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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-69586
CLINTRIALS RESEARCH INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1406017
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
20 BURTON HILLS BOULEVARD
SUITE 500
NASHVILLE, TENNESSEE 37215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 665-9665
(REGISTRANT'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
As of April 30, 1998, there were 18,194,976 shares of ClinTrials Research Inc.
common stock outstanding.
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CLINTRIALS RESEARCH INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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....................6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................14
SIGNATURES.............................................................................................................15
EXHIBIT 10.1
EXHIBIT 11
EXHIBIT 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
DECEMBER 31, MARCH 31,
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 28,275 $ 19,735
Accounts receivable 33,725 36,001
Advance payments to investigators 939 --
Income taxes receivable 3,167 5,049
Deferred income taxes 2,511 2,632
Other current assets 2,531 4,849
--------- ---------
Total current assets 71,148 68,266
Property, plant and equipment:
Land, buildings and leasehold improvements 16,825 15,597
Equipment 25,625 28,072
Furniture and fixtures 5,347 5,439
--------- ---------
47,797 49,108
Less: accumulated depreciation and amortization 13,025 14,366
--------- ---------
34,772 34,742
Other assets:
Excess of purchase price over net assets acquired 38,687 38,604
Other assets 372 2,007
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39,059 40,611
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$ 144,979 $ 143,619
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,839 $ 5,613
Advance billings 10,468 10,636
Payables to investigators 1,278 3,071
Accrued expenses 7,739 6,378
Income taxes payable 183 165
--------- ---------
Total current liabilities 26,507 25,863
Deferred income taxes 2,694 3,231
Long-term debt -- 382
Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value - 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock, $.01 par value - 50,000,000 shares
authorized; issued and outstanding 18,181,765 and
18,194,338 in 1997 and 1998, respectively 182 182
Additional paid-in capital 127,160 127,222
Retained earnings (deficit) (9,313) (11,553)
Accumulated other comprehensive income (loss) (2,251) (1,708)
--------- ---------
Total stockholders' equity 115,778 114,143
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$ 144,979 $ 143,619
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See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
1997 1998
---- ----
Revenue:
Service revenue $ 37,277 $ 29,277
Less: Subcontractor costs 8,674 5,629
--------- ---------
Net service revenue 28,603 23,648
Operating costs and expenses:
Direct costs 17,884 16,527
Selling, general and administrative costs 8,896 9,628
Depreciation and amortization 1,294 1,454
--------- ---------
Income (loss) from operations 529 (3,961)
Other income (expense):
Interest income 353 334
Interest expense (11) (6)
--------- ---------
342 328
--------- ---------
Income (loss) before income taxes 871 (3,633)
Provision (benefit) for income taxes 123 (1,393)
--------- ---------
Net income (loss) $ 748 $ (2,240)
========= =========
Earnings (loss) per share:
Basic $ 0.04 $ (0.12)
Diluted $ 0.04 $ (0.12)
Number of shares and common stock equivalents
used in computing earnings (loss) per share:
Basic 18,117 18,185
Diluted 18,522 18,185
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 748 $ (2,240)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,533 1,708
Changes in operating assets and liabilities (10,187) (5,962)
Other (25) 8
--------- ---------
Net cash used in operating activities (7,931) (6,486)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (2,099) (1,043)
Purchase of option to acquire MPI -- (1,552)
--------- ---------
Net cash used in investing activities (2,099) (2,595)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 44 43
Proceeds received on long-term debt borrowings -- 382
--------- ---------
Net cash provided by financing activities 44 425
Effect of exchange rate changes on cash (375) 116
--------- ---------
Net increase (decrease) in cash and cash equivalents (10,361) (8,540)
Cash and cash equivalents at beginning of period 38,087 28,275
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Cash and cash equivalents at end of period $ 27,726 $ 19,735
========= =========
See notes to condensed consolidated financial statements
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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 of
ClinTrials Research Inc. (the "Company") 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. Certain
prior year amounts have been reclassified to conform to the current year
presentation. Operating results for the three months ended March 31, 1998, are
not necessarily indicative of the results that may be expected for other
quarters or the entire year. 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, 1997.
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its common stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying condensed consolidated
financial statements give retroactive effect to the merger and include the
combined operations of the Company and Ovation.
NOTE 2 -EARNINGS (LOSS) PER SHARE
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") on December
31, 1997. SFAS No. 128 requires presentation of both Basic Earnings per Share
("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS is based
on the weighted average number of shares of common stock outstanding during the
year. Diluted EPS also includes the dilutive effect of common stock equivalents,
which consists of stock options representing 405,000 equivalent shares for the
three months ended March 31, 1997. Diluted loss per share for the three months
ended March 31, 1998 does not include common stock equivalents of 276,000 as
their effect would be anti-dilutive. Prior period earnings per share amounts
have been restated to present Basic EPS and Diluted EPS. The Company's stock is
currently traded in the Nasdaq Stock Market and sale information is included on
the Nasdaq National Market Issues System under the symbol "CCRO".
NOTE 3 -COMPREHENSIVE INCOME (LOSS)
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130")
on January 1, 1998. SFAS No. 130 establishes new rules for reporting and
displaying comprehensive income and its components; however, the adoption of
SFAS No. 130 has no impact on the Company's net income or stockholders' equity.
SFAS No. 130 requires the Company to include foreign currency translation
adjustments, which were previously reported by the Company as a separate
component of stockholders' equity, in other comprehensive income. Accumulated
other comprehensive income consists entirely of accumulated foreign currency
translation adjustments and is a separate
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component of stockholders' equity under SFAS No. 130. Prior period amounts have
been reclassified to conform to the requirements of SFAS No. 130.
The components of comprehensive income (loss), net of related tax, for the three
months ended March 31 are as follows (in thousands):
1997 1998
------- -------
Net income (loss) $ 748 $(2,240)
Foreign currency translation adjustments (1,031) 543
------ -------
Comprehensive income (loss) $ (283) $(1,697)
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NOTE 4 -PROVISION (BENEFIT) FOR INCOME TAXES
The effective tax benefit rate was 38.3% for the three months ended March 31,
1998, compared to an effective tax rate of 14.1% for the three months ended
March 31, 1997. The effective tax benefit rate for the 1998 period is primarily
the result of the tax benefit associated with operating losses combined with
research and development tax credits generated by the Company's Canadian
subsidiary, while the effective tax rate for the 1997 period was primarily the
result of the provision for income taxes partially offset by such research and
development tax credits. Significant items that create the difference between
the Company's federal statutory and effective tax rates are state and local
taxes and nondeductible amortization of goodwill. The Company, in general, will
not record a tax asset related to a foreign jurisdiction for losses incurred in
its foreign operations until such time, if any, that it has three years of
profits in the applicable jurisdiction. However, the Company will recognize a
tax benefit for losses incurred in its foreign operations as the subsidiary
generates taxable income to the extent of the cumulative losses.
NOTE 5 -LONG-TERM DEBT
In March 1998, the Company replaced its $10.0 million domestic credit facility
with a $15.0 million domestic credit facility which has expansion capabilities
to $40.0 million. Credit availability under the Company's new domestic line of
credit and its foreign line of credit ("Credit Facilities") totals approximately
$18.5 million. The lines are collateralized by certain of the Company's assets
and bear interest at a fluctuating rate based either on the respective bank's
prime interest rate or the London Interbank Offered Rate ("LIBOR"), as elected
by the Company. On March 31, 1998, there were no borrowings outstanding under
the lines of credit. Commitment availability at March 31, 1998 has been reduced
by issued letters of credit of approximately $750,000. Borrowings available
under the lines of credit are subject to certain financial and operating
covenants.
In March 1998, the Company's Canadian subsidiary borrowed approximately $382,000
from the Canadian government. This borrowing bears no interest and is repayable
in four annual installments beginning in 1999.
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NOTE 6 -CONTINGENCIES
In 1991, a customer commenced legal action against the predecessor of the
Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two research studies. Judgment was rendered in February
1997 by the Superior Court of Montreal against the Company's preclinical
subsidiary in the amount of approximately $560,000 plus interest to accrue from
September 1991. The Company's preclinical subsidiary, now responsible for this
action, has reserves adequate to cover the current judgment amount. The
Company's preclinical subsidiary has appealed the amount of the judgment and the
subsidiary's insurance company has appealed the portion of the judgment which
obligates the insurance company to pay the insurance claim related to this
litigation. The Company believes it is entitled, subject to certain limitations,
to indemnification from a former owner of the predecessor for a portion of this
claim. In the opinion of management, the ultimate resolution of such pending
legal proceedings will not have a material effect on the Company's financial
position or results of operations.
NOTE 7 -RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company accrued $1.6 million at December 31, 1997, for restructuring
costs to be incurred in 1998 in reducing its administrative workforce, primarily
in Europe. In the first quarter of 1998, the Company paid $852,000 of the
restructuring costs, primarily in severance costs to approximately 30
employees. At March 31, 1998, $798,000 remains in accrued expenses for
restructuring costs expected to be paid over the remainder of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky will be consolidated into its new clinical research center
in Research Triangle Park, North Carolina. In connection with the closing of the
Company=s Lexington facility, the Company will incur a restructuring charge
estimated to approximate $5.0 million for the write-off of goodwill, lease
costs, and involuntary termination benefits which will be recorded in the second
quarter of 1998.
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, 1997.
The information set forth and discussed below for the three months ended March
31, 1998 and 1997 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, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The Company's results of operations for a
particular quarter may not be indicative of the results that may be expected for
other quarters or the entire year.
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The Company's Form 10-Q includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import. Such statements include
statements concerning the Company's ability to obtain new business and to
accurately estimate the timing of recognition of revenue in the backlog due to
variability in size, scope and duration of projects, regulatory delays, study
results which lead to reductions or cancellations of projects, other decisions
totally within the control of its clients and its ability to immediately affect
the level of operating expenses, as well as statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations. Such statements are subject to various
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements because of a number of
factors, including those identified in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that such statements included in this document will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The
forward-looking statements are made as of the date of this document and the
Company assumes no obligation to update such statements or to update the reasons
that actual results could differ from those projected in the forward-looking
statements.
OVERVIEW
The Company is a full-service contract research organization ("CRO") serving the
pharmaceutical, biotechnology and medical device industries. The Company
designs, monitors and manages preclinical and clinical trials, provides clinical
data management and biostatistical services and offers product registration and
pharmacoeconomic services throughout the United States, Canada and Europe. The
Company generates substantially all of its revenue from the preclinical and
clinical testing of new pharmaceutical and biotechnology products.
The Company's contracts are typically fixed-price, multi-year contracts that
usually require a portion of the contract amount to be paid at or near the time
the trial is initiated. The Company generally bills its clients upon the
completion of negotiated performance requirements and, to a lesser extent, on a
date certain basis. The Company's contracts generally may be terminated with or
without cause. In the event of termination, the Company is typically entitled to
all sums owed for work performed through the notice of termination and all costs
associated with termination of the study. In addition, at times some of the
Company's contracts provide for an early termination fee, the amount of which
usually declines as the trial progresses. Termination or delay in the
performance of a contract may occur for various reasons, including, but not
limited to, unexpected or undesired results, inadequate patient enrollment or
investigator recruitment, production problems resulting in shortages of the
drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is recognized on a percentage of completion basis as work
is performed. Revenue is affected by the mix of trials conducted and the degree
to which labor and facilities are utilized. The Company
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routinely subcontracts with third party investigators in connection with
multi-site clinical trials and with other third party service providers for
laboratory analysis and other specialized services. These costs are passed
through to clients and, in accordance with industry practice, are included in
service revenue. Subcontractor services may vary significantly from contract to
contract; therefore, changes in gross service revenue may not be indicative of
trends in revenue growth. Accordingly, the Company views net service revenue,
which consists of service revenue less subcontractor costs, as its primary
measure of revenue growth. The Company has had, and will continue to have,
certain clients from which at least 10% of the Company's overall revenue is
generated over multiple contracts. Such concentrations of business are not
uncommon within the CRO industry.
The Company's core European operation consists of offices in Maidenhead, United
Kingdom and Brussels, Belgium. The Company expanded its ability to perform
international clinical trials by opening offices in Australia, Chile, France,
and Israel in 1996 and Italy and Scotland in 1997. The Company has made
significant investments in the marketing and infrastructure of its core European
operations; however, net revenue has not sufficiently grown to cover the
increased expense levels and in the fourth quarter of 1997 the Company decided
to reduce its general and administrative workforce (see restructuring charge
discussion below). The Company is focused on generating new business while
controlling its cost structure.
Contracts between the Company's subsidiaries (primarily in Canada and to a
lesser extent in the United Kingdom) and their clients may be denominated in a
currency other than the local currency of the subsidiary. Because substantially
all of the subsidiaries' expenses are paid in the local currency of the
subsidiary, such subsidiaries' earnings related to these contracts could be
affected by fluctuations in exchange rates. Generally, the Company attempts to
contractually limit its future foreign exchange risks with its clients. In
addition, the Company may use future foreign exchange contracts to hedge the
risk of changes in foreign currency exchange rates associated with contracts in
which the expenses for providing services are incurred in one currency and paid
for by the client in another currency. The Company's subsidiaries located
outside the United States generated approximately 50% of its net revenue for the
year ended December 31, 1997. More than half of the non U.S. revenue was
generated by the Company's Canadian subsidiary. Therefore, fluctuations in
exchange rates may have a material effect on the earnings of the Company.
The Company's consolidated financial statements are denominated in U.S. dollars
and, accordingly, changes in the exchange rates between the Company's
subsidiaries' local currency and the U.S. dollar will affect the translation of
such subsidiaries' financial results into U.S. dollars for purposes of reporting
the Company's consolidated financial results. Translation adjustments are
reported as a component of other comprehensive income (loss) in stockholders'
equity. Such adjustments may in the future be material to the Company's
financial statements.
RECENT DEVELOPMENTS
The Company developed a new business plan in April, 1998 which includes
consolidation of the Company's Lexington, Kentucky data management operations
into the Company's new clinical research center in Research Triangle Park, North
Carolina (see Restructuring Charges below); enhancement of the management team
with the recent hirings of individuals with extensive experience in clinical
drug development, information technology and
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business development; implementation of a $3.0 million incremental capital
expenditure program to improve the Company's information technology platform;
and acceleration of marketing efforts for renewed growth of sales.
The Company's new business contracted in the first quarter of 1998 of $11.4
million was significantly less than expected, primarily as a result of lower
clinical sales as the Company focused on implementing the restructuring
announced in December 1997 and developing and implementing its new business plan
discussed above. As a result of previously announced contract cancellations in
the fourth quarter of 1996 and first quarter of 1997, a level of new orders
insufficient to cover these cancellations and the underperformance of the
Company's European operations, the Company incurred a loss in fiscal 1997 and
expects to incur a loss for fiscal 1998. With the Company's new business plan in
place, the Company is now concentrating its energies on generating new study
proposals, streamlining the proposal review process and improving customer
focus.
MERGER WITH OVATION
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its Common Stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying consolidated financial
statements give retroactive effect to the merger and include the combined
operations of the Company and Ovation.
RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company recorded a $1.6 million restructuring charge for costs to be
incurred in reducing its administrative workforce, primarily in Europe. At
December 31, 1997, the entire $1.6 million restructuring charge is included in
accrued expenses as no termination benefits were paid as of year end. In the
first quarter of 1998, the Company paid $852,000 of the restructuring costs,
primarily in severance costs to 30 employees. At March 31, 1998, approximately
$798,000 remains in accrued expenses for restructuring costs expected to be paid
over the remainder of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky will be consolidated into its new clinical research center
in Research Triangle Park, North Carolina. In connection with the closing of the
Company's Lexington facility, the Company will incur a restructuring charge
estimated to approximate $5.0 million for the write-off of goodwill, lease costs
and involuntary termination benefits which will be recorded in the second
quarter of 1998.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net loss for the three months ended March 31, 1998 was $2.2 million, or $0.12
diluted loss per share, compared to net income in the same period of 1997 of
$0.7 million or $0.04 diluted earnings per share. This decrease is primarily
attributable to the cancellations of contracts, aggregating approximately $37
million in backlog, which
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occurred in the fourth quarter of 1996 and first quarter of 1997, a level of new
orders insufficient to cover the previously noted cancellations and the
underperformance of the European operations. The decrease in backlog left the
Company with unbillable resources related to those projects as well as a higher
level of direct costs and selling, general and administrative expenses incurred
to cover the expected higher revenue levels. None of the cancellations were
related to service or quality problems. Due to the mix of contracts in backlog
and the underperformance of the Company's European operations, revenue
recognized was not sufficient to cover expenses and the Company incurred a loss
in the first quarter of 1998.
Net service revenue decreased 17.3% to $23.6 million in the 1998 period from
$28.6 million in 1997. This decrease resulted primarily from the cancellations
of contracts and a level of new orders insufficient to cover these cancellations
previously discussed.
Direct costs decreased 7.6% to $16.5 million in the three months ended March 31,
1998 from $17.9 million in the same period in 1997. Direct costs increased as a
percentage of net service revenue to 69.9% from 62.5% due to unbillable
resources resulting from the previously discussed project cancellations and
underperformance of the Company's European operations. Direct costs are based on
the mix of contracts in progress and as a percentage of net revenue may
fluctuate from period to period dependent upon the mix of contracts in the
backlog. In addition, direct costs will fluctuate due to changes in labor and
facility utilization.
Selling, general and administrative costs increased 8.2% to $9.6 million in the
three months ended March 31, 1998 from $8.9 million in the same period in 1997
primarily due to the opening of the Glasgow facility in November 1997 and
increases in lease costs. Selling, general and administrative costs increased as
a percentage of net service revenue to 40.7% from 31.1%. The increase as a
percentage of net revenue is primarily attributable to lower levels of revenue
resulting from project cancellations and underperformance of the European
operations. Selling, general and administrative costs, which primarily includes
compensation for administrative employees and costs related to facilities,
information technology and marketing, are relatively fixed in the near term
while revenue is subject to fluctuation, therefore, minor variations in the
timing of contracts or the progress of clinical trials (both delays and
accelerations) may cause significant variations in quarterly operating results.
In addition, the Company has incurred and will continue to incur costs related
to expanded infrastructure required to open new offices or expand existing
offices as described previously.
Depreciation and amortization expense increased 12.4% to $1.5 million in the
three months ended March 31, 1998 compared to $1.3 million in the same period in
1997.
Interest income, net of interest expense, was $328,000 in the first quarter of
1998 compared to $342,000 in the same period of 1997.
The Company's benefit for income taxes was $1.4 million in the three months
ended March 31, 1998 as compared to a provision of $0.1 million in the first
quarter of 1997. The effective tax benefit rate in 1998 was 38.3% compared to an
effective tax rate of 14.1% in 1997. The effective tax benefit rate for the 1998
period is primarily the result of the tax benefit associated with operating
losses combined with research and development tax credits generated by the
Company's Canadian subsidiary, while the effective tax rate for the 1997 period
was primarily the result of the provision for income taxes partially offset by
such research and development tax credits. Other
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significant items that create the difference between the Company's federal
statutory and effective tax rates are state and local taxes and nondeductible
amortization of goodwill. The Company, in general, will not record a tax asset
related to a foreign jurisdiction for losses incurred in its foreign operations
until such time, if any, that it has three years of profits in the applicable
jurisdiction. However, the Company will recognize a tax benefit for losses
incurred in its foreign operations as the subsidiary generates taxable income to
the extent of the cumulative losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and long-term
basis are the payment of salaries, office rent and travel expenses, as well as
capital expenditures. The Company has historically financed these expenditures,
as well as acquisitions, with cash flow from operations, issuances of equity
securities and borrowings under its Credit Facilities as defined below. The
Company utilizes its working capital to finance these expenditures pending
receipt of its receivables. Contract receipts from the Company's clients vary
according to the terms of each contract.
The Company's contracts usually require a portion of the contract amount to be
paid at or near the time the trial is initiated. Payments are generally received
upon the completion of negotiated performance requirements and, to a lesser
extent, on a date certain basis throughout the life of the contract. Cash
receipts do not correspond to costs incurred and revenue recognition (which is
based on cost-to-cost type of percentage of completion accounting). Therefore,
the Company's cash flow is influenced by the interaction of changes in
receivables and advance billings. The Company typically receives a low volume of
large-dollar cash receipts.
The Company has experienced a trend, which it expects will continue, in which
clients place less emphasis on prepayments and greater emphasis on negotiated
performance requirements. This trend has increased, and may continue to
increase, days sales outstanding in accounts receivable. This trend could have
an impact on the Company's ability to maintain its current level of working
capital. The number of days sales outstanding in accounts receivable was 109
days at March 31, 1998, compared to 117 days at December 31, 1997 and 86 days at
March 31, 1997. The number of days sales outstanding in accounts receivable net
of advance billings was 75 days at March 31, 1998 compared to 82 days at
December 31, 1997 and 61 days at March 31, 1997. The increase is primarily due
to the change in payment methodology discussed above as well as a reduction in
revenue resulting from the previously discussed contract cancellations.
The Company had cash and cash equivalents of $19.7 million at March 31, 1998 as
compared to $28.3 million at December 31, 1997 and $27.7 million at March 31,
1997.
During the three months ended March 31, 1998, net cash used by operating
activities totaled $6.5 million, primarily due to a loss before depreciation and
amortization of $0.5 million, an increase in accounts receivable of $2.3
million, an increase in net tax receivables of $1.5 million, a decrease in
accounts payables and accrued expenses of $2.6 million, and an increase in other
current assets of $2.3 million, which was partially offset by an increase in net
payables to investigators of $2.7 million.
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Cash used in investing activities of $2.6 million during the first quarter of
1998 consisted of capital expenditures of $1.0 million and the purchase of an
option to acquire MPI, Inc. for $1.6 million. Capital expenditures have
primarily been made for computer system additions and upgrades, personal
computer equipment and expenditures on facility improvements. Capital
expenditures are estimated to be approximately $15.0 million in 1998, of which
approximately one-half relates to leasehold improvements to be paid when the
Company moves into its new clinical research center in Research Triangle Park,
North Carolina, improvements to be made to the Company's information technology
platform, and expansion of the Company's preclinical Canadian facility.
In the first quarter of 1998, the Company replaced its $10.0 million domestic
credit facility with a $15.0 million domestic credit facility which has
expansion capabilities to $40.0 million. Credit availability under the Company's
new domestic line of credit and its foreign line of credit (the "Credit
Facilities") totals approximately $18.5 million. There were no borrowings
outstanding under the lines of credit at March 31, 1998. Commitment availability
at March 31, 1998 has been reduced by issued letters of credit of approximately
$750,000. The lines are collateralized by certain of the Company's assets and
amounts outstanding would bear interest at a fluctuating rate based either on
the respective banks' prime interest rate or the London Interbank Offered Rate
("LIBOR"), as elected by the Company. Borrowings available under the lines of
credit are subject to certain financial and operating covenants. The Company's
Canadian subsidiary borrowed approximately $382,000 from the Canadian government
in March 1998. This borrowing bears no interest and is repayable in four annual
installments beginning in 1999.
The Company expects to continue expanding its operations through internal growth
and strategic acquisitions. The Company expects such activities will be funded
from existing cash and cash equivalents, cash flow from operations, and
available borrowings under its Credit Facilities. Although pressure on cash
reserves is expected, the Company estimates that its sources of cash will be
sufficient to fund the Company's current operations, including planned capital
expenditures, over the next year. There may be acquisition or other growth
opportunities which require additional external financing, and the Company may
from time to time seek to obtain additional funds from public or private
issuances of equity or debt securities. There can be no assurances that such
financings will be available on terms acceptable to the Company.
QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate as a result of factors
such as delays experienced in implementing or completing particular clinical
trials and termination of clinical trials, the costs associated with integrating
acquired operations, foreign exchange fluctuations, as well as the costs
associated with opening new offices. Since a high percentage of the Company's
operating costs are relatively fixed while revenue is subject to fluctuation,
minor variations in the timing of contracts or the progress of clinical trials
(both delays and accelerations) may cause significant variations in quarterly
operating results. Results of one quarter are not necessarily indicative of
results for the next quarter.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of certain computer programs being written
using two digits rather than four digits to define the applicable year. This
software recognizes a date using "00" as the year 1900 rather than 2000
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which could result in system failures, miscalculations, etc. Based upon a recent
assessment, the Company has determined certain software programs and computer
hardware will be modified or replaced as part of its on-going capital
expenditure program so that such programs are Year 2000 compliant. The cost
associated with these modifications and/or replacement is not expected to be
material to the Company. However, there can be no guarantee that the software of
outside vendors on which the Company's systems rely will be timely converted.
EXCHANGE RATE FLUCTUATIONS
The Company conducts business in several foreign countries and as a result
exposure exists to potentially adverse movement in foreign currency rates. The
Company uses foreign exchange contracts to hedge the risk of changes in foreign
currency exchange rates associated with contracts in which the expenses for
providing services are incurred in one currency and paid for by the client in
another currency. The objective of these contracts is to reduce the effect of
foreign exchange rate fluctuations on the Company's operating results.
INCOME TAXES
The Company's financial statements do not reflect U.S. or additional foreign
taxes on the possible distribution of undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Should the
Company determine the need to distribute these undistributed earnings of foreign
subsidiaries, it would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to various
countries.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO.
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10.1 Loan and Security Agreement dated March 27, 1998
by and between NationsBank of Tennessee, N.A. and
the Registrant and certain of its subsidiaries*
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
* A copy of the List of Exhibits to the Loan and Security Agreement has been
included. The exhibits have been omitted, but the Registrant shall furnish
supplementally a copy of any omitted exhibit to the Commission upon request.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by the Company during the
quarter ended March 31, 1998:
Any Financial
Date of Current Report Item(s) Reported Statements Filed
---------------------- ---------------- ----------------
January 30, 1998 Item 5 - Other Events No
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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.
Date: May 14, 1998 By: /s/JERRY R. MITCHELL, M.D., Ph.D.
--------------------------------------
Jerry R. Mitchell, M.D., Ph.D.
President and Chief Executive Officer
Date: May 14, 1998 By: /s/ MARY A. CHAPUT
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Mary A. Chaput
Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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