services, and offers product
registration services throughout the United States, Canada and Europe.
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its common stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying consolidated financial
statements give retroactive effect to the merger and include the combined
operations of the Company and Ovation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of ClinTrials
Research Inc. and its subsidiaries. All material intercompany balances and
transactions have been eliminated.
ESTIMATES
Judgment and estimation is exercised by management in certain areas of the
preparation of the financial statements including revenue recognition, reserves
for self-insurance risks and the allowance for uncollectible accounts.
Management believes that such estimates are fairly stated.
FOREIGN CURRENCIES
For subsidiaries outside of the United States that operate in a local currency
environment, assets and liabilities are translated to United States dollars at
year-end exchange rates. Income and expense items are translated at the average
rates of exchange prevailing during the year. Translation adjustments are
accumulated in a separate component of stockholders' equity. Transaction gains
and losses are included in the determination of net income.
CASH, CASH EQUIVALENTS AND HELD-TO-MATURITY SECURITIES
For the purpose of the statement of cash flows, cash and cash equivalents
include demand deposits and money market accounts held with a financial
institution. The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost, adjusted for amortization of premium and
accretion of discount to maturity. Such amortization is included in interest
income. Interest on securities classified as held-to-maturity is included in
interest income.
REVENUE RECOGNITION
Revenue from contracts is recorded as costs are incurred and includes estimated
earned fees or profits calculated on the basis of the relationship between costs
incurred and total estimated costs (cost-to-cost type of
percentage-of-completion method of accounting). Certain contracts contain
provisions for price redetermination for cost overruns. Such redetermined
amounts are included in service revenue when realization is assured and the
amounts can reasonably be determined. Estimated amounts representing contract
change orders, claims or funding limitations are included in service revenue
only when realization is probable. In the period in which it is determined that
a loss will result from the performance of a contract, the entire amount of the
estimated ultimate loss is provided for.
Subcontractor costs comprise investigator fees and certain other contract costs
which are reimbursed by clients. Accordingly, such subcontractor costs are
deducted in determining net service revenue.
UNBILLED RECEIVABLES AND ADVANCE BILLINGS
Unbilled receivables arise from those contracts under which billings can only be
rendered upon the achievement of certain negotiated performance requirements or
on a date-certain basis. Advance billings represent contractual billings for
services not yet rendered.
13
INVESTIGATOR PAYMENTS
Investigator fees (subcontractor costs) are accrued on a straight-line basis
over the life of the contract. Investigator payments are made based on
predetermined contractual arrangements, which may differ from the accrual of the
expense. Such differences in payments to investigators in excess of the accrued
expense represent advance payments to investigators and accrued expenses in
excess of payments made represent payables to investigators.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the respective properties, which approximate 5 to 40 years.
INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
Costs in excess of the net asset value are being amortized over periods of 20 to
40 years using the straight-line method. The carrying value of the excess of
purchase price over net assets acquired is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that the
excess of purchase price over net assets acquired will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the excess of
purchase price over net assets acquired is reduced by the estimated shortfall of
cash flows. Accumulated amortization of the excess of purchase price over fair
value of assets acquired was approximately $3,228,000, and $4,530,000 at
December 31, 1996 and 1997, respectively.
FOREIGN CURRENCY HEDGING
Foreign exchange forward contracts are legal agreements between two parties to
purchase and sell foreign currency for a specified price, with delivery and
settlement in the future. The Company uses foreign exchange contracts to hedge
the risk of changes in foreign currency exchange rates associated with contracts
in which the expenses for providing services are incurred in one currency and
paid for by the client in another currency. The Company recognizes changes in
value in income only when contracts are settled. At December 31, 1997, the
Company's Canadian subsidiary had outstanding contracts to purchase $800,000
United States dollars per month through April 1998 at an average rate of 1.3667
Canadian dollars per United States dollar.
EARNINGS PER SHARE
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" ("SFAS No. 128") on December 31, 1997. SFAS No. 128
requires presentation of both Basic Earnings per Share ("Basic EPS") and Diluted
Earnings per Share ("Diluted EPS"). Basic EPS is based on the weighted average
number of shares of common stock outstanding during the year. Diluted EPS also
includes the dilutive effect of common stock equivalents, which consists of
stock options representing 385,000 and 480,000 equivalent shares for the years
ended December 31, 1995 and 1996, respectively. Diluted loss per share for the
year ended December 31, 1997 does not include common stock equivalents of
391,000 as their effect would be anti-dilutive. Prior period earnings per share
amounts have been restated to present Basic EPS and Diluted EPS.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified in order to conform to
current period presentation. Such reclassifications had no material effect on
the financial position and results of operations as previously reported.
3. RESTRUCTURING OF OPERATIONS
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company recorded a $1,650,000 restructuring charge for costs to be
incurred in reducing its administrative workforce. At December 31, 1997, the
entire $1,650,000 restructuring charge is included in accrued expenses as no
termination benefits were paid as of year end. The restructuring charge
primarily represents the termination of benefits and costs for the reduction of
approximately 35 administrative employees to be completed in 1998.
4. STOCK SPLIT
On October 25, 1996, the Board of Directors declared a 3-for-2 stock split to be
effected in the form of a stock dividend of one-half share for each share of
Company common stock outstanding as of the record date, November 11, 1996. The
dividend was distributed to shareholders on November 25, 1996. The stated par
value was not changed from $0.01. A total of $60,000 was reclassified from the
Company's additional paid-in capital to the Company's common stock account.
Earnings per share, stock option and market price data referred to in the
financial statements and notes hereto have been adjusted retroactively to give
effect to the stock split.
14
5. ACQUISITION
On July 31, 1996, the Company purchased for $65.0 million in cash all of the
assets and assumed certain liabilities (the "Acquisition") of Bio-Research
Laboratories Ltd. of Montreal, Quebec ("Bio-Research"). The Acquisition was
financed with the proceeds of a public offering of 4,485,000 shares of the
Company's common stock at $20.00 per share on July 24, 1996. Net proceeds to the
Company from the offering were approximately $84.9 million, $65.0 million of
which was used to fund the Acquisition.
The Acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated to the tangible and intangible assets acquired and
liabilities assumed based upon their fair values. The purchase price allocation
was as follows (in thousands):
Current assets $16,468
Current liabilities assumed (9,635)
Property, Plant and Equipment 23,141
Excess purchase price over net assets acquired 35,026
-------
$65,000
=======
Operations of the acquired business are included in the Company's results of
operations from the date of the Acquisition.
The following represents the unaudited pro forma results of operations as if the
Acquisition had occurred as of January 1 of the respective periods for the years
ended December 31 (in thousands, except for per share data):
1995 1996
------- --------
Net service revenue $84,188 $110,597
Income before income taxes 7,906 9,658
Net income 6,368 7,336
Earnings per share:
Basic $ 0.38 $ 0.42
Diluted $ 0.37 $ 0.41
Weighted average shares
outstanding:
Basic 16,971 17,471
Diluted 17,356 17,951
The pro forma operating results include each company's results of operations for
the indicated periods with increased amortization of intangible assets as if the
Acquisition had occurred as of January 1, 1995. The pro forma information given
above does not purport to be indicative of the results that actually would have
been obtained if the operations were combined during the periods actually
presented, and is not intended to be a projection of future results or trends.
6. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31 (in thousands):
1996 1997
------- --------
Trade:
Billed $22,290 $ 21,306
Unbilled 12,624 12,485
Allowance for doubtful
accounts (744) (883)
------- --------
34,170 32,908
Other 738 817
------- --------
$34,908 $ 33,725
======= ========
The Company's exposure to credit loss in the event that payment is not received
for revenue recognized equals the outstanding accounts receivable and unbilled
services balance.
15
7. CREDIT FACILITIES
Subsequent to December 31, 1997, the Company replaced its $10.0 million domestic
credit facility with a $15.0 million domestic credit facility which has
expansion capabilities to $40.0 million. Credit availability under the Company's
new domestic line of credit and foreign line of credit (the "Credit Facilities")
totals approximately $18.5 million. The lines are collateralized by certain of
the Company's assets and bear interest at a fluctuating rate based either on the
respective banks' prime interest rate or the London Interbank Offered Rate
("LIBOR"), as elected by the Company. On December 31, 1996 and 1997, there were
no borrowings outstanding under the lines of credit. Commitment availability at
December 31, 1997 has been reduced by issued letters of credit of approximately
$750,000. Borrowings available under the lines of credit are subject to certain
financial and operating covenants.
8. OPERATING LEASES
The Company leases office space and office equipment under operating leases.
Minimum rental commitments payable in future years under operating leases having
an initial or remaining noncancelable term of one year or more are as follows
(in thousands):
1998 $ 8,089
1999 6,805
2000 7,016
2001 6,888
2002 6,873
Thereafter 50,506
-------
Total minimum rentals $86,177
=======
The 1998 minimum rental commitments of $8,089,000 above includes $2,114,000 of
leasehold improvements to be paid when the Company moves into its new leased
space in Cary, North Carolina.
Total rent expense for all operating leases was approximately $2,922,000 and
$3,973,000 and $5,584,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
9. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows (in thousands):
1996 1997
------- -------
Deferred tax assets:
Advance billings and receivables $ 2,252 $ 2,060
Accrued expenses 109 451
Research and development
credit carryforward 523 1,532
Undeducted research and
development expenditures 2,484 1,952
Other -- 388
------- -------
Total deferred tax assets 5,368 6,383
Valuation allowance for
deferred tax assets -- --
------- -------
Net deferred tax assets 5,368 6,383
Deferred tax liabilities:
Depreciation and amortization (5,609) (6,566)
------- -------
Net deferred tax assets (liabilities) $ (241) $ (183)
======= =======
The balance sheet classification of the net deferred tax assets (liabilities) is
as follows at December 31 (in thousands):
1996 1997
------- -------
Current deferred tax assets $ 2,361 $ 2,511
Net noncurrent deferred tax liabilities (2,602) (2,694)
------- -------
Net deferred tax assets (liabilities) $ (241) $ (183)
======= ========
16
For financial reporting purposes, income (loss) before income taxes for the
years ended December 31 includes the following components (in thousands):
1995 1996 1997
------- ------- -------
Income (loss) before income taxes:
United States $ 6,106 $ 8,383 $(7,745)
Foreign 59 1,030 (2,457)
------- ------- -------
$ 6,165 $ 9,413 $(10,202)
======= ======= =======
The Company's Canadian subsidiary qualifies for federal and Quebec Scientific
Research and Development deductions and tax credits. Expenditures on certain
capital assets are fully deductible or may be carried forward indefinitely until
utilized. The tax credits are equal to 20% of certain capital and current
expenditures. The tax credits are accounted for using the flow through method,
in which the credits are recognized as a reduction of income taxes in the year
the credit arises.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $6,686,000 at December 31, 1997. Provision has not been made for
U.S. or additional foreign taxes on undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various countries. It
is not practicable to estimate the amount of deferred tax liability on foreign
undistributed earnings which are intended to be permanently reinvested.
Significant components of the provision (benefit) for income taxes for the years
ended December 31 are as follows (in thousands):
1995 1996 1997
------- ------- -------
Current:
Foreign $ -- $ (602) $(1,261)
Federal 2,170 4,191 (2,517)
State and local 535 1,035 30
Deferred:
Federal (113) (1,317) 253
State (28) (319) (311)
------- ------- -------
Provision (benefit) for
income taxes $ 2,564 $ 2,988 $(3,806)
======= ======= =======
The Company's consolidated effective tax rate differed from the federal
statutory rate for the years ended December 31 as set forth below (in
thousands):
1995 1996 1997
------- ------- -------
Federal statutory rate $ 2,096 $ 3,200 $(3,469)
State and local income taxes
net of federal benefit 335 472 (185)
Research and development
tax credits -- (1,106) (2,532)
Amortization of excess of
purchase price over net assets
acquired and other intangible
assets 161 194 242
Unrecognized benefit of
foreign net operating losses -- 60 2,279
Tax-exempt investment income (200) (191) (156)
Other 172 359 15
------- ------- -------
$ 2,564 $ 2,988 $(3,806)
======= ======= =======
17
10. STOCK OPTION PLAN
The 1989 Stock Option Plan, as amended, provides for the grant of options to
purchase up to 1,350,000 shares of Common Stock to directors, officers and other
key persons. On May 3, 1996, the Stockholders approved an increase to the
options available to 2,025,000.
Information with respect to the 1989 Stock Option Plan is as follows:
Weighted-Average
Exercise Price
at December 31
------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- -------- --------
Options outstanding at January 1 960,984 1,014,156 1,133,290 $ 4.67 $ 9.90
Granted 308,252 368,694 826,377 $ 22.03 $ 8.36
Exercised (125,187) (135,081) (67,507) $ 3.28 $ 5.87
Canceled (129,893) (114,479) (555,581) $ 10.46 $ 17.83
---------- ---------- ----------
Outstanding at December 31 1,014,156 1,133,290 1,336,579 $ 9.90 $ 5.86
========== ========== ==========
Option price range at
December 31 $.35 to $12.92 $.35 to $28.50 $.35 to $12.92
Options exercisable
at December 31 584,402 559,141 634,214 $ 2.27 $ 3.04
At December 31, 1995, 1996 and 1997 there were 139,133 and 559,887 and 289,091
shares, respectively, available for grant. Under SFAS No. 123, disclosure of
exercise prices is required for the year ended 1996 and 1997 only. The
weighted-average fair value of options granted during 1997 was $3.19. The
weighted-average remaining contractual life of all options outstanding at
December 31, 1997 is 6.8 years.
On April 18, 1997, the Company repriced options to purchase 403,000 shares with
exercise prices between $12.67 and $28.50 with options to purchase 362,595
shares at an exercise price of $8.38 (which exceeded the closing market price on
April 18, 1997 of $7.63). The repricing excluded options held by the Company's
top two executives (its President/Chief Executive Officer and Executive Vice
President - Worldwide Operations).
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB No. 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively; risk-free interest rates of
6.26%, 5.99% and 6.10%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of .55, .55 and .59; and
a weighted-average expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
18
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows for the years ended December 31 (in thousands, except
for earnings per share information):
1995 1996 1997
------- ------- -------
Net income (loss) $ 3,601 $ 6,425 $(6,396)
Pro forma compensation expense
from stock options, net of taxes 129 814 1,561
------- ------- -------
Pro forma net income (loss)
$ 3,472 $ 5,611 $(7,957)
======= ======= =======
Pro forma earnings (loss) per share:
Basic EPS $ 0.26 $ 0.36 $ (0.44)
======= ======= =======
Diluted EPS $ 0.25 $ 0.35 $ (0.44)
======= ======= =======
11. EMPLOYEE BENEFITS
The Company provides defined contribution plans for substantially all of its
employees. Generally, the Company contributes to the plans based on employee
contributions and may also make additional discretionary contributions.
The Company's expense for its contributions to the plans was approximately
$768,000 and $1,364,000 and $1,976,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
12. OTHER FINANCIAL INFORMATION
The Company's operations involve a single industry segment providing preclinical
and clinical research and development services. The principal financial
information by geographic area is as follows for the years ended December 31 (in
thousands):
1995 1996 1997
------- ------- -------
Net revenue:
North America $51,135 $81,293 $88,278
International 6,711 13,426 14,712
------- ------- --------
$57,846 $94,719 $102,990
======= ======= ========
Operating profit (loss):
North America $ 5,803 $ 8,637 $(3,898)
International (303) (196) (7,508)
------- ------- --------
$ 5,500 $ 8,441 $(11,406)
======= ======= ========
Identifiable assets:
North America $54,992 $148,545 $133,709
International 3,634 8,678 11,270
------- ------- --------
$58,626 $157,223 $144,979
======= ======== ========
19
Net service revenue generated under multiple contracts by clients who accounted
for more than 10% of the Company's net service revenue for the years ended
December 31 are as follows (in thousands):
Client 1995 1996 1997
------ ------- ------- -------
A $14,606 <10% <10%
B $10,423 $21,601 $13,694
13. CONTINGENCIES
In 1991, a customer commenced legal action against the predecessor of the
Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two clinical research studies. Judgment was rendered in
February 1997 by the Superior Court of Montreal against the Company's
preclinical subsidiary in the amount of approximately $560,000 plus interest to
accrue from September 1991. The Company's preclinical subsidiary, now
responsible for this action, has reserves adequate to cover the current judgment
amount. The Company's preclinical subsidiary has appealed the amount of the
judgment and the subsidiary's insurance company has appealed the portion of the
judgment which obligates the insurance company to pay the insurance claim
related to this litigation. The Company believes it is entitled, subject to
certain limitations, to indemnification from a former owner of the predecessor
for a portion of this claim. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position or results of operations.
14. SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Company paid $1,500,000 cash for the option
to purchase MPI Research, a drug safety and pharmaceutical development company
located in Mattawan, Michigan. MPI Research is owned by Dr. Jerry R. Mitchell,
who became the Company's Chief Executive Officer and President in February 1998,
and William U. Parfet, a consultant to the Company. The Company's option to
purchase MPI Research at fair market value has a 26 month term.
20
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders ClinTrials Research Inc.
We have audited the accompanying consolidated balance sheets of ClinTrials
Research Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ClinTrials Research Inc. at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
January 30, 1998
21
ClinTrials Research Inc.
QUARTERLY FINANCIAL INFORMATION
(in thousands, except for per share amounts)
1997 First Second Third Fourth*
------- -------- -------- --------
Net revenue $28,603 $ 25,995 $ 24,199 $ 24,193
Income (loss) before income taxes $ 871 $ (1,893) $ (3,964) $ (5,216)
Net income (loss) $ 748 $ (1,480) $ (2,775) $ (2,889)
Earnings (loss) per share:
Basic $ 0.04 $ (0.08) $ (0.15) $ (0.16)
Diluted $ 0.04 $ (0.08) $ (0.15) $ (0.16)
Number of shares and dilutive common stock equivalents
used in computing earnings per share:
Basic 18,117 18,146 18,180 18,181
Diluted 18,522 18,146 18,180 18,181
Market prices of common stock:
High $ 32.00 $ 12.63 $ 12.69 $ 9.38
Low $ 7.75 $ 6.50 $ 8.25 $ 6.25
1996** First Second Third Fourth
------- -------- -------- --------
Net revenue $17,986 $ 19,710 $ 25,678 $ 31,345
Income before income taxes $ 1,800 $ 2,034 $ 2,554 $ 3,025
Net income $ 1,018 $ 1,181 $ 1,933 $ 2,293
Earnings per share:
Basic $ 0.08 $ 0.09 $ 0.12 $ 0.13
Diluted $ 0.07 $ 0.08 $ 0.11 $ 0.12
Number of shares and dilutive common stock equivalents
used in computing earnings per share:
Basic 13,501 13,543 16,578 18,112
Diluted 14,028 14,062 17,064 18,552
Market prices of common stock:
High $ 23.75 $ 33.67 $ 32.75 $ 29.17
Low $ 13.00 $ 22.67 $ 20.00 $ 16.88
1995 First Second Third Fourth
------- -------- -------- --------
Net revenue $11,783 $ 13,491 $ 15,984 $ 16,588
Income before income taxes $ 1,224 $ 1,409 $ 1,734 $ 1,798
Net income $ 721 $ 817 $ 979 $ 1,084
Earnings per share:
Basic $ 0.05 $ 0.06 $ 0.07 $ 0.08
Diluted $ 0.05 $ 0.06 $ 0.07 $ 0.08
Number of shares and dilutive common stock
equivalents used in computing earnings per share:
Basic 13,369 13,405 13,464 13,492
Diluted 13,815 13,837 13,936 13,938
Market prices of common stock:
High $ 8.67 $ 9.00 $ 13.50 $ 14.08
Low $ 6.00 $ 6.92 $ 8.67 $ 11.33
* The fourth quarter of 1997 includes $1,650 ($1,169 net of tax) restructuring
charge primarily related to termination costs associated with the severance
of certain general and administrative personnel.
** Quarterly results for 1996 have been restated to give retroactive effect to
the 1997 merger with Ovation, which was accounted for as a pooling of
interests.