1
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2001
Commission file number 000-23520
QUINTILES TRANSNATIONAL CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 998-2000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
The number of shares of Common Stock, $.01 par value, outstanding as of June 30,
2001 was 119,640,936.
1
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 2001 and December 31, 2000
3
Condensed consolidated statements of
operations - Three months ended June 30,
2001 and 2000; six months ended June 30,
2001 and 2000
4
Condensed consolidated statements of
cash flows - Six months ended
June 30, 2001 and 2000
5
Notes to condensed consolidated financial
statements - June 30, 2001
6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosure
about Market Risk
24
Part II. Other Information
Item 1. Legal Proceedings
24
Item 2. Changes in Securities
25
Item 3. Defaults upon Senior Securities - Not
Applicable 25
Item 4. Submission of Matters to a Vote of Security
Holders
26
Item 5. Other Information - Not Applicable
26
Item 6. Exhibits and Reports on Form 8-K
26
Signatures
27
2
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30
DECEMBER 31
2001
2000
------------
------------
(unaudited)
(Note 1)
(In
thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 411,436
$ 330,214
Trade accounts receivable and unbilled services, net 449,680
413,992
Investments in debt securities 28,230
31,080
Prepaid expenses 36,696
31,984
Other current assets and receivables 50,491
29,405
------------
------------
Total current assets 976,533
836,675
Property and equipment 624,628
602,950
Less accumulated depreciation (238,264)
(210,990)
------------
------------
386,364
391,960
Intangibles and other assets:
Intangibles, net 192,236
194,814
Investments in debt securities 9,250
76,732
Investments in marketable equity securities 347,255
384,040
Deferred income taxes 2,048
29,175
Deposits and other assets 66,676
48,182
------------
------------
617,465
732,943
------------
------------
Total assets $ 1,980,362
$ 1,961,578
============
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 4
$ 44
Accounts payable and accrued expenses 257,900
255,238
Credit arrangements, current 15,609
20,027
Unearned income 200,819
194,201
Income taxes payable 58,968
51,284
Deferred income taxes 4,360
4,774
Other current liabilities 1,712
2,423
------------
------------
Total current liabilities 539,372
527,991
Long-term liabilities:
Credit arrangements, less current portion 17,178
18,965
Deferred income taxes 3,650
--
Other liabilities 8,297
9,916
------------
------------
29,125
28,881
------------
------------
Total liabilities 568,497
556,872
Shareholders' equity:
Preferred stock, none issued and outstanding
at June 30, 2001 and December 31, 2000,
respectively --
--
Common stock and additional paid-in capital,
119,640,936 and 115,933,182 shares issued
and outstanding at June 30, 2001 and
December 31, 2000, respectively 914,694
876,407
Retained earnings 640,449
622,985
Accumulated other comprehensive loss (143,278)
(94,686)
------------
------------
Total shareholders' equity 1,411,865
1,404,706
------------
------------
Total liabilities and shareholders' equity $ 1,980,362
$ 1,961,578
============
============
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED
JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2001 2000
2001 2000
--------
---------- -------- ----------
(in thousands)
Net revenue $404,300 $
423,107 $808,770 $ 837,952
Costs and expenses:
Direct 241,108
255,901 482,114 508,310
General and administrative 129,402
142,597 264,119 280,726
Depreciation and amortization 23,893
22,749 46,546 45,871
Restructuring 2,146
-- 2,146 58,592
Disposal of business --
17,325 -- 17,325
--------
---------- -------- ----------
396,549
438,572 794,925 910,824
--------
---------- -------- ----------
Income (loss) from operations 7,751
(15,465) 13,845 (72,872)
Total other income, net 6,687
3,193 12,221 5,141
--------
---------- -------- ----------
Income (loss) from continuing operations before
income taxes 14,438
(12,272) 26,066 (67,731)
Income tax expense (benefit) 4,764
(4,050) 8,601 (22,350)
--------
---------- -------- ----------
Income (loss) from continuing operations 9,674
(8,222) 17,465 (45,381)
Income from discontinued operation, net of income taxes --
6,176 -- 16,770
Extraordinary gain from sale of discontinued operation,
net of income taxes --
436,327 -- 436,327
--------
---------- -------- ----------
Net income $ 9,674 $
434,281 $ 17,465 $ 407,716
========
========== ======== ==========
Basic net income per share:
Income (loss) from continuing operations $ 0.08 $
(0.07) $ 0.15 $ (0.39)
Income from discontinued operation --
0.05 -- 0.15
Extraordinary gain from sale of discontinued operation --
3.78 -- 3.78
--------
---------- -------- ----------
Basic net income per share $ 0.08 $
3.76 $ 0.15 $ 3.53
========
========== ======== ==========
Diluted net income per share:
Income (loss) from continuing operations $ 0.08 $
(0.07) $ 0.14 $ (0.39)
Income from discontinued operation --
0.05 -- 0.15
Extraordinary gain from sale of discontinued operation --
3.78 -- 3.78
--------
---------- -------- ----------
Diluted net income per share $ 0.08 $
3.76 $ 0.14 $ 3.53
========
========== ======== ==========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
2001 2000
---------- ----------
(In thousands)
OPERATING ACTIVITIES
Net income
$ 17,465 $ 407,716
Income from discontinued operation, net of income taxes
-- (16,770)
Gain on the sale of discontinued operation, net of income taxes
-- (436,327)
---------- ----------
Income (loss) from continuing operations
17,465 (45,381)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization
46,546 45,871
Restructuring charge (payments) accrual, net
(10,778) 50,874
Loss on disposal of business
-- 17,325
Provision for (benefit from) deferred income taxes
(740) 79
Change in operating assets and liabilities
27,440 (113,540)
Other
(1,808) 93
---------- ----------
Net cash provided by (used in) operating activities
78,125 (44,679)
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment
4,592 3,574
Acquisition of property and equipment
(44,567) (43,050)
Proceeds from disposal of discontinued operation, net of expenses
-- 391,500
Acquisition of businesses, net of cash acquired
(6,620) (8,419)
Proceeds from redemption of (purchases of) debt securities, net
71,114 (3,989)
Purchases of equity investments, net
(23,632) (3,057)
Other
-- 1
---------- ----------
Net cash provided by investing activities
887 336,560
FINANCING ACTIVITIES
(Decrease) increase in lines of credit, net
(38) 700
Principal payments on credit arrangements, net
(9,579) (153,074)
Issuance of common stock, net
20,554 8,599
Repurchase of common stock
(1,704) (8,510)
Dividend from discontinued operation
-- 17,086
---------- ----------
Net cash provided by (used in) financing activities
9,233 (135,199)
Effect of foreign currency exchange rate changes on cash
(7,023) (2,511)
---------- ----------
Increase in cash and cash equivalents
81,222 154,171
Cash and cash equivalents at beginning of period
330,214 191,653
---------- ----------
Cash and cash equivalents at end of period
$ 411,436 $ 345,824
========== ==========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
June 30, 2001
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001. The balance sheet at December 31, 2000 has been
derived from the audited consolidated financial statements of the Company. For
further information, refer to the Consolidated Financial Statements and Notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 2000 of Quintiles Transnational Corp. (the "Company").
For an update of the Company's legal proceedings, refer to Item 1 of Part II of
this Form 10-Q.
2. Acquisitions
During the first quarter of 2001, the Company acquired OEC, SA, a
Switzerland-based company that provides drug safety services to the
pharmaceutical industry, and Ungerer Laboratory, a laboratory based in Pretoria,
South Africa specializing in microbiology, molecular biology and hematology.
These transactions were accounted for as purchases with an aggregate purchase
price of approximately $7.1 million.
3. Stock Repurchase
The authorization by the Board of Directors to repurchase up to $200 million of
the Company's Common Stock expired March 1, 2001. The Company did not enter into
any agreements to repurchase its Common Stock under this authorization during
2001.
On March 13, 2001, the Board of Directors authorized the Company to repurchase
up to $100 million of the Company's Common Stock. During the first six months of
2001, the Company repurchased 100,000 shares of its Common Stock for an
aggregate price of approximately $1.7 million.
4. Significant Customers
One customer accounted for 10.4% and 10.9% of consolidated net revenue for the
three and six months ended June 30, 2001, respectively. No one customer
accounted for greater than 10% of consolidated net revenue for the three and six
months ended June 30, 2000. These revenues were derived from each of the
Company's segments.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
5. Restructuring Charge
During the second quarter of 2001, the Company recognized a $2.1 million
restructuring charge relating primarily to a reorganization of the Internet
initiative and the commercialization group in the United States. All of the 40
positions to be eliminated as a part of this restructuring were terminated as of
June 30, 2001.
As of June 30, 2001, the following amounts were recorded (in thousands):
Activity Six-Months
Ended
June 30, 2001
-------------------------
Balance at
Write-Offs/ Balance at
December 31, 2000 Accruals
Payments June 30, 2001
----------------- --------
----------- -------------
Severance and related costs $ -- $ 1,970 $
(773) $1,197
Exit costs -- 176
(176) --
---- --------
-------- ------
$ -- $ 2,146 $
(949) $1,197
==== ========
======== ======
During 2000, the Company adopted a restructuring plan ("January 2000 Plan") and
a follow-on restructuring plan which resulted in the recognition of a
restructuring charge of $58.6 million. Of the approximately 990 positions that
were to be eliminated under these plans, 909 positions have been terminated as
of June 30, 2001, which includes 764 positions under the January 2000 plan.
Activity during the first six months of 2001 is as follows (in thousands):
Balance at
Balance at
December 31, 2000 Accruals
Write-Offs/Payments June 30, 2001
----------------- --------
------------------- -------------
Severance and related costs $ 8,867 $ -- $
(6,114) $2,753
Exit costs 5,788 --
(2,601) 3,187
-------- --------
-------- ------
$ 14,655 $ -- $
(8,715) $5,940
======== ========
======== ======
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
6. Net Income Per Share
The following table sets forth the computation of the weighted-average shares
used when calculating the basic and diluted net income per share (in thousands):
Three Months Ended June 30 Six Months
Ended June 30
--------------------------
------------------------
2001 2000 2001
2000
-------- -------- --------
--------
Weighted average shares:
Basic weighted average shares 117,149 115,394 116,746
115,417
Effect of dilutive securities:
Stock options 3,698 -- 3,754
--
-------- -------- --------
--------
Diluted weighted average shares 120,847 115,394 120,500
115,417
======== ======== ========
========
Options to purchase approximately 8.8 million shares of common stock were
outstanding during the three and six months ended June 30, 2001, but were not
included in the computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common stock
and, therefore, the effect would be antidilutive.
Warrants to purchase 10 million shares of common stock were outstanding during
the three and six months ended June 30, 2001 but were not included in the
computation of diluted net income per share because the warrant's exercise price
was greater than the average market price of the common stock and, therefore,
would be antidilutive.
7. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and six months ended June 30, 2001 and 2000 (in thousands):
Three Months Ended June 30
Six Months Ended June 30
--------------------------
------------------------
2001 2000
2001 2000
-------- ----------
-------- ----------
Net income $ 9,674 $ 434,281
$ 17,465 $ 407,716
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities,
net of income taxes 55,719 56,516
(27,245) 66,623
Foreign currency adjustment (7,398) (12,042)
(21,344) (19,489)
-------- ----------
-------- ----------
Comprehensive income (loss) $ 57,995 $ 478,755
$(31,124) $ 454,850
======== ==========
======== ==========
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
8. Segments
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development service group, the commercialization service group and the
informatics service group. Management has distinguished these segments based on
the normal operations of the Company. The product development group is primarily
responsible for all phases of clinical research. The commercialization group is
primarily responsible for sales force deployment and strategic marketing
services. The informatics group is primarily responsible for providing market
research solutions and strategic analysis to support healthcare decisions. The
Company does not include net revenue and expenses relating to the Internet
initiative, charges relating to restructurings and disposal of business,
interest income (expense) and income tax expense (benefit) in segment
profitability. Overhead costs are allocated based upon management's best
estimate of efforts expended in managing the segments. There are not any
significant intersegment revenues.
Three Months Ended June 30 Six Months Ended
June 30
--------------------------
--------------------------
2001 2000 2001
2000
---------- ---------- ----------
----------
Net revenue:
Product development $ 224,678 $ 202,469 $ 441,632 $
402,965
Commercialization 165,007 206,257 337,025
406,613
Informatics 14,615 14,256 30,080
27,804
Internet initiative -- 125 33
570
---------- ---------- ----------
----------
$ 404,300 $ 423,107 $ 808,770 $
837,952
========== ========== ==========
==========
Income from operations:
Product development $ 9,308 $ (4,585) $ 17,790 $
(13,830)
Commercialization 9,319 16,711 15,659
32,380
Informatics (4,377) (5,272) (7,110)
(7,767)
Internet initiative (4,353) (4,994) (10,348)
(7,738)
---------- ---------- ----------
----------
$ 9,897 $ 1,860 $ 15,991 $
3,045
========== ========== ==========
==========
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
9. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
that requires all business combinations initiated after June 30, 2001 to be
accounted for as purchases. The Company adopted SFAS No. 141 as required on July
1, 2001. The adoption did not have a material impact on the Company's financial
position or results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
requiring that all intangible assets without a contractual life no longer be
amortized but reviewed at least annually for impairment. The Company will adopt
SFAS No. 142 when required to do so on January 1, 2002. The adoption of SFAS No.
142 is expected to reduce the Company's amortization expense before income taxes
by approximately $2.3 million per quarter. The Company has not assessed the
impact of any impairment under the new tests prescribed by the standard.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent our judgement concerning the future and are subject to risks and
uncertainties that could cause our actual operating results and financial
position to differ materially. Such forward looking statements can be identified
by the use of forward looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," "believe," or "continue," or the negative thereof or
other variations thereof or comparable terminology.
We caution you that any such forward looking statements are further qualified by
important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including without
limitation the risk the market for our products and services will not grow as we
expect, the risk that our PharmaBio transactions will not generate revenues,
profits or return on investment at the rate or levels we expect, our ability to
efficiently distribute backlog among project management groups and match demand
to resources, actual operating performance, the actual savings and operating
improvements resulting from our restructuring activities, the ability to
maintain large client contracts or to enter into new contracts, changes in
trends in the pharmaceutical industry, and the ability to operate successfully
in new lines of business. In addition, our data products business remains
subject to state and federal regulations and contracts with data vendors
including WebMD Corporation. See "Risk Factors" below for additional factors
that could cause actual results to differ.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Continuing Operations
Three Months Ended June 30, 2001 and 2000
Net revenue for the second quarter of 2001 was $404.3 million, a decrease of
$18.8 million or (4.4%) as compared to the second quarter of 2000 net revenue of
$423.1 million. Net revenue decreased as a result of large commercialization
contracts that were terminated or converted in-house by our customers instead of
being renewed. This decrease was partially offset by $5.0 million of net revenue
contributed by an acquisition which is included in the product development group
that was completed in the first quarter of 2001 and an increase of approximately
$4.1 million from our Phase I development services. We experienced strong growth
in the Asia Pacific region but a decrease in the Americas region primarily
resulting from the decline in the commercialization segment. The growth in the
Europe and Africa region was negatively impacted by approximately $10.9 million
due to the effect of foreign currency fluctuations related to the strengthening
of the US Dollar relative to the euro and other European currencies.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$241.1 million or 59.6% of net revenue for the second quarter of 2001 versus
$255.9 million or 60.5% of net revenue for the second quarter of 2000.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $129.4 million or
32.0% of net revenue for the second quarter of 2001 versus $142.6 million or
33.7% of net revenue for the second quarter of 2000. General and administrative
expenses decreased primarily due to the effects of reductions relating to our
restructuring activities. These reductions were partially offset by an increase
of $2.8 million in costs associated with the continued implementation of our
shared service center initiative.
Depreciation and amortization were $23.9 million or 5.9% of net revenue for the
second quarter of 2001 versus $22.7 million or 5.4% of net revenue for the
second quarter of 2000. Depreciation expense increased $1.2 million due to the
increase in our capitalized asset base.
During the second quarter of 2001, we recognized a $2.1 million restructuring
charge relating primarily to a reorganization of our Internet initiative and the
commercialization group in the United States. The restructuring charge consists
of $2.0 million related to severance payments and $176,000 of exit costs. As
part of this restructuring, approximately 40 positions were eliminated.
During the quarter, we transferred certain domain experts from our Internet
initiative into our service groups for the purpose of operationalizing the
technology in preparation for deployment. As part of this reorganization, there
were approximately 20 individuals who had completed their assigned task of
developing the applications that were not transferred into the service groups
and their positions were eliminated. The costs associated with the elimination
of these positions were included in the restructuring charge.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Income from operations was $7.8 million or 1.9% of net revenue for the second
quarter of 2001 versus a loss from operations of $15.5 million or (3.7%) of net
revenue for the second quarter of 2000. Excluding the $4.4 million and $5.0
million for the Internet initiative in the second quarter of 2001 and 2000,
respectively, and the $2.1 million for the 2001 restructuring and the $17.3
million for the 2000 disposal of our Ledbury operations, income from operations
was $14.3 million or 3.5% of net revenue for the second quarter of 2001 versus
$6.9 million or 1.6% for the second quarter of 2000.
Other income was $6.7 million for the second quarter of 2001 versus $3.2 million
for the second quarter of 2000. Included in other income for the three months
ended June 30, 2001 was approximately $2.3 million in net realized gains from
investments which was partially offset by approximately $317,000 in transaction
related costs. The remaining $1.5 million increase was primarily due to an
increase in net interest income as a result of an increase in investable funds
and a decrease in debt.
The effective income tax rate for the second quarter of 2001 was 33.0% versus a
(33.0%) effective income tax rate for the second quarter of 2000. Since we
conduct operations on a global basis, our effective income tax rate may vary.
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the three months ended June 30, 2001 and 2000. We do not include
net revenue and expenses relating to the Internet initiative and charges related
to restructurings and disposal of a business in our segment analysis (dollars in
millions).
Net Revenue
(Loss)/Income From Operations
------------------------------
-------------------------------------------
Growth % of Net
% of Net
2001 2000 % 2001 Revenue
2000 Revenue
------ ------ ------ ------ --------
------ --------
Product development $224.7 $202.5 11.0% $ 9.3 4.1%
$ (4.6) (2.3)%
Commercialization 165.0 206.3 (20.0) 9.3 5.6
16.7 8.1
Informatics 14.6 14.3 2.5 (4.4) (29.9)
(5.3) (37.0)
------ ------ ------
------
$404.3 $423.0 (4.4)% $ 14.3 3.5%
$ 6.9 1.6%
====== ====== ======
======
The product development group recognized $224.7 million in net revenue for the
quarter ended June 30, 2001, which is the highest quarterly net revenue ever
achieved by this group. The product development group's financial performance
improvement was a result of several factors, including process enhancements and
cost reduction efforts in the American operations and growth in our Phase I
development services.
The commercialization group's financial performance was negatively impacted
during the quarter by the effects of large contracts converted in-house or
terminated by our customers instead of being renewed. This was partially offset
by the effects of cost reduction efforts primarily in the United States.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The informatics group's performance was impacted by the costs associated with
developing new data products.
Six Months Ended June 30, 2001 and 2000
Net revenue for the six months ended June 30, 2001 was $808.8 million, a
decrease of $29.2 million or (3.5%) as compared to the six months ended June 30,
2000 net revenue of $838.0 million. Net revenue decreased as a result of large
commercialization contracts that were terminated or converted in-house by our
customers instead of being renewed. This decrease was partially offset by $10.2
million of net revenue contributed by an acquisition which is included in the
product development group that was completed during the first quarter of 2001
and an increase of approximately $7.8 million from our Phase I development
services. We experienced strong growth in the Asia Pacific region but a decrease
in the Americas primarily resulting from the decline in the commercialization
segment. The growth in the Europe and Africa region was negatively impacted by
approximately $24.7 million due to the effect of foreign currency fluctuations
related to the strengthening of the US Dollar relative to the euro and other
European currencies.
Direct costs, which include compensation and related fringe benefits for
billable employees, and other expenses directly related to contracts, were
$482.1 million or 59.6% of net revenue for the first six months of 2001 versus
$508.3 million or 60.7% of net revenue for the first six months of 2000.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $264.1 million or
32.7% of net revenue for the first six months of 2001 versus $280.7 million or
33.5% of net revenue for the first six months of 2000. General and
administrative expenses decreased primarily due to the effects of reductions
relating to our restructuring activities. These reductions were partially offset
by an increase of costs associated with initiatives begun during 2000. The
following is a brief description of the progress made during 2001 on these
initiatives:
- Costs relating to our Internet initiative increased $3.5 million.
During the second quarter of 2001, we launched several new products
into beta testing.
- Costs relating to the implementation of a global shared service center
increased $5.5 million. During 2001, we opened our finance shared
service center in Scotland. We anticipate the implementation of the
global finance and human resources shared service centers to continue
during the second half of 2001.
- Costs relating to the implementation of global account teams increased
$2.5 million. We currently have 16 global account teams in place. These
teams have regularly scheduled meetings to pursue key customers and
contracts.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Depreciation and amortization were $46.5 million or 5.8% of net revenue for the
first six months of 2001 versus $45.9 million or 5.5% of net revenue for the
first six months of 2000. Depreciation expense increased $836,000 due to the
increase in our capitalized asset base.
During the second quarter of 2001, we recognized a $2.1 million restructuring
charge as discussed herein.
Income from operations was $13.8 million or 1.7% of net revenue for the first
six months of 2001 versus loss from operations of $72.9 million or (8.7%) of net
revenue for the first six months of 2000. Excluding the $10.3 million and $7.7
million for the Internet initiative for the first six months of 2001 and 2000,
respectively, and the charges relating to the restructurings and the disposal of
a business, income from operations was $26.3 million or 3.3% of net revenue for
the first six months of 2001 versus $10.8 million or 1.3% of net revenue for the
first six months of 2000.
Other income was $12.2 million for the first six months of 2001 versus $5.1
million for the first six months of 2000. Included in other income for the six
months ended June 30, 2001 was approximately $1.4 million in net realized gains
on investments which was partially offset by approximately $347,000 in
transaction related costs. The remaining $6.1 million variation was primarily
due to an increase in net interest income as a result of an increase in
investable funds and a decrease in debt.
The effective income tax rate for the first six months of 2001 was 33.0% versus
a (33.0%) effective income tax rate for the first six months of 2000. Since we
conduct operations on a global basis, our effective income tax rate may vary.
Analysis by Segment:
The following table summarizes the operating activities for our three reportable
segments for the six months ended June 30, 2001 and 2000. We do not include net
revenue and expenses relating to the Internet initiative and charges relating to
restructurings and the disposal of a business in our segment analysis (dollars
in millions)
Net Revenue
(Loss)/Income From Operations
------------------------------
-------------------------------------------
Growth % of Net
% of Net
2001 2000 % 2001 Revenue
2000 Revenue
------ ------ ------ ------ --------
------ --------
Product development $441.6 $403.0 9.6% $ 17.8 4.0%
$(13.8) (3.4)%
Commercialization 337.0 406.6 (17.1) 15.7 4.6
32.4 8.0
Informatics 30.1 27.8 8.2 (7.1) (23.6)
(7.8) (27.9)
------ ------ ------
------
$808.7 $837.4 (3.4)% $ 26.3 3.3%
$ 10.8 1.3%
====== ====== ======
======
The product development group's financial performance improvement was a result
of several factors, including process enhancements and cost reduction efforts in
the American and European operations and growth in our Phase I development
services.
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The commercialization group's financial performance was negatively impacted by
several factors, including the effects of large contracts converted in-house or
terminated by our customers instead of being renewed and the effects of a
collection issue with a non-pharmaceutical customer receivable. These were
partially offset by the effects of cost reduction efforts primarily in the
United States.
The informatics group's financial performance was impacted by the costs
associated with developing new data products.
Liquidity and Capital Resources
Cash provided by operations were $78.1 million for the six months ended June 30,
2001 versus cash used in operations of $44.7 million for the comparable period
of 2000. Included in cash provided by operations for the six months ended June
30, 2001 was an income tax refund of $47.6 million. Investing activities, for
the six months ended June 30, 2001, consisted primarily of capital asset
purchases and equity investment purchases. These expenditures were offset by
proceeds from the redemption of debt securities. Capital asset purchases
required an outlay of cash of $44.6 million for the six months ended June 30,
2001 compared to an outlay of $43.1 million for the same period in 2000. In
1999, we acquired substantial assets of Aventis' Kansas City-based Drug
Innovation and Approval Facility. We are targeting payment of the remainder of
the purchase price for the facility, approximately $58 million, early in the
fourth quarter of 2001.
Total working capital was $437.2 million as of June 30, 2001, an increase of
$128.5 million versus working capital of $308.7 million as of December 31, 2000.
Net receivables from customers (trade accounts receivable and unbilled services,
net of unearned income) were $248.9 million at June 30, 2001 as compared to
$219.8 million at December 31, 2000. As of June 30, 2001, trade accounts
receivable were $256.3 million versus $246.3 million at December 31, 2000.
Unbilled services were $193.4 million at June 30, 2001 versus $167.7 million at
December 31, 2000, offset by unearned income balances of $200.8 million and
$194.2 million, respectively. The number of days revenue outstanding in trade
accounts receivable and unbilled services, net of unearned income, were 48 days
at June 30, 2001, as compared to 43 days at December 31, 2000 as a result of
customer payment patterns.
Investments in debt securities were $37.5 million at June 30, 2001 as compared
to $107.8 million at December 31, 2000. Our investments in debt securities
consist primarily of U.S. Government Securities, which are callable by the
issuer, at par, and money funds. The $70.3 million decrease is a result of
investments being called by the issuer.
Investments in strategic marketable equity securities at June 30, 2001 were
$347.3 million, a decrease of $36.8 million, as compared to $384.0 million at
December 31, 2000. This decrease is due to unrealized losses on the portfolio as
a result of market price declines. A significant factor was the decline in the
market price of WebMD Corporation. It is our policy to continually review
declines in fair value of our marketable equity securities for declines that may
be other than temporary. If the Company's expectation for the future market
price of WebMD's common shares does not recover to near our cost basis of $12.78
per share, we would record a loss that would reflect the write-down necessary to
establish a new cost basis.
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We have a $150 million senior unsecured credit facility with a U.S. bank. In
addition, we have available to us a (pound)10.0 million (approximately $14.1
million) unsecured line of credit and a (pound)1.5 million (approximately $2.1
million) general banking facility with a U.K. bank. At June 30, 2001, we did not
have any outstanding balances on these facilities.
In March 2001, the Board of Directors authorized us to repurchase up to $100
million of our common stock until March 1, 2002. During the first six months of
2001, we entered into agreements to repurchase 100,000 shares for an aggregate
price of $1.7 million. Shareholders' equity at June 30, 2001 was $1.41 billion
versus $1.40 billion at December 31, 2000.
Based on our current operating plan, we believe that our available cash and cash
equivalents and investments in marketable securities, together with future cash
flows from operations and borrowings under our line of credit agreements will be
sufficient to meet our foreseeable cash needs in connection with our operations.
As part of our business strategy, we review many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, we
are continually evaluating new acquisition and expansion possibilities. We may
from time to time seek to obtain debt or equity financing in our ordinary course
of business or to facilitate possible acquisitions or expansion.
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RISK FACTORS
In addition to the other information provided in our reports, you should
consider the following factors carefully in evaluating our business and us.
Additional risks and uncertainties not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general, such as competitive conditions, may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or results of operations could be materially adversely
affected.
Changes in outsourcing trends in the pharmaceutical and biotechnology industries
could adversely affect our operating results and growth rate.
Economic factors and industry trends that affect our primary customers,
pharmaceutical and biotechnology companies, also affect our business. For
example, the practice of many companies in these industries has been to hire
outside organizations like us to conduct large clinical research and sales and
marketing projects. This practice has grown substantially over the past decade,
and we have benefited from this trend. Some industry commentators believe that
the rate of growth of outsourcing will continue to trend downward. If these
industries reduce their tendency to outsource those projects, our operations,
financial condition and growth rate could be materially and adversely affected.
Recently, we also believe we have been negatively impacted by mergers and other
factors in the pharmaceutical industry, which appear to have slowed decision
making by our customers and delayed certain trials. A continuation of these
trends would have an ongoing adverse effect on our business. In addition,
numerous governments have undertaken efforts to control growing healthcare costs
through legislation, regulation and voluntary agreements with medical care
providers and pharmaceutical companies. If future regulatory cost containment
efforts limit the profits which can be derived on new drugs, our customers may
reduce their research and development spending, which could reduce the business
they outsource to us. We cannot predict the likelihood of any of these events or
the effects they would have on our business, results of operations or financial
condition.
If we are unable to successfully develop and market potential new services, our
growth could be adversely affected.
Another key element of our growth strategy is the successful development and
marketing of new services that complement or expand our existing business. If we
are unable to succeed in (1) developing new services and (2) attracting a
customer base for those newly developed services, we will not be able to
implement this element of our growth strategy, and our future business, results
of operations and financial condition could be adversely affected.
For example, we are expanding our pharmaceutical and healthcare information and
market research services. These services involve analyzing healthcare
information to study aspects of current healthcare products and procedures for
use in developing new products and services or in analyzing sales and marketing
of existing products. In addition to the other difficulties associated with the
development of any new service, our ability to develop these services may be
limited further by contractual provisions limiting our use of the healthcare
information or the legal rights of others that may prevent or impair our use of
the healthcare information. Due
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
to these and other limitations, we cannot assure you that we will be able to
develop this type of service successfully. Our inability to develop new products
or services or any delay in development may adversely affect our ability to
maintain our rate of growth in the future.
Our plan to web-enable our product development and commercialization services
may negatively impact our results in the short term.
We are currently making a substantial investment in developing an Internet
platform for our product development and commercialization services, but we do
not believe that we will see any positive impact to our revenues from this
investment over the short term. We have entered into an agreement with WebMD
Corporation and certain other vendors for them to provide web-enablement
services to help us develop this platform. Performance and other issues
regarding the agreement currently are under dispute with WebMD. If WebMD or
other vendors fail to perform as required, if we are unable to favorably resolve
our current dispute with WebMD or if there are substantial delays in developing
and implementing this platform, we may have to make substantial further
investments, internally or with WebMD or other third parties, to achieve our
objectives. Meeting our objectives is dependent on a number of factors which may
not take place as we anticipate, including obtaining adequate web-enablement
services, creating web-enablement services which our customers will find
desirable and implementing our business model with respect to these services.
Also, these expenditures are likely to negatively impact our profitability, at
least until our web-enabled products are commercialized. Over time, we envision
continuing to invest in extending and enhancing our Internet platform in other
ways to further support and improve our services. We cannot assure you that any
improvements in revenues resulting from our Internet capabilities will be
sufficient to offset our investments in the Internet platform. Our results could
be further negatively impacted if our competitors are able to execute their
services on a web-based platform before we can launch our Internet services or
if they are able to structure a platform that attracts clients away from our
services.
Our ability to provide informatics services depends on our agreement with WebMD.
In order to provide our informatics products and services, we need access to
healthcare data. Prior to the sale of our ENVOY subsidiary, we obtained this
data directly from ENVOY. Following the sale of ENVOY to WebMD, we entered into
a data rights agreement with WebMD to continue to provide us with the ENVOY
data, as well as other data collected by WebMD. If WebMD fails to perform under
this agreement, for example, by stopping transmission of data to us, or our
access to data is otherwise significantly limited, we would be unable to provide
some or all of our informatics services, which would have a negative impact on
our business.
On February 24, 2001, WebMD unilaterally stopped the transmission of data to us
in violation of our rights under the data rights agreement. We have obtained a
preliminary injunction requiring WebMD to continue the unaltered and
uninterrupted flow of data to us until the matter can be resolved, and we intend
to pursue our rights under the data agreement. If we are unable to enforce our
rights to this data, we would have to re-negotiate the terms of our agreement
with WebMD or seek to obtain similar data from alternate sources. These options
may not be available if WebMD or third parties are not willing to negotiate or
provide terms that are acceptable to us, or are unable to give us access to the
quality and timeliness of data that we need to
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
support our informatics products. If we do not have continued access to data on
the terms we negotiated with WebMD or on similar terms, our informatics service
group would not be able to support its contracts with existing customers or
continue development projects as currently planned, which would have a material
adverse effect on our business.
The potential loss or delay of our large contracts could adversely affect our
results.
Many of our customers can terminate our contracts upon 15-90 days' notice. In
the event of termination, our contracts often provide for fees for winding down
the project, but these fees may not be sufficient for us to maintain our
margins, and termination may result in lower resource utilization rates. Thus,
the loss or delay of a large contract or the loss or delay of multiple contracts
could adversely affect our net revenue and profitability. We believe that this
risk has potentially greater effect as we pursue larger outsourcing arrangements
with global pharmaceutical companies, which may encompass global clinical trials
at a number of sites and cross many service lines. Also, since 1999 we have
observed that customers may be more willing to delay, cancel or reduce contracts
more rapidly than in the past. If this trend continues, it could become more
difficult for us to balance our resources with demands for our services and our
financial results could be adversely affected.
Our backlog may not be indicative of future results.
We report backlog, $1.93 billion at June 30, 2001, based on anticipated net
revenue from uncompleted projects that our customers have authorized. We cannot
assure you that the backlog we have reported will be indicative of our future
results. A number of factors may affect our backlog, including:
- the variable size and duration of projects (some are performed over
several years);
- the loss or delay of projects; and
- a change in the scope of work during the course of a project.
Also, if customers delay projects, the projects will remain in backlog, but will
not generate revenue at the rate originally expected. Accordingly, historical
indications of the relationship of backlog to revenues are not indicative of the
future relationship.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Underperformance of our risk-sharing and gain-sharing strategies could have a
negative impact on our financial performance.
As part of our sales strategy, we enter into creative arrangements with
customers in which we take on some of the risk of the potential success or
failure of the customer's product. We may take risk through our PharmaBio
transactions, which may include a strategic investment in a customer, providing
financing to a customer, or by taking an interest in the revenues from a
customer's product. For example, we may build a sales organization for a
biotechnology customer to commercialize a new product in exchange for a share in
the revenues of the product. We must carefully analyze and select the customers
and products with which we are willing to structure our risk-based deals. Our
financial results would be adversely affected if our customers' products do not
achieve the level of success that we anticipate and/or our return or payment
from the product, investment or financing is less than our costs of performance,
investment or financing.
If we lose the services of Dennis Gillings, Pamela Kirby or other key personnel,
our business could be adversely affected.
Our success substantially depends on the performance, contributions and
expertise of our senior management team, led by Dennis B. Gillings, Ph.D., our
Chairman, and Pamela Kirby, Ph.D., our Chief Executive Officer. Our performance
also depends on our ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as our ability
to recruit qualified representatives for our contract sales services. The
departure of Dr. Gillings, Dr. Kirby or any key executive, or our inability to
continue to attract and retain qualified personnel could have a material adverse
effect on our business, results of operations or financial condition.
Our product development services create a risk of liability from clinical trial
participants and the parties with whom we contract.
We contract with drug companies to perform a wide range of services to assist
them in bringing new drugs to market. Our services include supervising clinical
trials, data and laboratory analysis, patient recruitment and other services.
The process of bringing a new drug to market is time-consuming and expensive. If
we do not perform our services to contractual or regulatory standards, the
clinical trial process could be adversely affected. Additionally, if clinical
trial services such as laboratory analysis do not conform to contractual or
regulatory standards, trial participants could be affected. These events would
create a risk of liability to us from the drug companies with whom we contract
or the study participants.
We also contract with physicians to serve as investigators in conducting
clinical trials. Such testing creates risk of liability for personal injury to
or death of volunteers, particularly to volunteers with life-threatening
illnesses, resulting from adverse reactions to the drugs administered during
testing. It is possible third parties could claim that we should be held liable
for losses arising from any professional malpractice of the investigators with
whom we contract or in the event of personal injury to or death of persons
participating in clinical trials. We do not believe we are legally accountable
for the medical care rendered by third party investigators, and we would
vigorously defend any such claims. Nonetheless, it is possible we could be found
liable for those types of losses.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In addition to supervising tests or performing laboratory analysis, we also own
a number of labs where Phase I clinical trials are conducted. Phase I clinical
trials involve testing a new drug on a limited number of healthy individuals,
typically 20 to 80 persons, to determine the drug's basic safety. We also could
be liable for the general risks associated with ownership of such a facility.
These risks include, but are not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers.
We also could be held liable for errors or omissions in connection with our
services. For example, we could be held liable for errors or omissions or breach
of contract if one of our laboratories inaccurately reports or fails to report
lab results or if our informatics products violate rights of third parties. We
maintain insurance to cover ordinary risks but any insurance might not be
adequate, and it would not cover the risk of a customer deciding not to do
business with us as a result of poor performance.
Relaxation of government regulation could decrease the need for the services we
provide.
Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development/approval process. A large part of
our business involves helping pharmaceutical and biotechnology companies through
the regulatory drug approval process. Any relaxation in regulatory approval
standards could eliminate or substantially reduce the need for our services,
and, as a result, our business, results of operations and financial condition
could be materially adversely affected. Potential regulatory changes under
consideration in the United States and elsewhere include mandatory substitution
of generic drugs for patented drugs, relaxation in the scope of regulatory
requirements or the introduction of simplified drug approval procedures. These
and other changes in regulation could have an impact on the business
opportunities available to us.
Failure to comply with existing regulations could result in a loss of revenue.
Any failure on our part to comply with applicable regulations could result in
the termination of ongoing clinical research or sales and marketing projects or
the disqualification of data for submission to regulatory authorities, either of
which could have a material adverse effect on us. For example, if we were to
fail to verify that informed consent is obtained from patient participants in
connection with a particular clinical trial, the data collected from that trial
could be disqualified, and we could be required to redo the trial under the
terms of our contract at no further cost to our customer, but at substantial
cost to us.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Proposed and final laws and regulations may create a risk of liability and
increase the cost of our business or limit our service offerings.
The confidentiality of individually identifiable health information and the
circumstances under which such individually identifiable health records may be
released for inclusion in our databases or used in other aspects of our business
are subject to substantial government regulation both domestically and
internationally. Additional U.S. legislation governing the possession, use and
dissemination of medical record information and other personal health
information has been proposed or adopted at both the state and federal levels.
Proposed and final U.S. and international regulations governing individually
identifiable health information may (1) require us to implement new security
measures that may require substantial expenditures or (2) limit our ability to
offer some of our products and services. These regulations may also increase
costs by creating new privacy requirements for our informatics business and
mandating additional privacy procedures for our clinical research business.
Additionally, states in the U.S. may adopt health information legislation or
regulations that contain privacy and security provisions that are more
burdensome than the proposed U.S. federal regulations. In our dispute with
WebMD, WebMD has advised us that it believes a number of state laws in the U.S.
apply which may require modifications to access specifications for particular
data elements in de-identified health information. These and other changes in
regulation could limit our ability to offer some of our products or have an
impact on the business opportunities available to us. There is a risk of civil
or criminal liability if we are found to be responsible for any violations of
applicable laws, regulations or duties relating to the privacy or security of
individually identifiable health information.
Industry regulation may restrict our ability to analyze and disseminate
pharmaceutical and healthcare data.
We are directly subject to certain restrictions on the collection and use of
data. Laws relating to the collection and use of data are evolving, as are
contractual rights. We cannot assure you that contractual restrictions imposed
by our customers, legislation or regulations will not, now or in the future,
directly or indirectly restrict the analysis or dissemination of the type of
information we gather and therefore materially adversely affect our operations.
We also have certain obligations to indemnify parties which provide us data for
losses they may incur arising from claims that they have provided us data in
violation of contract or other rights.
Our services are subject to evolving industry standards and rapid technological
changes.
The markets for our services, particularly our informatics services, which
include our data analysis services, are characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new and
enhanced services. To succeed, we must continue to:
- enhance our existing services;
- introduce new services on a timely and cost-effective basis to meet
evolving customer requirements;
- achieve market acceptance for new services; and
- respond to emerging industry standards and other technological changes.
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Exchange rate fluctuations may affect our results of operations and financial
condition.
We derive a large portion of our net revenue from international operations; for
example, we derived approximately 44.0% of our 2000 net revenue from outside the
United States. Our financial statements are denominated in U.S. dollars; thus,
factors associated with international operations, including changes in foreign
currency exchange rates and any trends associated with the transition to the
euro, could significantly affect our results of operations and financial
condition. Exchange rate fluctuations between local currencies and the U.S.
dollar create risk in several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of our
foreign operations are generally denominated in local currencies.
- Foreign Currency Transaction Risk. Our service contracts may be
denominated in a currency other than the currency in which we incur
expenses related to such contracts.
We try to limit these risks through exchange rate fluctuation provisions stated
in our service contracts, or we may hedge our transaction risk with foreign
currency exchange contracts or options. Although we may hedge our transaction
risk, there were no open foreign exchange contracts or options relating to
service contracts at June 30, 2001. Despite these efforts, we may still
experience fluctuations in financial results from our operations outside the
United States, and we cannot assure you that we will be able to favorably reduce
our currency transaction risk associated with our service contracts.
We may be adversely affected by customer concentration.
We have one customer that accounted for 10.4% and 10.9% of our net revenues for
the three and six months ended June 30, 2001, respectively. These revenues
resulted from services provided by each of our three service groups. If any
large customer decreases or terminates its relationship with us, our business,
results of operations or financial condition could be materially adversely
affected.
New healthcare legislation or regulation could restrict our informatics
business.
On December 28, 2000, the Secretary of Health and Human Services, also referred
to as HHS, issued the final rule on Standards for Privacy of Individually
Identifiable Health Information to implement the privacy requirements for HIPAA.
This rule generally (1) imposes standards for covered entities transmitting or
maintaining protected data in an electronic, paper or oral form with respect to
the rights of individuals who are the subject of protected health information;
and (2) establishes limitations on and procedures for (a) the exercise of those
individuals' rights and (b) the uses and disclosures of protected health
information. The effective date of the final rule was April 14, 2001 and the
compliance date is April 14, 2003. HHS' Office for Civil Rights, the enforcement
office for the rule, issued guidance in the form of questions and answers on the
rule in July 2001 and according to the Secretary, further modifications and/or
guidelines to the regulation will be forthcoming in the next few months. If
state or federal legislation or a more restrictive regulation is adopted, it
could inhibit third party processors in using, transmitting or disclosing health
data (even if they have been de-identified) for purposes other than facilitating
payment or performing other clearinghouse functions which would restrict our
ability to obtain data for use in our informatics services (any such state law
may be subject to constitutional and federal preemption issues as to
enforceability in this context).
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
In addition, it could require us to establish uniform specifications for
obtaining de-identified data, so that de-identified data obtained from different
sources could be aggregated. While the impact of developments in legislation,
regulations or the demands of third party processors is difficult to predict,
each could materially adversely affect our informatics business.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company did not have any material changes in market risk from December 31,
2000.
PART II. Other Information
Item 1. Legal Proceedings
Beginning on September 30, 1999, several purported class action lawsuits were
filed in the United States District Court for the Middle District of North
Carolina against us and several of our executive officers and directors on
behalf of all persons who purchased or otherwise acquired shares of our common
stock between July 16, 1999, and September 15, 1999. These actions were
subsequently consolidated and plaintiffs filed an amended complaint purporting
to represent a class of purchasers of our stock or call options, and sellers of
put options, during the period between April 21, 1999, and September 15, 1999.
The amended complaint alleges violations of Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. Plaintiffs seek unspecified damages,
plus costs and expenses, including attorneys' fees and experts' fees. We
believed the claims to be without merit and intended to defend the suit
vigorously. Accordingly, we and the named officers and directors filed a motion
to dismiss the amended complaint. Immediately prior to the hearing scheduled on
February 6, 2001, on the motion to dismiss, the parties agreed to settle the
lawsuit. The parties have negotiated a memorandum of understanding and the
settlement is before the court for approval.
On January 26, 2001, a purported class action lawsuit was filed in the State
Court of Richmond County, Georgia, naming Novartis Pharmaceuticals Corp.,
Pharmed Inc., Debra Brown, Bruce I. Diamond and Quintiles Laboratories Limited,
one of our subsidiaries, on behalf of 185 Alzheimer's patients who participated
in drug studies involving an experimental drug manufactured by defendant
Novartis and their surviving spouses. The complaint alleges claims for breach of
fiduciary duty, civil conspiracy, unjust enrichment, misrepresentation, Georgia
RICO violations, infliction of emotional distress, battery, negligence and loss
of consortium as to class member spouses. The complaint seeks unspecified
damages, plus costs and expenses, including attorneys' fees and experts' fees.
We believe the claims to be without merit and intend to defend the suit
vigorously.
On February 25, 2001, we initiated a lawsuit in Superior Court of Wake County,
North Carolina against WebMD Corporation. Our complaint alleged that WebMD's
suspension of the delivery of data to us on February 24, 2001 was a material
breach of the Data Rights Agreement we entered into with WebMD in May 2000, and
we requested a preliminary injunction to require WebMD to continue providing the
data to us pending final resolution of the action. We obtained a temporary
restraining order on February 25, 2001 requiring WebMD to continue the delivery
of data to us pursuant to the Data Rights Agreement. WebMD removed the suit to
the United States District Court for the Eastern District of North Carolina on
March 1, 2001 and moved to dissolve the temporary restraining order. On March 5,
2001, the court denied the
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
defendant's motion to dissolve the temporary restraining order and, subsequently
extended the temporary restraining order through March 16, 2001. On March 16 and
March 21, the court entered a preliminary injunction requiring WebMD to continue
the unaltered and uninterrupted flow of data, which WebMD appealed to the United
States Court of Appeals for the Fourth Circuit on April 16, 2001. On April 7,
2001, at the request of the parties, the court entered a stay of the trial court
proceedings through May 4, 2001 to facilitate settlement negotiations. The court
extended the stay on April 27, 2001 through June 4, 2001 and again through July
31, 2001. The appeal schedule was also extended. We intend to vigorously pursue
the protection of our rights under the Data Rights Agreement.
On May 8, 2001, Joseph Lewis renewed his civil lawsuit in the State Court of
Fulton County, State of Georgia naming as defendants Richard L. Borison, Bruce
I. Diamond, Janssen Pharmaceutica, Inc., Novartis Pharmaceuticals Corporation
and Quintiles Laboratories Limited, one of our subsidiaries. The plaintiff
alleges that he suffered from schizophrenia and that he was given experimental
drugs for this condition in connection with numerous clinical drug trials
conducted by defendants Borison and Diamond between January 1988 and June 1996.
The plaintiff alleges that the defendants and their agents conspired to conduct
these drug trials on him, and that they improperly supervised, monitored and
regulated the trials, causing him to have violent adverse reactions to the drugs
involved in the trials. The plaintiff seeks to recover his actual damages in
unspecified amounts, medical expenses, attorney fees, litigation costs and
punitive damages. The plaintiff previously had dismissed his claims against us,
without prejudice. Subsequently, the plaintiff dismissed his claims against us
with prejudice.
We are also a party in certain other pending litigation arising in the normal
course of our business. While the final outcome of such litigation cannot be
predicted with certainty, it is the opinion of management, based on consultation
with legal counsel, that the outcome of these matters would not materially
affect our consolidated financial position or results of operations.
Item 2. Changes in Securities
During the three months ended June 30, 2001, options to purchase 15,000 shares
of Common Stock were exercised at an average exercise price of $3.0565 per share
in reliance on Rule 701 under the Securities Act of 1933. Such options were
issued by the Company prior to becoming subject to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, pursuant to its
Non-qualified Employee Incentive Stock Option Plan.
Item 3. Defaults upon Senior Securities -- Not applicable
25
26
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
On May 2, 2001, the Company held its Annual Meeting of Shareholders
during which the shareholders:
(1) Elected three nominees to serve as Class I directors with
terms continuing until the Annual Meeting of Shareholders in
2004. The votes were cast as follows:
Broker
For Withheld
Non-Vote
---------- --------
--------
Robert C. Bishop, Ph.D. 88,182,754 6,196,552
--
Arthur M. Pappas 87,891,763 6,487,543
--
E.G. F. Brown 88,305,534 6,073,772
--
(2) Ratified the appointment of Arthur Andersen LLP as independent
public accountants for the Company and its subsidiaries for
the fiscal year ending December 31, 2001. The votes were cast
as follows:
Broker
For
Against Abstain Non-Vote
----------
--------- ------- --------
Ratification of Arthur Andersen LLP 91,577,926
2,446,400 354,980 --
Item 5. Other Information -- Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable
(b) During the three months ended June 30, 2001, the Company filed
one report on Form 8-K.
The Company filed a Form 8-K, dated April 18,2001, including its press release
announcing the Company's earnings information for the period ended March 31,
2001.
No other reports on Form 8-K were filed during the three months ended June 30,
2001.
26
27
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
-----------------------------
Registrant
Date July 30, 2001 /s/ Dennis B. Gillings
------------------ --------------------------------------------
Dennis B. Gillings, Chairman
Date July 30, 2001 /s/ Pamela J. Kirby
------------------ --------------------------------------------
Pamela J. Kirby, Chief Executive Officer
Date July 30, 2001 /s/ James L. Bierman
------------------ --------------------------------------------
James L. Bierman, Chief Financial Officer
27