1
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 March 31, 1998
Commission file number 340-23520
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
incorporation or organization) Identification No.)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
(Address of principal executive offices) (Zip Code)
(919) 941-2000
(Registrant's telephone number, including area code)
N/A
(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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock, $.01 par value, outstanding as of April
30, 1998 was 75,201,891.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
March 31, 1998 and December 31, 1997 3
Condensed consolidated statements of
income - Three months ended
March 31, 1998 and 1997 4
Condensed consolidated statements of
cash flows - Three months ended
March 31, 1998 and 1997 5
Notes to condensed consolidated financial
statements - March 31, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 11
Part II. Other Information 11
Signatures 15
Exhibit Index 16
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
1998 1997
---------- -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 40,345 $ 78,007
Accounts receivable and unbilled services 287,640 210,444
Investments 48,147 44,372
Prepaid Expenses 25,765 22,261
Other current assets 22,876 22,596
--------- ---------
Total current assets 424,773 377,680
Property and equipment 288,798 265,851
Less accumulated depreciation 90,564 80,479
--------- ---------
198,234 185,372
Intangibles and other assets:
Intangibles 71,877 71,976
Investments 87,918 69,089
Deferred income taxes 68,658 68,651
Deposits and other assets 26,779 26,130
--------- ---------
255,232 235,846
--------- ---------
Total assets $ 878,239 $ 798,898
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 98,461 $ 96,059
Credit arrangements, current 34,603 25,202
Unearned income 109,953 85,327
Income taxes and other current liabilities 14,162 6,234
--------- ---------
Total current liabilities 257,179 212,822
Long-term liabilities:
Credit arrangements, less current portion 156,312 149,379
Long-term obligation 21,038 20,985
Deferred income taxes and other liabilities 30,398 28,607
--------- ---------
207,748 198,971
--------- ---------
Total liabilities 464,927 411,793
Shareholders' equity:
Common stock and additional paid-in capital,
75,148,033 and 73,853,867 shares issued
and outstanding at March 31, 1998 and
December 31, 1997, respectively 350,024 335,312
Retained earnings 70,571 60,008
Other equity (7,283) (8,215)
--------- ---------
Total shareholders' equity 413,312 387,105
--------- ---------
Total liabilities and shareholders' equity $ 878,239 $ 798,898
========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
--------- ---------
(In thousands, except per share data)
Net revenue $ 254,690 $ 179,885
Costs and expenses:
Direct 134,021 92,035
General and administrative 81,704 60,861
Depreciation and amortization 12,064 8,058
--------- ---------
Total costs and expenses 227,789 160,954
--------- ---------
Income from operations 26,901 18,931
Other expense, net (458) (723)
--------- ---------
Income before income taxes 26,443 18,208
Income taxes 8,438 6,729
--------- ---------
Net income $ 18,005 $ 11,479
========= =========
Basic net income per share $ 0.24 $ 0.16
========= =========
Diluted net income per share $ 0.24 $ 0.16
========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31
1998 1997
-------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income $ 18,005 $ 11,479
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 12,064 8,058
Net loss on sale of property and equipment 328 --
Provision for deferred income tax expense 6,736 --
Change in operating assets and liabilities (57,532) (11,138)
Other 9,142 (1,036)
Change in fiscal year of pooled entity -- 313
-------- ---------
Net cash (used in) provided by operating activities (11,257) 7,676
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 801 66
Acquisition of property and equipment (17,989) (18,109)
Acquisition of intangible assets 2,098 (520)
Payment of dividend (385) --
Security investments, net (22,677) 3,226
Change in fiscal year of pooled entity -- 8
-------- ---------
Net cash used in investing activities (38,152) (15,329)
FINANCING ACTIVITIES
Proceeds from borrowings and line of credit 37,855 3,491
Principal payments on credit arrangements (31,713) (11,162)
Proceeds from issuance of common stock 6,272 87,371
Other -- (30)
Change in fiscal year of pooled entity -- 124
-------- ---------
Net cash provided by financing activities 12,414 79,794
Effect of foreign currency exchange rate changes on cash (667) (1,551)
-------- ---------
(Decrease) increase in cash and cash equivalents (37,662) 70,590
Cash and cash equivalents at beginning of period 78,007 68,730
-------- ---------
Cash and cash equivalents at end of period $ 40,345 $ 139,320
======== =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
March 31, 1998
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 a fair presentation have
been included. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1997 has been derived from the audited
financial statements of the Company. The balance sheet does not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements.
2. Mergers
On February 2, 1998, the Company acquired Pharma Networks N.V. ("Pharma"), a
leading contract sales organization in Belgium. The Company acquired Pharma in
exchange for 132,000 shares of the Company's Common Stock. On February 4, 1998,
the Company acquired Technology Assessment Group ("TAG"), an international
health outcomes assessment firm that specializes in patient registries and in
evaluating the economic, quality-of-life and clinical effects of drug therapies
and disease management programs. The Company acquired TAG in exchange for
460,366 shares of the Company's Common Stock. On February 26, 1998, the Company
acquired T2A S.A. ("T2A"), a leading French contract sales organization. The
Company acquired T2A in exchange for 311,899 shares of the Company's Common
Stock. On February 27, 1998, the Company acquired More Biomedical Contract
Research Organization Ltd. ("More Biomedical"), a leading contract research
organization in Taiwan. The Company acquired More Biomedical in exchange for
16,600 shares of the Company's Common Stock. All of the above transactions were
accounted for as poolings of interests, and all consolidated financial data for
periods subsequent to January 1, 1998 have been restated to include the results
of the pooled companies. The financial data of the pooled companies prior to
January 1, 1998 were not materially different from that previously reported by
the Company, and thus have not been restated. The results from operations for
the periods from January 1, 1998 through the date of each acquisition are not
material.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
Three Months Ended March 31,
----------------------------
1998 1997
------- -------
Net income $18,005 $11,479
======= =======
Weighted average shares:
Basic weighted average shares 74,977 70,017
Effect of dilutive securities - Stock options 1,577 1,914
------- -------
Diluted weighted average shares 76,554 71,931
======= =======
Basic net income per share $ 0.24 $ 0.16
Diluted net income per share $ 0.24 $ 0.16
4. Comprehensive Income
The Company adopted Financial Accounting Standard Board Statement No. 130,
"Reporting Comprehensive Income" in the first quarter of 1998. The adoption of
Statement No. 130 did not have an impact on the Company's financial position or
results from operations.
The following table represents the Company's comprehensive income for the three
months ended March 31, 1998 and 1997 (in thousands):
Three Months Ended March 31,
----------------------------
1998 1997
-------- --------
Net income $ 18,005 $ 11,479
Other comprehensive income:
Unrealized (loss) gain on marketable securities,
net of tax (81) 5
Foreign currency adjustment 991 (8,629)
-------- --------
Comprehensive income $ 18,915 $ 2,855
======== ========
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net revenue for the first quarter of 1998 was $254.7 million, an increase of
$74.8 million or 41.6% over first quarter of 1997 net revenue of $179.9 million.
Growth occurred across each of the Company's three geographic regions. Factors
contributing to the growth included an increase of contract service offerings,
the provision of increased services rendered under existing contracts and the
initiation of services under contracts awarded subsequent to the first quarter
of 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $134
million or 52.6% of net revenue for the first quarter of 1998 versus $92 million
or 51.2% of net revenue for the first quarter of 1997. The increase in direct
costs as a percentage of net revenue was primarily attributable to the increase
in net revenue generated from contract sales and marketing services, which incur
a higher level of direct costs (but lower general and administrative expenses)
relative to net revenue than contract research services.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $81.7 million or
32.1% of net revenue for the first quarter of 1998 versus $60.9 million or 33.8%
of net revenue for the first quarter of 1997. The $20.8 million increase in
general and administrative expenses was primarily due to an increase in
personnel, facilities and locations and outside services resulting from the
Company's growth.
Depreciation and amortization were $12.1 million or 4.7% of net revenue for the
first quarter of 1998 versus $8.1 million or 4.5% of net revenue for the first
quarter of 1997.
Income from operations was $26.9 million or 10.6% of net revenue for the first
quarter of 1998 versus $18.9 million or 10.5% of net revenue for the first
quarter of 1997.
Other expense decreased to $458,000 for the first quarter of 1998 from $723,000
in the first quarter of 1997, primarily due to decreases in net interest
expense.
The effective tax rate for the first quarter of 1998 was 31.9% versus a 37.0%
effective tax rate for the first quarter of 1997. Higher proportion of profits
were generated in countries with lower tax rates and where net operating losses
could be utilized. Since the Company conducts operations on a global basis, its
effective tax rate may vary.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources
Cash outflows from operations were $11.3 million for the three months ended
March 31, 1998 versus cash inflows of $7.7 million for the comparable period of
1997. Investing activities, for the three months ended March 31, 1998, consisted
primarily of capital asset purchases and investment security purchases and
maturities. These investing activities required an outlay of cash of $38.2
million for the three months ended March 31, 1998 compared to an outlay of $15.3
million for investing activities during the same period in 1997.
As of March 31, 1998, total working capital was $167.6 million versus $164.9
million as of December 31, 1997. Net receivables from clients (accounts
receivable and unbilled services net of unearned income) increased to $177.7
million at March 31, 1998 as compared to $125.1 million at the end of 1997. The
number of days revenue outstanding in accounts receivable and unbilled services,
net of unearned income, increased to 54 days at March 31, 1998 as compared to 42
days at December 31, 1997. Although the number of days revenue outstanding has
historically dropped at the end of the fiscal year and risen during the
following quarter, the increase from December 31, 1997 to March 31, 1998 was
greater than usually experienced by the Company. Management has taken actions
designed to reduce the number of days outstanding in the second quarter of 1998.
The Company has a (pound)15.0 million (approximately $25.2 million) unsecured
line of credit with a U.K. bank and a (pound)5.0 million (approximately $8.4
million) unsecured line of credit with a second U.K. bank. At March 31, 1998,
the Company had (pound)7.9 million (approximately $13.2 million) available under
these arrangements.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents, together with future cash flows from operations and
borrowings under its line of credit agreements will be sufficient to meet its
foreseeable cash needs in connection with its operations. As part of its
business strategy, the Company reviews many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, the
Company is continually evaluating new acquisition and expansion possibilities.
The Company may from time to time seek to obtain debt or equity financing in its
ordinary course of business or to facilitate possible acquisitions or expansion.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000
The Year 2000 Issue is the result of computer processors and software not
processing date values correctly. This issue could result in a system failure or
data corruption of the Company or its customers or suppliers which could cause
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in similar business activities or to receive
information or services from suppliers.
The Company's computing infrastructure is based upon industry standard systems.
The Company is not dependent on large legacy systems and does not use
mainframes. Many of the specially developed systems the Company uses have been
developed within the past few years and will process date values appropriately.
The Company has appointed a Year 2000 Project Team to conduct an assessment of
the Company's operations worldwide from an internal, supplier and customer
perspective. The assessment, which is currently in progress, addresses all of
the Company's computer systems, applications and any other systems that the
Company believes may be vulnerable to the Year 2000 Issue and significantly
affect operations. This assessment includes an evaluation of external services
on which the Company is dependent, although the Company cannot control whether
or the manner in which such services will be provided. As part of the
assessment, the Company is preparing detailed plans to address Year 2000 Issues.
The Company is utilizing both internal and external resources to implement the
plans. The Company currently anticipates addressing all business critical
systems during 1998 and will address follow-up issues and all remaining systems
during 1999. While the Company currently does not believe that the costs
associated with addressing Year 2000 Issues will be material to the Company's
financial statements, business or operations, the Company's assessment of Year
2000 Issues is ongoing and there can be no assurance that Year 2000 Issues or
the costs of addressing them will not have a material impact on the Company's
financial statements, business or 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 the Company's judgement concerning the future and are subject to risks
and uncertainties that could cause the Company's 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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the ability of the combined businesses to be
integrated with the Company's historical operations, the actual costs of the
combining of the businesses, actual operating performance, the ability to
maintain large client contracts or to enter into new contracts and the level of
demand for services. See Exhibit 99.01 for additional factors that could cause
the Company's actual results to differ.
Item 3. Quantitative and Qualitative Disclosure About Market Risk--Not
Applicable
PART II. Other Information
Item 1. Legal Proceedings -- Not applicable
Item 2. Changes in Securities
On February 2, 1998, the Company completed the acquisition of
Pharma Networks N.V., a Belgian contract sales organization. The
Company issued 132,000 shares of its Common Stock, par value $0.01
per share, in connection with the acquisition, which shares were
received by the holders of all of the outstanding share capital of
Pharma Networks N.V. in exchange for such interest. An aggregate of
42,200 shares were issued in reliance on Regulation S and 89,800
shares were issued in reliance on a claim of exemption pursuant to
section 4(2) of the Securities Act of 1933, as amended, based on
representations made by the recipients in the share exchange
agreement. The Company's issuance of shares in this transaction was
previously reported on Form 8-K, dated February 2, 1998.
On February 4, 1998, the Company completed the acquisition of
Technology Assessment Group ("TAG"), an international health
outcomes assessment firm that specializes in patient registries and
in evaluating the economic, quality-of-life and clinical effects of
drug therapies and disease management programs. The Company issued
460,366 shares of its Common Stock, par value $0.01 per share, in
connection with the acquisition, which shares were received by the
holders of all of the outstanding share capital of TAG in exchange
for such interests. The shares were issued in reliance on a claim
of exemption pursuant to section 4(2) of the Securities Act of
1933, as amended, based on representations made by the recipients
in the merger and partnership interest exchange agreement.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information, continued
On February 26, 1998, the Company completed the acquisition of T2A
S.A., a French contract sales organization ("T2A"). The Company
issued 311,899 shares of its Common Stock, par value $0.01 per
share, in exchange for the interests of the holders of all of the
outstanding share capital of T2A, other than three dissenting
shareholders owning less than 0.03% of T2A who were paid cash. An
aggregate of 109,166 shares were issued in reliance on Regulation S
and 202,733 shares were issued in reliance on a claim of exemption
pursuant to section 4(2) of the Securities Act of 1933, as amended,
based on representations made by the recipients in the share
acquisition agreement. The Company's issuance of shares in this
transaction was previously reported on Form 8-K, dated February 26,
1998.
On February 27, 1998, the Company completed the acquisition of More
Biomedical Contract Research Organization Ltd., a contract research
organization based in Taiwan ("More Biomedical"). The Company
issued 16,600 shares of its Common Stock, par value $0.01 per
share, to the sole shareholder of More Biomedical in exchange for
his interest. All of such shares were issued in reliance on
Regulation S based on representations made by the recipient in the
share sale agreement. The Company's issuance of shares in this
transaction was previously reported on Form 8-K, dated February 26,
1998.
During the three months ended March 31, 1998, options to purchase
78,908 shares of Common Stock were exercised at an average exercise
price of $3.61 per share in reliance on Rule 701 under the Act.
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
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 1998, the Company held its Annual Meeting of Shareholders
during which the shareholders:
(1) Elected two nominees to serve as Class III directors with
terms continuing until the Annual Meeting of Shareholders in
2000. The votes were cast as follows:
BROKER
FOR WITHHOLD NON-VOTE
---------- -------- --------
Virginia V. Weldon, M.D. 58,977,471 226,599
David F. White 58,948,070 256,000
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information, continued
(2) Elected one nominee to serve as Class II director with a term
continuing until the Annual Meeting of Shareholders in 1999.
The votes were cast as follows:
BROKER
FOR WITHHOLD NON-VOTE
---------- -------- --------
Eric J. Topol, M.D. 58,919,086 284,984
(3) Elected five nominees to serve as Class I directors with terms
continuing until the Annual Meeting of Shareholders in 2001.
The votes were cast as follows:
BROKER
FOR WITHHOLD NON-VOTE
---------- -------- --------
Robert C. Bishop, Ph.D. 58,992,726 211,344
Santo J. Costa 58,938,261 265,809
Arthur M. Pappas 58,956,549 247,521
Ludo J. Reynders, Ph.D. 58,949,623 254,447
E. G. F. Brown 58,989,967 214,103
(4) Ratified an increase in the number of shares reserved for
issuance under the Company's Employee Stock Purchase Plan. The
votes were cast as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
---------- --------- ------- --------
Ratification of increase in 57,843,791 1,268,910 91,369
number of shares reserved
(5) Ratified appointment of Arthur Andersen LLP as independent
auditors for the Company and its subsidiaries for the fiscal
year ending December 31, 1998. The votes were cast as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
---------- --------- ------- --------
Ratification of
Arthur Andersen LLP 52,747,233 41,284 6,415,553
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information, continued
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.01 Financial Data Schedule
99.01 Risk Factors
(b) During the three months ended March 31, 1998, the Company
filed reports on Form 8-K, dated February 2, 1998, February
4, 1998, February 26, 1998, March 2, 1998 (amended March 20,
1998 on Form 8-K/A), and March 20, 1998. On the report on
Form 8-K, dated February 2, 1998, the Company reported the
sales of equity securities pursuant to Regulation S in
connection with the acquisition of Pharma Networks N.V. On
the report on Form 8-K, dated February 4, 1998, the Company
filed a press release announcing its fiscal 1997 earnings
information. On the report on Form 8-K, dated February 26,
1998, the Company reported the sales of equity securities
pursuant to Regulation S in connection with the acquisitions
of T2A S.A. and More Biomedical Contract Research
Organization Ltd. On the report on Form 8-K, dated March 2,
1998 (as amended by Form 8-K/A on March 20, 1998), the
Company reported a change in its certifying accountant On
the report on Form 8-K, dated March 20, 1998, the Company
filed certain of its restated historical financial
statements for the three year period ended December 31,
1997, as well as Management's Discussion and Analysis of
Financial Condition and Results of Operation for the
relevant periods. No other reports on Form 8-K were filed
during the three months ended March 31, 1998. Subsequently,
the Company filed one report on Form 8-K, dated April 22,
1998, including its press release announcing the Company's
fiscal first quarter 1998 earnings information.
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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 May 15, 1998 /s/ Dennis B. Gillings
-------------------------- -----------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date May 15, 1998 /s/ Rachel R. Selisker
-------------------------- -----------------------------------------
Rachel R. Selisker, Chief Financial Officer
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
27.01 Financial Data Schedule
99.01 Risk Factors
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