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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 SEPTEMBER 30, 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 0-22510
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 October 31, 1998, there were 18,230,172 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:
Three Months Ended September 30, 1997 and 1998 2
Nine Months Ended September 30, 1997 and 1998 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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, SEPTEMBER 30,
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 28,275 $ 8,569
Accounts receivable 33,725 31,584
Advance payments to investigators 939 --
Income taxes receivable 3,167 7,172
Deferred income taxes 2,511 620
Other current assets 2,531 3,079
--------- ---------
Total current assets 71,148 51,024
Property, plant and equipment:
Land, buildings and leasehold improvements 16,825 19,534
Equipment 25,625 29,811
Furniture and fixtures 5,347 5,395
--------- ---------
47,797 54,740
Less: accumulated depreciation and amortization 13,025 16,292
--------- ---------
34,772 38,448
Other assets:
Excess of purchase price over net assets acquired 38,687 33,926
Other assets 372 2,000
--------- ---------
39,059 35,926
--------- ---------
$ 144,979 $ 125,398
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,839 $ 5,294
Advance billings 10,468 11,046
Payables to investigators 1,278 1,406
Accrued expenses 7,739 8,696
Income taxes payable 183 306
Current maturities of long-term debt -- 88
--------- ---------
Total current liabilities 26,507 26,836
Deferred income taxes 2,694 3,597
Long-term debt -- 266
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
18,230,172 in 1997 and 1998, respectively 182 182
Additional paid-in capital 127,160 127,329
Retained earnings(deficit) (9,313) (26,282)
Accumulated other comprehensive income(loss) (2,251) (6,530)
--------- ---------
Total stockholders' equity 115,778 94,699
--------- ---------
$ 144,979 $ 125,398
========= =========
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
1997 1998
-------- --------
Revenue:
Service revenue $ 27,529 $ 24,187
Less: Subcontractor costs 3,330 3,186
-------- --------
Net service revenue 24,199 21,001
Operating costs and expenses:
Direct costs 17,425 14,840
Selling, general and administrative costs 9,620 9,005
Depreciation and amortization 1,388 1,433
-------- --------
Loss from operations (4,234) (4,277)
Other income(expense):
Interest income 275 148
Interest expense (5) (6)
-------- --------
270 142
-------- --------
Loss before income taxes (3,964) (4,135)
Provision (benefit) for income taxes (1,189) 118
-------- --------
Net loss $ (2,775) $ (4,253)
======== ========
Loss per share:
Basic $ (0.15) $ (0.23)
Diluted $ (0.15) $ (0.23)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,180 18,219
Diluted 18,180 18,219
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
1997 1998
-------- --------
Revenue:
Service revenue $ 95,435 $ 82,809
Less: Subcontractor costs 16,638 15,272
-------- --------
Net service revenue 78,797 67,537
Operating costs and expenses:
Direct costs 52,726 47,247
Selling, general and administrative costs 27,917 28,642
Depreciation and amortization 4,037 4,278
Restructuring charge -- 6,364
-------- --------
Loss from operations (5,883) (18,994)
Other income(expense):
Interest income 918 700
Interest expense (21) (23)
-------- --------
897 677
-------- --------
Loss before income taxes (4,986) (18,317)
Benefit for income taxes (1,479) (1,348)
-------- --------
Net loss $ (3,507) $(16,969)
======== ========
Loss per share:
Basic $ (0.19) $ (0.93)
Diluted $ (0.19) $ (0.93)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,148 18,200
Diluted 18,148 18,200
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1997 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,507) $(16,969)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,756 5,015
Changes in operating assets and liabilities (8,747) 2,293
Other 52 132
-------- --------
Net cash used in operating activities (7,446) (9,529)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (5,572) (8,833)
Costs associated with purchase of option to
acquire MPI -- (1,552)
-------- --------
Net cash used in investing activities (5,572) (10,385)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 376 140
Proceeds received on long-term debt borrowings -- 382
-------- --------
Net cash provided by financing activities 376 522
Effect of exchange rate changes on cash (455) (314)
-------- --------
Net decrease in cash and cash equivalents (13,097) (19,706)
Cash and cash equivalents at beginning of period 38,134 28,275
-------- --------
Cash and cash equivalents at end of period $ 25,037 $ 8,569
======== ========
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 and nine months ended September
30, 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.
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 while diluted EPS also includes the dilutive effect of common stock
equivalents. Diluted loss per share for the three months ended September 30,
1997 and 1998 does not include common stock equivalents of 340,000 and 457,000,
respectively, as their effect would be anti-dilutive. Diluted loss per share for
the nine months ended September 30, 1997 and 1998 does not include common stock
equivalents of 359,000 and 417,000, respectively, 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 (loss) consists entirely of accumulated foreign
currency translation adjustments and is a separate component of stockholders'
equity under SFAS No. 130. Prior period amounts have been reclassified to
conform to the requirements of SFAS No. 130.
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The components of comprehensive income (loss), net of related tax, are as
follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1998
------- -------
Net loss $(2,775) $(4,253)
Foreign currency translation adjustments (219) (2,630)
------- -------
Comprehensive loss $(2,994) $(6,883)
======= =======
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998
------- --------
Net loss $(3,507) $(16,969)
Foreign currency translation adjustments (1,085) (4,279)
------- --------
Comprehensive loss $(4,592) $(21,248)
======= ========
NOTE 4-PROVISION (BENEFIT) FOR INCOME TAXES
The effective tax rate was 2.9% for the three months ended September 30, 1998,
compared to an effective tax benefit rate of 30.0% for the three months ended
September 30, 1997. The effective tax benefit rate was 7.4% and 29.7% for the
nine months ended September 30, 1998 and 1997, respectively. The effective tax
benefit rate declined in 1998 as the Company fully realized its available tax
loss carrybacks in the second quarter of 1998. Due to the restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company recorded a valuation allowance of $4.8 million in the
nine months ended September 30, 1998 for its deferred tax assets primarily
related to the Company's potential tax benefit of such loss carryforwards
associated with its operating loss in the second and third quarters of 1998.
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 provided the Company meets certain financial requirements.
Credit availability under the Company's new domestic line of credit and its
foreign line of credit ("Credit Facilities") totals approximately $18.3 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 September 30, 1998, there were no borrowings outstanding under the
lines of credit. Commitment availability at September 30, 1998 has been reduced
by issued letters of credit of approximately $701,000. 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.
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 $525,000 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
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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 nine months ended September 30, 1998, the Company paid $1.5
million of the restructuring costs, primarily in severance costs to 35
employees. At September 30, 1998, $0.1 million remains in accrued expenses for
restructuring costs expected to be paid by the end of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with leases following
the Company's restructuring decision to consolidate facilities. The 1998
restructuring charge consists of the following (in thousands):
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 9/30/98
------------- ----------
Write down of assets in connection with closure of
Lexington facility $1,983 $ 485
Lease costs associated with consolidation of
facilities 1,976 1,112
Severance costs 2,132 336
Other 273 31
------ ------
$6,364 $1,964
====== ======
NOTE 8-RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") will require the Company to disclose segment
information about its services, geographic areas and major customers. The
Company will begin disclosing this information in accordance with SFAS No. 131
in its annual report on Form 10-K for the year ended December 31, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133") which is required to be adopted in years beginning after June 15, 1999.
The Company plans to adopt SFAS No. 133 effective January 1, 2000. The Company's
Canadian subsidiary enters into foreign exchange forward contracts to hedge its
United States dollar denominated contracts in backlog. The Company does not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
the financial position of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
The information set forth and discussed below for the three and nine months
ended September 30, 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.
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
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the drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is recorded in accordance with SOP 81-1 "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts" as costs
are incurred and includes estimated earned fees or profits calculated on the
basis of the relationship between costs incurred and total estimated costs
(cost-to-cost type of percentage-of-completion method of accounting). Revenue is
affected by the mix of trials conducted and the degree to which labor and
facilities are utilized. The Company routinely subcontracts with third party
investigators in connection with multi-site clinical trials and with other third
party service providers for laboratory analysis and other specialized services.
These costs are passed through to clients and, in accordance with industry
practice, are included in gross 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 gross service revenue less
subcontractor costs, as its primary measure of revenue growth. The Company has
had, and is expected to 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
nine months ended September 30, 1998 and 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 implemented a new business plan in April, 1998 which includes the
following: 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 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.
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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 April 1998 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 implementing a
product development focus with its customers. New orders signed have improved to
$23.8 million in the second quarter of 1998 and $31.3 million in the third
quarter of 1998; however, due to the start-up schedules of these new orders and
the low level of new orders prior to the second quarter of 1998, the Company
expects that revenues and earnings per share for the fourth quarter of 1998 and
the first quarter of 1999 will be below third quarter 1998 levels.
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
nine months ended September 30, 1998, the Company paid $1.5 million of the
restructuring costs, primarily in severance costs to 35 employees. At September
30, 1998, approximately $0.1 million remains in accrued expenses for
restructuring costs expected to be paid by the end of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with leases following
the Company's restructuring decision to consolidate facilities. The 1998
restructuring charge consists of the following (in thousands):
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 9/30/98
------------- ----------
Write down of assets in connection with closure of
Lexington facility $1,983 $ 485
Lease costs associated with consolidation of
facilities 1,976 1,112
Severance costs 2,132 336
Other 273 31
------ ------
$6,364 $1,964
====== ======
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Net loss for the three months ended September 30, 1998 was $4.3 million, or
$0.23 diluted loss per share, compared to a net loss in the same period of 1997
of $2.8 million or $0.15 diluted loss per share. The increase in the net loss is
primarily attributable to the valuation allowance recorded in 1998 on deferred
tax assets associated with loss carryforwards resulting from the Company's 1998
operating loss (discussed below).
Net service revenue decreased 13.2% to $21.0 million in the 1998 period from
$24.2 million in 1997. This decrease resulted primarily from a level of new
orders insufficient to cover prior period cancellations of contracts previously
discussed.
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Direct costs decreased 14.8% to $14.8 million in the three months ended
September 30, 1998 from $17.4 million in the same period in 1997. Direct costs
decreased as a percentage of net service revenue to 70.7% from 72.0%. 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 decreased 6.4% to $9.0 million in the
three months ended September 30, 1998 from $9.6 million in the same period in
1997 primarily due to cost savings from the closing of the Company's Lexington
facility in April, 1998. Selling, general and administrative costs increased as
a percentage of net service revenue to 42.9% from 39.8%. The increase as a
percentage of net revenue is primarily attributable to lower levels of revenue.
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, variations in the timing of contracts or the
progress of clinical trials (both delays and accelerations) may cause
significant variations in quarterly operating results.
Depreciation and amortization expense was $1.4 million in the three months ended
September 30, 1998 and 1997 as increased depreciation resulting from 1998
capital expenditures was offset by a decrease in depreciation and amortization
for the Company's Lexington facility closed in April 1998.
Interest income, net of interest expense, was $0.1 million in the third quarter
of 1998 compared to $0.3 million in the same period of 1997.
The Company's provision for income taxes was $0.1 million in the three months
ended September 30, 1998 as compared to an income tax benefit of $1.2 million in
the third quarter of 1997. The effective tax rate in the third quarter of 1998
was 2.9% compared to an effective tax benefit rate of 30.0% in the same period
in 1997. The effective tax benefit rate declined in 1998 as the Company fully
realized its available tax loss carrybacks in the second quarter of 1998. Due to
the restrictions that accounting standards place on deferred tax assets
associated with loss carryforwards, the Company recorded a valuation allowance
of $2.0 million in the third quarter of 1998 for its deferred tax assets
primarily related to the Company's potential tax benefit associated with its
operating loss in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net loss for the nine months ended September 30, 1998 was $17.0 million, or
$0.93 diluted loss per share, compared to a net loss in the same period of 1997
of $3.5 million or $0.19 diluted loss per share. The increase in the net loss is
primarily attributable to the $6.4 million restructuring charge in the second
quarter of 1998 (discussed above); the significant decrease in the Company's
effective tax benefit rate (discussed below); and the cancellations of
contracts, aggregating approximately $37 million in backlog, which occurred in
the fourth quarter of 1996 and first quarter of 1997 (discussed previously)
along with a level of new orders in previous quarters insufficient to cover the
previously noted cancellations. As a result, revenue recognized has not been
sufficient to cover expenses since the second quarter of 1997.
Net service revenue decreased 14.3% to $67.5 million in the 1998 period from
$78.8 million in 1997. This decrease resulted primarily from a level of new
orders through March 31, 1998 which were insufficient to cover prior period
cancellations of contracts previously discussed.
Direct costs decreased 10.4% to $47.2 million in the nine months ended September
30, 1998 from $52.7 million in the same period in 1997. Direct costs increased
as a percentage of net service revenue to 70.0% from 66.9% due to unbillable
resources resulting from the previously discussed project cancellations and an
insufficient level of new orders through March 31, 1998 to cover these
cancellations. 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.
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Selling, general and administrative costs increased 2.6% to $28.6 million in the
nine months ended September 30, 1998 from $27.9 million in the same period in
1997 primarily due to the opening of the Glasgow facility in November 1997,
increases in lease costs and one-time costs to move into the Company's new
clinical research center in Research Triangle Park, North Carolina which offset
cost savings from the closing of the Company's Lexington facility in April 1998.
Selling, general and administrative costs increased as a percentage of net
service revenue to 42.4% from 35.4%. The increase as a percentage of net revenue
is primarily attributable to lower levels of revenue resulting from project
cancellations and an insufficient level of new orders through March 31, 1998.
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, variations in the timing of contracts or the
progress of clinical trials (both delays and accelerations) may cause
significant variations in quarterly operating results.
Depreciation and amortization expense increased 6.0% to $4.3 million in the nine
months ended September 30, 1998 compared to $4.0 million in the same period in
1997 as increased depreciation resulting from 1998 capital expenditures was
partially offset by a decrease in depreciation and amortization for the closing
of the Company's Lexington facility in April 1998.
Interest income, net of interest expense, was $0.7 million in the first nine
months of 1998 compared to $0.9 million in the same period of 1997.
The Company's benefit for income taxes was $1.3 million in the nine months ended
September 30, 1998 as compared to $1.5 million in the first nine months of 1997.
The effective tax benefit rate in the nine months ended September 30, 1998 was
7.4% compared to 29.7% in the same period in 1997. The effective tax benefit
rate declined in 1998 as the Company fully realized its available tax loss
carrybacks in the second quarter of 1998. Due to the restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company recorded a valuation allowance of $4.8 million in
1998 for its deferred tax assets primarily related to the Company's potential
tax benefit of such loss carryforwards associated with its operating loss in
1998.
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. As a result
and as is customary in the contract research organization industry, contracts
may have advance billings or unbilled receivables based upon the relationship
between the payment schedule set by the contract and revenue recognized in
accordance with the percentage of completion accounting method. As of September
30, 1998, the Company's advance billings were $11.0 million and its accounts
receivables of $31.6 million included $11.5 million of unbilled receivables. The
Company expects to bill and collect these unbilled receivables within one year
of revenue recognition. Cash receipts do not correspond to costs incurred and
revenue recognition (which is typically based on cost-to-cost type of percentage
of completion accounting) and 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 number of
days sales outstanding in accounts receivable (which includes unbilled
receivables) was 130 days at September 30, 1998, compared to 117 days at
December 31, 1997 and 126 days at September 30, 1997. The number of days sales
outstanding in accounts receivable
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(which includes unbilled receivables) net of advance billings was 88 days at
September 30, 1998 compared to 82 days at December 31, 1997 and 88 days at
September 30, 1997.
The Company had cash and cash equivalents of $8.6 million at September 30, 1998
as compared to $28.3 million at December 31, 1997 and $25.0 million at September
30, 1997.
During the nine months ended September 30, 1998, net cash used by operating
activities totaled $9.5 million, primarily due to a loss before depreciation and
amortization of $12.0 million (of which $6.4 million related to the
restructuring charge), a decrease in accounts payable and accrued expenses of
$0.6 million and an increase in net tax receivables of $1.1 million, which was
partially offset by a decrease in net accounts receivable (net of advance
billings) of $2.7 million and an increase in net payables to investigators of
$1.1 million.
Cash used in investing activities of $10.4 million during the first nine months
of 1998 consisted of capital expenditures of $8.8 million and the costs
associated with 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 $14 million in 1998, of
which approximately one-half relates to leasehold improvements to the Company's
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 provided the Company meets certain
financial requirements. Credit availability under the Company's new domestic
line of credit and its foreign line of credit (the "Credit Facilities") totals
approximately $18.3 million. There were no borrowings outstanding under the
lines of credit at September 30, 1998. Commitment availability at September 30,
1998 has been reduced by issued letters of credit of approximately $701,000. 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,
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.
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YEAR 2000 ISSUE
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 which
could result in system failures, miscalculations, etc.
State of Readiness: Based upon a recent assessment of all information technology
and non-information technology systems, the Company has determined certain
computer 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. As a result, the Company is currently meeting with several
software vendors and evaluating which software product best meets the Company's
needs. Selection of new software is anticipated by the first half of 1999.
Installation of this software followed by applicable testing on that system is
anticipated to be completed by the middle of 1999.
Based on a review of third-party representations, the Company is not currently
aware of any third-party issue applicable to the Year 2000 that is likely to
have a material impact on the conduct of business, the results of operations or
the financial condition of the Company.
Costs to Address the Company's Year 2000 Issues: The Company believes that Year
2000 related remediation costs incurred through September 30, 1998 have not been
material to its results of operations. The Company is not able to reasonably
estimate the total costs to be incurred for completion of its Year 2000 strategy
at this time. However, the cost associated with this strategy is not expected to
be material to the Company.
Risks of the Company's Year 2000 Issues: Management of the Company believes it
has an effective strategy in place to resolve the Year 2000 issue in a timely
manner. As noted above, the Company has not yet completed all the necessary
phases of the Year 2000 strategy. In the unlikely event that the Company does
not complete any additional phases of its Year 2000 program or the Company or
its suppliers should fail to adequately address the Year 2000 issues, the
Company would be unable to process transactions and monitor projects which could
have a direct impact on its ability to generate revenue per agreements with its
customers. However, the amount of this potential liability and potential loss of
revenue cannot be reasonably estimated at this time.
The Company's Contingency Plans: The Company currently does not have contingency
plans in place at all of its divisions in the event it does not complete all
phases of the Year 2000 program. The Company plans to evaluate the status of
strategy completion in the first half of 1999 and determine whether such a plan
is necessary at those divisions.
The Company cannot guarantee that its efforts will prevent all consequences.
There may be undetermined future costs which could have a material, adverse
affect on the Company due to business disruption that may be caused by
customers, suppliers, or unforeseen circumstances.
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 forward 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 the functional currency of the Company's
foreign subsidiary, but payments on contracts are made 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 foreign subsidiary'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.
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
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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: November 13, 1998 By: /s/ JERRY R. MITCHELL, M.D., Ph.D.
Jerry R. Mitchell, M.D., Ph.D.
President and Chief Executive Officer
Date: November 13, 1998 By: /s/ S. COLIN NEILL
S. Colin Neill
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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