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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 33-69586
CLINTRIALS RESEARCH INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1406017
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Burton Hills Boulevard
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Suite 210
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Nashville, Tennessee 37215
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(Address of principal executive offices)
(Zip Code)
(615) 665-9665
(Company's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date.
As of April 30, 1996, there were 8,843,951 shares of
ClinTrials Research Inc. common stock outstanding.
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CLINTRIALS RESEARCH INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ClinTrials Research Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
December 31, March 31,
1995 1996
Assets (Note) (Unaudited)
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Current assets:
Cash, cash equivalents and held-to-maturity securities $17,031 $16,831
Accounts receivable 22,248 25,407
Advanced payments to investigators 3,932 2,808
Deferred income taxes 644 691
Other current assets 499 1,016
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Total current assets 44,354 46,753
Equipment, furniture & fixtures:
Equipment 9,042 10,426
Furniture, fixtures and leasehold improvements 3,022 2,961
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12,064 13,387
Less accumulated depreciation and amortization 4,947 5,491
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7,117 7,896
Other assets:
Excess of purchase price over net assets acquired 7,088 6,965
Other assets 67 38
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7,155 7,003
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$58,626 $61,652
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,579 $ 1,546
Advance billings 19,976 21,167
Payables to investigators 3,490 3,485
Accrued expenses 2,352 2,420
Other current liabilities 90 692
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Total current liabilities 27,487 29,310
Deferred income taxes 188 234
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 - 30,000,000 shares
authorized, issued and outstanding 8,829,451 and
8,842,427 in 1995 and 1996, respectively 88 88
Additional paid-in capital 40,100 40,180
Retained earnings (deficit) (9,342) (8,229)
Cumulative foreign currency translation adjustments 105 69
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Total stockholders' equity 30,951 32,108
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$58,626 $61,652
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See notes to condensed consolidated financial statements
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
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ClinTrials Research Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except for share data)
Three Months Ended March 31,
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1995 1996
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Revenues:
Service revenue $18,030 $26,397
Less subcontract costs 6,247 8,727
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Net service revenue 11,783 17,670
Operating costs:
Direct costs 6,890 10,526
Selling, general and administrative costs 3,345 4,750
Depreciation and amortization 527 700
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Income from operations 1,021 1,694
Other income (expense):
Interest income 223 215
Interest expense (20) (14)
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Income before income taxes 1,224 1,895
Provision for income taxes 503 782
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Net income $ 721 $ 1,113
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Earnings per common and common equivalent share:
Net income $ 0.08 $ 0.12
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Weighted average shares outstanding (see exhibit 11) 9,043 9,185
See notes to condensed consolidated financial statements
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ClinTrials Research Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands, except for share data)
Three Months Ended March 31,
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1995 1996
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Net income $ 721 $ 1,113
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 527 700
Change in operating assets and liabilities (2,722) (728)
Other operating activities 22 (34)
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Net cash provided by (used in) operating activities (1,452) 1,051
Cash flows from investing activities:
Purchasing of property, plant and equipment (net) (970) (1,331)
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Net cash used in investing activities (970) (1,331)
Cash flows from financing activities:
Proceeds from issuance of common stock 44 80
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Net cash provided by (used in) financing activities 44 80
Net increase (decrease) in cash and cash equivalents (2,378) (200)
Cash, cash equivalents, and held-to-maturity securities at
beginning of period 21,045 17,031
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Cash, cash equivalents, and held-to-maturity securities at
end of period $18,667 $16,831
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ClinTrials Research Inc.
Notes to Condensed Consolidated Financial Statements
Note 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 accruals) considered necessary for
fair presentation have been included. Operating results for the three-month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended December 31,
1995.
Note 2 - Earnings per Share
The earnings per share calculations for the three-month period ending March 31,
1996 are based on 8,834,490 weighted average shares outstanding plus 350,701
common stock equivalent shares related to the 1989 Stock Option Plan. The
Company's stock is currently traded in the Nasdaq Stock Market and sale
information is included on Nasdaq National Market Issues System under the
symbol "CCRO".
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
The information set forth and discussed below for the three-month
period ended March 31, 1996 is derived from the Condensed Consolidated
Financial Statements included elsewhere herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of such information. The Company's results of
operations for a particular quarter may not be indicative of the results
expected during the other quarters or for the entire year.
OVERVIEW
The Company is a full service clinical research organization ("CRO")
serving the pharmaceutical, biotechnology and medical device industries. The
Company designs, monitors and manages clinical trials, provides clinical data
management and biostatistical services, and offers product registration
services throughout the United States and Europe. The Company generates
substantially all of its revenue from the clinical testing of new
pharmaceutical and biotechnology products.
The Company's contracts are typically fixed priced, multi-year
contracts that 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, 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 occurs 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
deemphasize 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 is 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 service revenue may not be indicative of trends in
revenue growth. Accordingly, the Company views net service revenue, which
consists of service revenue
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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 percent of the Company's overall revenue is generated over multiple
contracts. Such concentrations of business are not uncommon within the CRO
industry.
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, 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.
Previously, the Company has reported backlog as consisting of
anticipated net revenue from letters of intent and signed contracts that have
not been completed. Since it has become more 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 the client,
through a written contract or otherwise. Using the modified method of
reporting backlog, at March 31, 1996, backlog was approximately $98.8 million,
as compared to approximately $71.8 million at March 31, 1995. The modification
discussed did not have a material effect on backlog as of March 31, 1996 and
1995. 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 business in the United States has experienced
significant growth, reflecting both an expansion of the Company's client base
and an increase in the number and size of projects under management. Prior to
1992, the Company's European operations primarily performed services required
by contracts generated by United States operations. In late 1992, the Company
began expanding its European operations, which contributed significantly to
operating losses for 1993 and 1994 in Europe. European operations broke even
in 1995, and are expected to become profitable in 1996. Recently, the Company
expanded its international operations by opening offices in Australia, Israel
and Chile. This was done partially in response to client requests for the
Company to provide services in these areas. The Company plans to continue to
develop these and other operations abroad. This will require additional
investments in marketing and infrastructure and may include the establishment
of other new offices. As a result, the Company expects its new offices to
incur losses at least through 1996.
Contracts between the Company's United Kingdom subsidiary and its
clients are generally denominated in pounds sterling. Payments received for
services rendered on such contracts, as well as payments made for the
subsidiaries' expenses, are in pounds sterling. Therefore, the subsidiary
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recognizes revenue and expense in pounds sterling and its earnings are not
materially affected by fluctuations in exchange rates. Due to the Company's
expansion abroad as discussed previously, it is possible the Company's
subsidiaries will enter into contracts which are denominated in currencies
other than the local currency of the subsidiary. Because substantially all of
the subsidiaries' expenses are paid in the local currency of that subsidiary,
fluctuations in exchanges rates may affect the subsidiaries' earnings.
The Company's consolidated financial statements are denominated in
dollars and, accordingly, changes in the exchange rates between the Company's
subsidiaries' local currency and the dollar will affect the translation of such
subsidiaries' financial results into dollars for purposes of reporting the
Company's consolidated financial results. Translation adjustments are reported
as a separate section of stockholders' equity. To date, such adjustments have
not been material to the Company's financial statements.
RESULTS OF OPERATIONS
Quarter ended March 31, 1996 compared with quarter ended March 31, 1995.
Net service revenue increased 50% to $17.7 million in the first
quarter of 1996 from $11.8 million in the same period of 1995. This increase
resulted primarily from an increase in the number of contracts under management
and in the size of such contracts. The backlog at March 31, 1996, was $98.8
million, representing 217 contracts from 58 clients, as compared to $71.8
million at March 31, 1995, representing 147 contracts from 44 clients.
Direct costs increased 53% to $10.5 million in the first quarter of
1996 from $6.9 million in the same period of 1995, and increased as a
percentage of net service revenue to 60% from 59%. 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 utilization resulting from the
growth the Company has experienced.
Selling, general and administrative costs increased 42% to $4.7
million in the first quarter of 1996 from $3.3 million in the same period of
1995, and declined as a percentage of net service revenue to 27% from 28%.
Selling, general and administrative costs are relatively fixed in the near term
and generally will increase at a lower rate than net revenue. The two largest
components of selling, general and administrative costs are labor (executive,
business development, finance and administration) and rent. Labor costs
increased 34% to $1.6 million in the first quarter of 1996 from $1.2 million in
the same period of 1995, but decreased as a percentage of net service revenue
to 9% from 11%. Rent expense increased 32% to $815,000 in the first quarter of
1996 from $616,000 in the same period of 1995, and remained constant as a
percentage of net service revenue at 5%.
Depreciation and amortization expense increased to 33% to $700,000 in
the first quarter of 1996 compared to $527,000 in the same period of 1995.
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Interest income, net of interest expense, decreased to $201,000 in the
first quarter of 1996 from $203,000 in the same period of 1995.
Consolidated income before income taxes increased $671,000 to $1.9
million in the first quarter of 1996 which included a six thousand dollar loss
from foreign operations compared to consolidated income before income taxes of
$1.2 million in the same period of 1995 which included a $34,000 loss from
foreign operations. The provision for income taxes was $782,000 in the first
quarter of 1996 as compared to $503,000 in the same period of 1995 resulting in
effective tax rates of 41% for both periods. The significant items which
create the difference between the Company's federal statutory and effective tax
rates are foreign net operating losses unrecognized for U.S. tax purposes, non-
deductible amortization of goodwill, timing differences created by
depreciation, state and local income taxes, tax- exempt interest income and
certain other accrued expenses. The Company will not be able to 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 be able to 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 CRO industry is generally not capital intensive. The Company's
primary cash needs on both a short-term and long-term basis are the payment of
salaries, office rent and the travel expenditures of its employees. The
Company has historically financed these expenditures, including acquisitions,
with cash flow from operations, issuances of equity securities and borrowings
under its Credit Facility as defined below. The Company utilizes its working
capital to finance these expenditures pending receipt of its receivables.
Contract payments by the Company's clients vary according to the terms of each
contract. Capital expenditures have primarily been incurred for computer
system additions and upgrades and computer equipment for new employees.
Capital expenditures were $2.0 million in 1994 and $3.8 million in 1995 and are
anticipated to be approximately $4 to 5 million in 1996.
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 made upon the completion of negotiated performance requirements and,
to a lesser extent, on a date certain basis throughout the life of the
contract. 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 is likely to increase days sales
outstanding in accounts receivable. However, the Company does not expect this
trend to have a significant impact on its ability to maintain its overall
working capital. 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. Historically,
the Company has received significant cash receipts from its clients in the
fourth quarter. As a result, the number of days revenue outstanding in
accounts receivable will fluctuate due to the timing and size of cash receipts,
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particularly in the fourth quarter. The number of days revenue outstanding in
accounts receivable was 77 days at March 31, 1996 and 76 days at March 31,
1995. The number of days revenue outstanding in accounts receivable net of
advanced billings was 6 days at March 31, 1996 and 21 days at March 31, 1995.
During the three months ended March 31, 1996, the Company experienced
net cash provided by operating activities of $1.0 million primarily due to net
income, net of non-cash expenses, of $1.8 million, an increase in advanced
billings of $1.2 million, and a decrease in advance payments to investigators
of $1.1 million which were partially offset by an increase in accounts
receivable of $3.2 million.
Cash used in investing activities of $1.3 million during the three
months ended March 31, 1996, consisted principally of capital expenditures.
Cash provided by financing activities of $80,000 for the same period resulted
principally from the issuance of common stock.
The Company had cash, cash equivalents and held-to-maturity securities
of $16.8 million at March 31, 1996 as compared to $18.7 million at March 31,
1995.
The Company's Credit Facility consists of a $10 million line of credit
to be used for working capital and acquisition purposes at the Company's
discretion (the "Credit Facility"). Interest on any outstanding portion of the
Credit Facility is at the bank's prime lending rate (8.25% at March 31, 1996)
or LIBOR plus 200 basis points at the Company's option. The Company pays a fee
of .25% (annualized) of the unused portion of the available borrowings. The
fee is payable quarterly. The Company had no principal borrowings outstanding
on its line of credit as of March 31, 1996. The Credit Facility is
collateralized by the Company's assets and by a pledge of the capital stock of
its subsidiaries. The Credit Facility, when in use, contains certain financial
and operational covenants including minimum levels for stockholders' equity,
working capital, and fixed charge coverage ratios. The Credit Facility also
limits the amount of capital expenditures, sale of any shares of capital stock,
incurrence of indebtedness or liens, investments and guarantees, and prohibits
the declaration or payment of all dividends.
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, cash equivalents,
held-to-maturity securities, cash flow from operations, and available
borrowings under its Credit Facility. The Company estimates that such sources
of cash will be sufficient to fund the Company's current operations, including
expansions of its foreign operations, at least through 1996. Although the
Company has no present acquisition agreements or arrangements, there may be
acquisition or other growth opportunities which require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities. There can be no
assurances that such financings will be available on terms acceptable to the
Company.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Statement re Computation of Earnings
Per Common and Common Equivalent Share
Exhibit 27 - Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-K
None
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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.
CLINTRIALS RESEARCH INC.
(REGISTRANT)
Date: May 13, 1996 By: /s/ William C. O'Neil, Jr.
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William C. O'Neil, Jr.
Chairman of the Board, President,
and Chief Executive Officer
Date: May 13, 1996 By: /s/ John W. Robbins
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John W. Robbins
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit No. Page
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11 Computation of Earnings Per Common and
Common Equivalent Share E-I
27 Financial Data Schedule (for SEC use only)
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