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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
Commission file number 340-23520
QUINTILES TRANSNATIONAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
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(Address of principal executive offices) (Zip Code)
(919) 941-2000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding as of July 24,
1998 was 75,642,110.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
Part I. Financial Information ----
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 1998 and December 31, 1997 3
Condensed consolidated statements of income
- Three months ended June 30, 1998 and 1997;
six months ended
June 30, 1998 and 1997 4
Condensed consolidated statements of
cash flows - Six months ended
June 30, 1998 and 1997 5
Notes to condensed consolidated financial
statements - June 30, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 12
Part II. Other Information 13
Signatures 15
Exhibit Index 16
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 45,541 $ 78,007
Accounts receivable and unbilled services 306,119 210,444
Investments 51,952 44,372
Prepaid Expenses 25,752 22,261
Other current assets 10,582 22,596
--------- ---------
Total current assets 439,946 377,680
Property and equipment 314,773 265,851
Less accumulated depreciation 100,987 80,479
--------- ---------
213,786 185,372
Intangibles and other assets:
Intangibles 70,329 71,976
Investments 75,084 69,089
Deferred income taxes 68,619 68,651
Deposits and other assets 29,381 26,130
--------- ---------
243,413 235,846
--------- ---------
Total assets $ 897,145 $ 798,898
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 5,905 $ 10,335
Accounts payable and accrued expenses 104,968 96,059
Credit arrangements, current 10,744 14,867
Unearned income 125,942 85,327
Income taxes and other current liabilities 14,006 6,234
--------- ---------
Total current liabilities 261,565 212,822
Long-term liabilities:
Credit arrangements, less current portion 155,624 149,379
Long-term obligation 23,676 20,985
Deferred income taxes and other liabilities 22,964 28,607
--------- ---------
202,264 198,971
--------- ---------
Total liabilities 463,829 411,793
Shareholders' equity:
Common stock and additional paid-in capital,
75,612,627 and 73,853,867 shares issued and
outstanding at June 30, 1998 and December
31,1997, respectively 353,753 335,312
Retained earnings 89,297 60,008
Other equity (9,734) (8,215)
--------- ---------
Total shareholders' equity 433,316 387,105
--------- ---------
Total liabilities and shareholders' equity $ 897,145 $ 798,898
========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 1998 1997
---------- --------- --------- ---------
(In thousands, except per share data)
Net revenue $ 280,810 $ 194,180 $ 536,159 $ 374,065
Costs and expenses:
Direct 146,692 100,654 281,070 192,689
General and administrative 91,129 63,622 173,020 124,483
Depreciation and amortization 13,639 8,793 25,721 16,851
--------- --------- --------- ---------
251,460 173,069 479,811 334,023
--------- --------- --------- ---------
Income from operations 29,350 21,111 56,348 40,042
Other expense, net (510) (333) (978) (1,056)
--------- --------- --------- ---------
Income before income taxes 28,840 20,778 55,370 38,986
Income taxes 9,323 7,915 17,779 14,644
--------- --------- --------- ---------
Net income $ 19,517 $ 12,863 $ 37,591 $ 24,342
========= ========= ========= =========
Basic net income per share $ 0.26 $ 0.18 $ 0.50 $ 0.34
========= ========= ========= =========
Diluted net income per share $ 0.25 $ 0.17 $ 0.49 $ 0.33
========= ========= ========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
1998 1997
-------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income $ 37,591 $ 24,342
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 25,721 16,851
Net loss on sale of property and equipment 554 --
Provision for deferred income tax expense (1,495) --
Change in operating assets and liabilities (38,607) (15,891)
Other -- (3,422)
Change in fiscal year of pooled entity -- (581)
-------- ---------
Net cash provided by operating activities 23,764 21,299
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 1,480 626
Acquisition of property and equipment (44,201) (38,930)
Acquisition of intangible assets, net of cash acquired 3,334 (3,504)
Payment of non-recurring transaction costs -- (5,648)
Payment of dividend (836) --
Security investments, net (13,566) (5,575)
Change in fiscal year of pooled entity -- (17)
-------- ---------
Net cash used in investing activities (53,789) (53,048)
FINANCING ACTIVITIES
Decrease in lines of credit, net (3,793) (7,900)
Principal payments on credit arrangements (7,904) (8,902)
Issuance of common stock 10,196 88,756
Dividend paid by pooled entity -- (1,563)
Change in fiscal year of pooled entity -- 57
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Net cash (used in) provided by financing activities (1,501) 70,448
Effect of foreign currency exchange rate changes on cash (940) (1,364)
-------- ---------
(Decrease) increase in cash and cash equivalents (32,466) 37,335
Cash and cash equivalents at beginning of period 78,007 68,730
-------- ---------
Cash and cash equivalents at end of period $ 45,541 $ 106,065
======== =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
June 30, 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 and six month periods ended June
30, 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 and Acquisitions
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. On May 31, 1998, the Company
acquired Crossbox Limited t/a Cardiac Alert ("Cardiac Alert"), a UK based
company which provides a centralized electrocardiogram monitoring service for
international clinical trials. The Company acquired Cardiac Alert in exchange
for 70,743 shares of the Company's Common Stock. On May 31, 1998, the Company
acquired ClinData International Pty Ltd. ("ClinData"), a leading biostatistics
and data management company in South Africa. The Company acquired ClinData in
exchange for 123,879 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
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
2. Mergers and Acquisitions - Continued
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 of the pooled companies for the periods from January 1, 1998
through the date of each acquisition are not material.
3. Long Term Obligation
On May 31, 1998, the Company acquired a clinical trial production and warehouse
facility in Livingston, Scotland. The 58,000-square-foot facility in Livingston,
Scotland, will be integrated with Quintiles' two other nearby facilities, one
(at Bathgate) specializing in clinical trial packaging and distribution and the
other (at Edinburgh) providing services in all aspects of preclinical and
pharmaceutical drug development.
The Company has made a purchase commitment valued at approximately (pound)1.75
million ($2.9 million) with payment due in May, 2001.
4. 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 June 30, Six Months Ended June 30,
1998 1997 1998 1997
------- ------- ------- -------
Net income $19,517 $12,863 $37,591 $24,342
======= ======= ======= =======
Weighted average shares:
Basic weighted average shares 75,507 72,538 75,340 71,269
Effect of dilutive securities - Stock options 1,608 1,523 1,600 1,702
------- ------- ------- -------
Diluted weighted average shares 77,115 74,061 76,940 72,971
======= ======= ======= =======
Basic net income per share $ 0.26 $ 0.18 $ 0.50 $ 0.34
Diluted net income per share $ 0.25 $ 0.17 $ 0.49 $ 0.33
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
5. 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
and six months ended June 30, 1998 and 1997 (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
-------- ------- -------- --------
Net income $ 19,517 $12,863 $ 37,591 $ 24,342
Other comprehensive income:
Unrealized gain on marketable securities,
net of tax 113 154 32 159
Foreign currency adjustment (2,664) 2,535 (1,673) (6,094)
-------- ------- -------- --------
Comprehensive income $ 16,966 $15,552 $ 35,950 $ 18,407
======== ======= ======== ========
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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
Three Months Ended June 30, 1998 and 1997
Net revenue for the second quarter of 1998 was $280.8 million, an increase of
$86.6 million or 44.6% over second quarter of 1997 net revenue of $194.2
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 second
quarter of 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $146.7
million or 52.2% of net revenue for the second quarter of 1998 versus $100.7
million or 51.8% of net revenue for the second 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 $91.1 million or
32.5% of net revenue for the second quarter of 1998 versus $63.6 million or
32.8% of net revenue for the second quarter of 1997. The $27.5 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 $13.6 million or 4.9% of net revenue for the
second quarter of 1998 versus $8.8 million or 4.5% of net revenue for the second
quarter of 1997.
Income from operations was $29.4 million or 10.5% of net revenue for the second
quarter of 1998 versus $21.1 million or 10.9% of net revenue for the second
quarter of 1997.
The effective tax rate for the second quarter of 1998 was 32.3% versus a 38.1%
effective tax rate for the second quarter of 1997. A 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
Results of Operations -- Continued
Six Months Ended June 30, 1998 and 1997
Net revenue for the six months ended June 30, 1998 was $536.2 million, an
increase of $162.1 million or 43.3% over net revenue of $374.1 million for
the six months ended June 30, 1997. 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 six months ended June 30, 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $281.1
million or 52.4% of net revenue for the six months ended June 30, 1998 versus
$192.7 million or 51.5% of net revenue for the six months ended June 30, 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 $173.0 million or
32.3% of net revenue for the six months ended June 30, 1998 versus $124.5
million or 33.3% of net revenue for the six months ended June 30, 1997. The
$48.5 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 $25.7 million or 4.8% of net revenue for the
six months ended June 30, 1998 versus $16.9 million or 4.5% of net revenue for
the six months ended June 30, 1997.
Income from operations was $56.3 million or 10.5% of net revenue for the six
months ended June 30, 1998 versus $40.0 million or 10.7% of net revenue for the
six months ended June 30, 1997.
The effective tax rate for the six months ended June 30, 1998 was 32.1% versus a
37.6% effective tax rate for the six months ended June 30, 1997. A 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 inflows from operations were $23.8 million for the six months ended June
30, 1998 versus cash inflows of $21.3 million for the comparable period of 1997.
Investing activities, for the six months ended June 30, 1998, consisted
primarily of capital asset purchases and investment security purchases and
maturities. These investing activities required an outlay of cash of $53.8
million for the six months ended June 30, 1998 compared to an outlay of $53.0
million for investing activities during the same period in 1997.
As of June 30, 1998, total working capital was $178.4 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 $180.2
million at June 30, 1998 as compared to $125.1 million at the end of 1997.
The Company has a (pound)15.0 million (approximately $24.9 million) unsecured
line of credit with a U.K. bank and a (pound)5.0 million (approximately $8.3
million) unsecured line of credit with a second U.K. bank. At June 30, 1998, the
Company had (pound)16.4 million (approximately $27.3 million) available under
these arrangements.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents and investments in marketable securities, 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.
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
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 evaluating all business critical
systems during 1998 and taking appropriate action with respect to those systems
during 1998 and 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.
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 Company to integrate acquired
businesses with the Company's historical operations, the actual costs of the
combining of the acquired 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
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings -- Not applicable
Item 2. Changes in Securities
On May 31, 1998, the Company completed the acquisition of ClinData,
a leading biostatistics and data management company in South
Africa. The Company issued 123,879 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 ClinData 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 exchange agreement.
On May 31, 1998, the Company completed the acquisition of Cardiac
Alert, a UK based company which provides a centralized
electrocardiogram monitoring service for international clinical
trials. The Company issued 70,743 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 Cardiac Alert 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 exchange
agreement.
During the three months ended June 30, 1998, options to purchase
111,338 shares of Common Stock were exercised at an average
exercise price of $2.4582 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
Previously reported on the Company's Form 10-Q filed for the
quarterly period ended March 31, 1998.
Item 5. Other Information - Not applicable
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information, continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
27.01 Financial Data Schedule
99.01 (1) Risk Factors
(1) Exhibit 99.01 to the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange
Commission on May 15, 1998 and incorporated herein by
reference.
(b) During the three months ended June 30, 1998, 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. No other reports on Form
8-K were filed during the three months ended June 30, 1998.
Subsequently, the Company filed one report on Form 8-K, dated
July 22, 1998, including its press release announcing the
Company's fiscal second 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 July 31, 1998 /s/ Dennis B. Gillings
-------------------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date July 31, 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 (1) Risk Factors
(1) Exhibit 99.01 to the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on May
15, 1998 and incorporated herein by reference.
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