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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 27, 1999
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 340-23520 56-1714315
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
4709 CREEKSTONE DRIVE, RIVERBIRCH BUILDING, SUITE 200,
DURHAM, NORTH CAROLINA 27703-8411
(Address of principal executive offices)
(919) 998-2000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
In connection with certain acquisitions accounted for as pooling of
interests which were consummated between January 1, 1996 and September 30, 1998,
Quintiles Transnational Corp. (the "Company") has restated certain of its
historical consolidated financial data and provides the restated consolidated
financial statements and other materials described below.
Item Description Page
1) Selected Consolidated Financial Data 5
2) Annual Consolidated Financial Data of the Company
a. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
b. Consolidated Financial Statements of the
Company
i. Consolidated Statements of Income
for the three years ended December 31, 1997,
1996 and 1995 15
ii Consolidated Balance Sheets as of
December 31, 1997 and 1996 16
iii. Consolidated Statements of Cash
Flows for the three years ended December 31,
1997, 1996 and 1995 18
iv. Consolidated Statements of
Shareholders' Equity for the three years
ended December 31, 1997, 1996 and 1995 20
v. Notes to Consolidated Financial
Statements 21
vi. Report of Independent Auditors 36
3) Condensed Consolidated Financial Data of the Company
- March 31, 1998 (Unaudited)
a. Condensed Consolidated Financial Statements
of the Company - March 31, 1998 (Unaudited)
i. Condensed Consolidated Balance
Sheets as of March 31, 1998 and December 31,
1997 37
ii. Condensed Consolidated Statements
of Income - Three Months Ended March 31,
1998 and 1997 38
iii. Condensed Consolidated Statements
of Cash Flows - Three Months Ended March 31,
1998 and 1997 39
iv. Notes to Condensed Consolidated
Financial Statements - March 31, 1998 40
b. Management's Discussion and Analysis of
Financial Condition and Results of Operations 42
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4) Condensed Consolidated Financial Data of the Company
- June 30, 1998 (Unaudited)
a. Condensed Consolidated Financial Statements
of the Company - June 30, 1998 (Unaudited)
i. Condensed Consolidated Balance
Sheets as of June 30, 1998 and December 31,
1997 49
ii. Condensed Consolidated Statements
of Income - Three Months Ended June 30, 1998
and 1997 and Six Months Ended June 30, 1998
and 1997 50
iii. Condensed Consolidated Statements
of Cash Flows - Six Months Ended June 30,
1998 and 1997 51
iv. Notes to Condensed Consolidated
Financial Statements - June 30, 1998 52
b. Management's Discussion and Analysis of
Financial Condition and Results of Operations 55
5) Condensed Consolidated Financial Data of the Company
- September 30, 1998 (Unaudited)
a. Condensed Consolidated Financial
Statements of the Company - September 30, 1998
(Unaudited)
i. Condensed Consolidated Balance
Sheets 62
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as of September 30, 1998 and December 31,
1997
ii. Condensed Consolidated Statements
of Income - Three Months Ended September 30,
1998 and 1997 and Nine Months Ended
September 30, 1998 and 1997 63
iii. Condensed Consolidated Statements
of Cash Flows - Nine Months Ended September
30, 1998 and 1997 64
iv. Notes to Condensed Consolidated
Financial Statements - September 30, 1998 65
b. Management's Discussion and Analysis of
Financial Condition and Results of Operations 68
On January 26, 1999, the Company issued a press release regarding its financial
results for the period ended December 31, 1998. A copy of the press release is
attached hereto as Exhibit 99.03 and incorporated by reference herein.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected Consolidated Statement of Income Data set forth below for each
of the years in the three-year period ending December 31, 1997 and the
Consolidated Balance Sheet Data set forth below as of December 31, 1996 and 1997
are derived from the audited consolidated financial statements of the Company
and notes thereto, as restated for certain pooling transactions, included in
this Current Report on Form 8-K dated January 27, 1999. The selected
Consolidated Statement of Income Data set forth below for the years ended
December 1994 and 1993, and the Consolidated Balance Sheet Data set forth below
as of December 31, 1995, 1994 and 1993 are derived from the audited consolidated
financial statements of the Company as subsequently restated for certain pooling
transactions. The data provided as of September 30, 1998 and for the nine months
ended September 30, 1997 and 1998 are derived from unaudited consolidated
financial statements included in the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998, as subsequently restated herein for certain
pooling transactions, but in the opinion of management, contain all adjustments,
consisting only of normal recurring accruals, which are necessary for a fair
statement of the results of such periods. The consolidated financial statements
of the Company have been restated to reflect material acquisitions by the
Company in transactions accounted for as poolings of interests. However, the
consolidated financial statements have not been restated to reflect certain
other acquisitions accounted for as pooling of interests where the Company
determined that the consolidated financial data would not have been materially
different if the pooled companies had been included. For such immaterial pooling
of interests transactions, which include two transactions in 1997 and two
transactions in 1996, the Company's financial statements for the year of each
transaction have been restated to include the pooled companies from January 1 of
that year, but the financial statements for years prior to the year of each
transaction have not been restated because the effect of such restatement would
be immaterial. The selected consolidated financial data presented below should
be read in conjunction with the Company's audited and unaudited consolidated
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included herein.
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------------- ----------------
1997 1996(1) 1995(1) 1994(1) 1993(1) 1998 1997
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
Net revenue $852,900 $600,100 $368,056 $230,583 $169,623 $848,379 $608,436
Income from operations 88,812 43,851 25,900 17,456 12,545 88,654 63,387
Income before income taxes 86,535 24,241 24,655 16,567 9,785 86,737 61,387
Net income available for common
shareholders 55,683 7,648 14,626 10,598 5,230 58,914 38,862
Basic net income per share 0.76 0.11 0.23 0.18 0.11 0.77 0.53
Diluted net income per share $ 0.74 $ 0.11 $ 0.23 $ 0.18 $ 0.10 $ 0.78 $ 0.52
Weighted average shares outstanding(2):
Basic 73,739 69,148 63,171 58,128 49,681 76,476 73,283
Diluted 75,275 71,785 64,946 58,512 50,191 77,987 74,967
As of December 31, As of September 30,
------------------------------------------------------------ -------------------
1997 1996(1) 1995(1) 1994(1) 1993(1) 1998 1997
---- ---- ---- ---- ---- ---- ----
(In thousands, except employees)
Cash and cash equivalents $ 80,247 $ 74,474 $ 84,569 $ 52,011 $ 18,188 $ 88,499 $ 77,338
Working capital 164,987 99,787 72,102 48,245 18,879 197,667 141,204
Total assets 814,027 554,619 352,277 208,944 136,272 937,952 741,544
Long-term debt including current portion 185,511 185,493 52,662 21,386 20,855 191,570 187,690
Shareholders' equity $388,639 $150,528 $165,943 $ 90,193 $ 89,015 $464,947 $339,628
Employees 11,540 7,896 4,835 3,115 2,346 14,682 9,682
(1) Prior to the Company's November 29, 1996 share exchange with Innovex
Limited (Innovex), Innovex had a fiscal year end of March 31 and the
Company had (and continues to have) a fiscal year end of December 31.
As a result, the pooled data presented above for 1993 through 1995
include Innovex's March 31 fiscal year data in combination with the
Company's December 31 fiscal year data. In connection with the share
exchange, Innovex changed its fiscal year end to December 31.
Accordingly, the pooled data presented above for 1996 include both
Innovex's and the Company's data on a December 31 year end basis.
Because of the difference between Innovex's fiscal year end in 1995
compared with 1996, Innovex's quarter ended March 31, 1996 data are
included in the Company's pooled data for both 1995 and 1996.
(2) Restated to reflect the two-for-one stock splits of the Company's
Common Stock effected as a 100% stock dividend in November 1995 and
December 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Quintiles Transnational Corp. ("Quintiles" or "the Company") is a market leader
in providing full-service contract research, sales, marketing and healthcare
policy consulting and health information management services to the global
pharmaceutical, biotechnology, medical device and healthcare industries. Based
on industry analyst reports, the Company is the largest company in the
pharmaceutical outsourcing services industry as ranked by 1997 net revenue; the
net revenue of the second largest company was over $200 million less than the
Company's 1997 net revenue.
During 1997, the Company completed several strategic acquisitions that
complemented its existing operations and expanded its array of services.
Specifically:
On February 27, 1997, the Company acquired Debra Chapman Consulting Group Pty
Limited and the Medical Alliances Australia Pty Limited group of companies
(collectively "DCCG/MAA") located in Sydney and Melbourne, Australia. The
Company purchased 100% of the DCCG/MAA group of companies' outstanding stock for
an undisclosed amount of cash.
On June 2, 1997, the Company acquired Butler Communications Inc. ("Butler") and
its affiliated companies, including Butler Clinical Recruitment, Inc., which
specialize in communication programs to accelerate the recruitment of patients
for clinical trials. The Company acquired the Butler businesses in exchange for
428,610 shares of the Company's Common Stock. In addition, the Company assumed
approximately $2.8 million in existing Butler debt. The acquisition of Butler
was accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include the historical financial data of
Butler.
On June 11, 1997, the Company acquired Action International Marketing Services
Limited and its subsidiaries, including Medical Action Communications Limited
(collectively "MAC"), a leading international strategic medical communications
consultancy. The Company acquired MAC in exchange for 1,131,394 shares and
granted stock options exercisable for an additional 125,700 shares of the
Company's Common Stock. The acquisition was accounted for as a pooling of
interests, and accordingly, the Company previously restated all historical
financial data to include the historical financial data of MAC.
On June 21, 1997, the Company acquired the operating assets of Pharmacology Data
Management Corporation ("PDMC"), a software services company, for an undisclosed
amount of cash.
On July 2, 1997, the Company acquired CerebroVascular Advances, Inc. ("CVA"), a
leader in stroke clinical trials. The Company acquired CVA in exchange for
467,936 shares and stock options exercisable for an additional 34,038 shares of
the Company's Common Stock. The acquisition was accounted for as a pooling of
interests, and accordingly, the Company restated all historical financial data
to include the historical financial data of CVA.
On August 29, 1997, the Company acquired Intelligent Imaging, Inc. ("Intelligent
Imaging"), an information management company specializing in providing digital
medical imaging services for clinical trials and the healthcare industry, in
exchange for 171,880 shares of the Company's Common Stock. The acquisition of
Intelligent Imaging was accounted for as a pooling of interests, and all
consolidated financial data for periods subsequent to January 1, 1997 have been
restated to include the results of the pooled company. The financial data of the
pooled companies prior to January 1, 1997 were not materially different from
that previously reported by the Company, and thus have not been restated.
On August 29, 1997, the Company acquired Clindepharm International (Pty) Limited
("Clindepharm"), South Africa's leading contract research organization, in
exchange for 477,966 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests, and accordingly, the Company previously
restated all historical financial data to include the historical financial data
of Clindepharm since its inception in 1996.
On August 29, 1997, the Company acquired Rapid Deployment Services and its
affiliated companies ("RDS"), South Africa's leading contract sales
organization, in exchange for 121,668 shares of the Company's Common Stock. The
acquisition of RDS was accounted for as a pooling of interests, and all
consolidated financial data for periods subsequent to January 1, 1997 have been
restated to include the results of the pooled company. The financial data of the
pooled companies prior to January 1, 1997 were not materially different from
that previously reported by the Company, and thus have not been restated.
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Overview -- Continued
In addition, on September 10, 1997, the Company officially opened its 171,000 -
square foot clinical trials material packaging and distribution facility in
Bathgate, Scotland. The facility, which includes a data management center,
opened with a staff of about 115, and it is expected to eventually employ
approximately 300 people.
Also, on December 1, 1997, the Company effected a two-for-one split of the
Company's Common Stock in the form of a 100% stock dividend. All references to
number of shares and per share amounts have been restated to reflect the stock
split.
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. The acquisition of
Pharma was accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include the historical financial data of
Pharma.
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. The acquisition of T2A was accounted for
as a pooling of interests, and as such, all historical financial data have been
restated to include the historical financial data of T2A.
On August 24, 1998, the Company acquired The Royce Consultancy, Limited
("Royce"), a leading pharmaceutical sales representative recruitment and
contract sales organization in the U.K. The Company acquired Royce in exchange
for 664,194 shares of the Company's Common Stock. The acquisition of Royce was
accounted for as a pooling of interests and as such, all historical financial
data have been restated to include the results of Royce.
On September 9, 1998, the Company acquired Data Analysis Systems, Inc. ("DAS"),
a leader in sales force planning and territory organization systems for the
pharmaceutical industry. The Company acquired DAS in exchange for 358,897 shares
of the Company's Common Stock. The acquisition of DAS was accounted for as a
pooling of interests and as such, all historical financial data have been
restated to include the results of DAS.
Contract Revenue
The Company considers net revenue, which excludes reimbursed costs, its primary
measure of revenue growth. Substantially all net revenue is earned by performing
services under contracts with various pharmaceutical, biotechnology, medical
device and healthcare companies. Many of the Company's contracts are fixed
price, with some variable components, and range in duration from a few months to
several years. The Company is also party to fee-for-service and unit-of-service
contracts. The Company recognizes net revenue based upon (1) labor costs
expended as a percentage of total labor costs expected to be expended
(percentage of completion) for fixed price contracts, (2) contractual per diem
or hourly rate basis as work is performed for fee-for-service contracts or (3)
completion of units of service for unit-of-service contracts.
The Company's contracts generally provide for price negotiation upon scope of
work changes. The Company recognizes revenue related to these scope changes when
the underlying services are performed and realization of revenue is assured.
Most contracts are terminable upon 15 - 90 days' notice by the customer. In the
event of termination, contracts typically require payment for services rendered
through the date of termination, as well as subsequent services rendered to
close out the contract. Any anticipated losses resulting from contract
performance are charged to earnings in the period identified.
Each contract specifies billing and payment procedures. Generally, the
procedures require a portion of the contract fee to be paid at the time the
project is initiated with subsequent contract billings and payments due
periodically over the length of the project's term in accordance with
contractual provisions. Revenue recognized in excess of billings is classified
as unbilled services, while billings in excess of revenue are classified as
unearned income.
The Company reports backlog based on anticipated net revenue from uncompleted
projects which have been authorized by the customer through a written contract
or otherwise. Using this method of reporting backlog, at December 31, 1997, 1996
and 1995 the backlog was approximately $1.09 billion, $727 million and $432
million, respectively. The Company believes that backlog may not be a consistent
indicator of future results because backlog can be affected by a number
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Contract Revenue -- Continued
of factors, including the variable size and duration of projects, many of which
are performed over several years, loss or significant delay of contracts, or a
change in the scope of a project during the course of a study.
Results of Operations
Year Ended December 31, 1997 Compared with
Year Ended December 31, 1996
Net revenue for the year ended December 31, 1997 was $852.9 million, an increase
of $252.8 million or 42.1% over fiscal 1996 net revenue of $600.1 million.
Growth occurred across each of the Company's 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 January 1, 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $448.9
million or 52.6% of 1997 net revenue versus $308.9 million or 51.5% of 1996 net
revenue. 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 $277.2 million or
32.5% of 1997 net revenue versus $206.3 million or 34.4% of 1996 net revenue.
The $71.0 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 $37.9 million or 4.4% of 1997 net revenue
versus $25.7 million or 4.3% of 1996 net revenue.
Income from operations was $88.8 million or 10.4% of 1997 net revenue versus
$43.9 million or 7.3% of 1996 net revenue. Excluding non-recurring costs
incurred in 1996 as described below, income from operations was $59.3 million or
9.9% of net revenue.
Other expense decreased to $2.3 million in 1997 from $19.6 million in 1996.
Excluding acquisition costs and non-recurring transaction costs, other expense
was $85,000 in 1997 and $2.5 million in 1996. The $2.4 million change was
primarily due to decreases in net interest expense of approximately $2.2 million
and other expense of approximately $200,000.
The effective tax rate for 1997 was 35.7% versus a 61.1% rate in 1996. Excluding
non-recurring transaction and restructuring costs which were not deductible for
tax purposes, the 1996 effective tax rate would have been 34.5%. Since the
Company conducts operations on a global basis, its effective tax rate may vary.
See "--Taxes."
Year Ended December 31, 1996 Compared with
Year Ended December 31, 1995
Prior to the Company's November 29, 1996 share exchange with Innovex Limited
("Innovex"), Innovex had a fiscal year end of March 31, and the Company had (and
continues to have) a fiscal year end of December 31. As a result, the pooled
data prior to January 1, 1996 includes Innovex's March 31 fiscal year data in
combination with the Company's December 31 fiscal year data. In connection with
the share exchange, Innovex changed its fiscal year end to December 31.
Accordingly, the pooled data presented for 1996 include both Innovex's and the
Company's data on a December 31 year end basis. Because of the difference
between Innovex's fiscal year end in 1995 compared with 1996, Innovex's quarter
ended March 31, 1996 data are included in the Company's pooled data for both
1995 and 1996.
Net revenue for the year ended December 31, 1996 was $600.1 million, an increase
of $232.0 million or 63.0% over fiscal 1995 net revenue of $368.1 million. In
general, growth occurred across each of the Company's geographic regions and
within each contract service sector. Factors contributing to both the regional
and service growth included the
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Year Ended December 31, 1996 Compared with
Year Ended December 31, 1995 -- Continued
provision of increased services rendered under existing contracts, the
initiation of services under contracts awarded subsequent to January 1, 1996 and
the Company's acquisitions (excluding BRI International, Inc. ("BRI") and
Innovex) completed during 1996 and 1995 which contributed approximately $44.8
million in 1996 versus $11.7 million in 1995. Without these acquisitions, the
Company's 1996 net revenue increased by $198.9 million or 54.1% over comparable
1995 net revenue. One customer accounted for 11.5% of the Company's 1996 net
revenue.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $308.9
million or 51.5% of 1996 net revenue versus $192.9 million or 52.4% of 1995 net
revenue. The decrease in direct costs as a percentage of net revenue was
primarily attributable to efficiency realized through the use of information
technology in the Company's provision of services related to global, long-term
contracts, offset by increased costs 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 $206.3 million or
34.4% of 1996 net revenue versus $127.0 million or 34.5% of 1995 net revenue.
The $79.3 million increase in general and administrative expenses was primarily
due to an increase in personnel, facilities and locations, business development
and marketing activities, and outside services resulting from the Company's
growth.
Depreciation and amortization were $25.7 million or 4.3% of 1996 net revenue
versus $17.6 million or 4.8% of 1995 net revenue.
Income from operations was $43.9 million or 7.3% of 1996 net revenue versus
$25.9 million or 7.0% of 1995 net revenue. Net of non-recurring costs, income
from operations was $59.3 million or 9.9% of 1996 net revenue versus $30.6
million or 8.3% of 1995 net revenue. During the quarter ended March 31, 1996,
Innovex recognized two non-recurring charges: a $2.4 million expense for an
Innovex internal reorganization and a related $2.3 million special pension
contribution. Accordingly, the Company's pooled, consolidated financial results
include such charges, totaling $4.7 million, in both the fiscal years ended
December 31, 1996 and 1995. In the fourth quarter of 1996, the Company
recognized approximately $10.7 million in non-recurring restructuring costs
related to the BRI and Innovex transactions.
Other expense increased to $19.6 million in 1996 from $1.2 million in 1995.
Other expense includes approximately $17.1 million of non-recurring transaction
costs for the year ended December 31, 1996, most of which were not deductible
for tax purposes. Net of such non-recurring transaction costs, other expense was
$2.5 million for 1996 and $1.2 million in 1995. This increase of approximately
$1.2 million was primarily due to an increase of interest and miscellaneous
expense of $5.9 million which was offset by an increase in interest income of
approximately $4.6 million.
The effective tax rate for 1996 was 61.1% versus a 37.8% rate in 1995. The
increase in the 1996 effective tax rate was primarily attributable to the
non-tax deductible, non-recurring transaction costs incurred and a portion of
the non-recurring costs relating to the Innovex internal reorganization prior to
its pooling of interests with the Company. The lack of tax relief for the
Innovex internal reorganization costs was reflected in both the effective tax
rates for 1996 and 1995. The effective tax rate for 1996 was 34.5% versus a
35.5% rate in 1995 excluding the non-recurring costs. Since the Company conducts
operations on a global basis, its effective tax rate may vary. See "-- Taxes."
Liquidity and Capital Resources
Cash flows generated from operations were $79.1 million in 1997 versus $41.6
million and $34.1 million in 1996 and 1995, respectively. Cash flows used in
investing activities in 1997 were $154.8 million, versus $144.9 million and
$38.7 million in 1996 and 1995, respectively. The change in the amount of cash
from investing activities from 1995 to 1996 was primarily due to the investment
of the Company's net proceeds from the May 1996 private placement of its 4.25%
Convertible Subordinated Notes due May 31, 2000. Capital asset purchases
required $79.3 million in 1997 versus $40.6 million and $26.5 million in 1996
and 1995, respectively. Capital asset expenditures in 1997 and 1996 included
(pound)15.8 million (approximately $26.5 million) and (pound)2.7 million
(approximately $5.0 million), respectively, related to the Company's purchase of
land and construction of a facility in Bathgate, Scotland. The remaining capital
expenditures
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Liquidity and Capital Resources -- Continued
were predominantly incurred in connection with the expansion of existing
operations, the enhancement of information technology capabilities and the
opening of new offices.
Total working capital was $165.0 million at December 31, 1997 compared to $99.8
million at December 31, 1996. Including long-term cash investments of $69.1
million and $25.1 million at December 31, 1997 and 1996, respectively, in total
working capital, the increase was $109.2 million. Total accounts receivable and
unbilled services increased 13.5% to $219.4 million at December 31, 1997 from
$193.3 million at December 31, 1996, as a result of the growth in net revenue.
The number of days revenue outstanding in accounts receivable and unbilled
services, net of unearned income, was 42 and 47 days at December 31, 1997 and
December 31, 1996, respectively.
During 1995, the Company acquired a drug development facility in Edinburgh,
Scotland. Related to this acquisition, the Company entered into a purchase
commitment valued at (pound)13.0 million (approximately $21.0 million) with
payment due in December 1999. The Company has hedged this commitment by
purchasing forward contracts. The Company's forward contracts mature on December
29, 1999, and as of December 31, 1997, the Company had committed to purchasing
approximately (pound)1.5 million (approximately $2.3 million) under such
contracts. The Company is obligated to purchase up to an additional (pound)5.9
million through December 28, 1999 in varying amounts as the daily
dollar-to-pound exchange rate ranges between $1.5499 and $1.6800.
The Company has available to it a (pound)15.0 million unsecured line of credit
with a U.K. bank and a (pound)5.0 million unsecured line of credit with a second
U.K. bank. At December 31, 1997, the Company had (pound)13.8 million available
under these credit agreements.
On March 12, 1997, the Company completed a public offering of 11,040,000 shares
of its Common Stock at a price of $31.4375 per share. Of the 11,040,000 shares
sold, 2,830,000 shares were sold by the Company and 8,210,000 shares were sold
by selling shareholders. Net proceeds to the Company amounted to approximately
$84.3 million.
On August 7, 1998, the Company entered into a $150 million senior unsecured
credit facility ("$150 million facility") with a U.S. bank. Based upon its
current financing plan, the Company believes the $150 million facility would be
available to retire its long-term credit arrangements and obligations, if
necessary.
All foreign currency denominated amounts due, subsequent to December 31, 1997,
have been translated using the Friday, December 26, 1997 foreign exchange rates
as published in the December 29, 1997 edition of the Wall Street Journal. Based
on its current operating plan, the Company believes that its available cash and
cash equivalents, together with future cash flows from operations and borrowings
under its line of credit agreements will be sufficient to meet its foreseeable
cash needs in connection with its operations. As part of its business strategy,
the Company reviews many acquisition candidates in the ordinary course of
business, and in addition to acquisitions already made, the Company is
continually evaluating new acquisition and expansion possibilities. The Company
may from time to time seek to obtain debt or equity financing in its ordinary
course of business or to facilitate possible acquisitions or expansion.
Foreign Currency
Approximately 51.7%, 58.1% and 63.3% of the Company's net revenue for the years
ended December 31, 1997, 1996, and 1995, respectively, were derived from the
Company's operations outside the United States. The Company's financial
statements are denominated in U.S. dollars, and accordingly, changes in the
exchange rate between foreign currencies 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.
The Company may be subject to foreign currency transaction risk when the
Company's service contracts are denominated in a currency other than the
currency in which the Company earns fees or incurs expenses related to such
contracts. The Company limits its foreign currency transaction risk through
exchange rate fluctuation provisions stated in its contracts with customers, or
the Company may hedge its transaction risk with foreign currency exchange
contracts or options. The Company recognizes changes in value in income only
when foreign currency exchange contracts or options are settled or exercised,
respectively. There were several foreign exchange contracts relating to service
contracts open at December 31, 1997, all of which are immaterial to the Company.
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Taxes
Since the Company conducts operations on a global basis, the Company's effective
tax rate has depended and will continue to depend on the amount of profits in
locations with varying tax rates. The Company's results of operations will be
impacted by changes in the tax rates of the various jurisdictions and by changes
in any applicable tax treaties. In particular, as the portion of the Company's
non-U.S. business increases, the Company's effective tax rate may vary
significantly from period to period. The Company's effective tax rate may also
depend upon the extent to which the Company is allowed (and is able to use under
applicable limitations) U. S. foreign tax credits in respect of taxes paid on
its foreign operations.
Inflation
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
Impact of Year 2000 Issue
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of the Company's operations, including,
among other things, a temporary inability to process information; receive
information, services or products from third parties; interface with customers
in the performance of contracts; or operate or communicate in some or all of the
regions in which it operates. The Company's computing infrastructure is based on
industry standard systems. The Company does not depend on large legacy systems
and does not use mainframes. Rather, the scope of its Year 2000 Program includes
unique software systems and tools in each of its service groups, especially its
contract research service group, embedded systems in its laboratory and
manufacturing operations, facilities such as elevators and fire alarms in over
70 offices (which also involve embedded technology) and numerous supplier and
other business relationships. The Company has identified critical systems within
each service group and is devoting its resources to address these items first.
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established a
Year 2000 Program Management Office, staffed by consultants, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for the Company's Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
The Company is in the process of assessing those systems, facilities and
business relationships which it believes may be vulnerable to the Year 2000
issue and which it believes could impact its operations. Although the Company
cannot control whether and how third parties will address the Year 2000 issue,
its assessment also will include a limited evaluation of certain services on
which it is substantially dependent, and the Company plans to develop
contingency plans for possible deficiencies in those services. For example, the
Company believes that among its most significant third party service providers
are physician investigators who participate in clinical studies conducted
through its contract research services; consequently, the Company is developing
a specialized process to assess and address Year 2000 issues arising from these
relationships. The Company does not plan to assess how its customers, such as
pharmaceutical and large biotechnology companies, are dealing with the Year 2000
issue.
As the Company completes the assessment of its systems, it is developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. The Company will utilize both
internal and external resources to implement these plans. The Company's
strategic healthcare communications services are less dependent on information
technology than its other services, and the Company expects to complete all
phases of the program with respect to those services in 1998. The Company
expects to address most systems relating to its healthcare consulting services
in 1998, with completion expected in the first half of 1999. The Company also
expects to address most of its contract sales systems
11
12
State of Readiness -- Continued
in 1998, and complete development in the first half of 1999. The Company's
contract research services utilize numerous systems, which it must address
independently on disparate schedules, depending on the magnitude and complexity
of the individual system. The Company anticipates that critical deployment of
these systems (or migration to replacement systems where necessary) will occur
primarily in 1999. The Company expects to complete the core components of its
Year 2000 Program before there is a significant risk that internal Year 2000
problems will have a material impact on its operations.
Costs
The Company estimates that the aggregate costs of its Year 2000 Program will be
approximately $14 million, including costs already incurred through December 31,
1997 and costs to be incurred in 1998 and 1999. A significant portion of these
costs, approximately $6 million, are not likely to be incremental costs, but
rather will represent the redeployment of existing resources. This reallocation
of resources is not expected to have a significant impact on the Company's
day-to-day operations. The Company incurred total Year 2000 Program costs of
$3.6 million through December 31, 1997, of which approximately $2.6 million
represented incremental expense. The Company's estimates regarding the cost,
timing and impact of addressing the Year 2000 issue are based on numerous
assumptions of future events, including the continued availability of certain
resources, its ability to meet deadlines and the cooperation of third parties.
The Company cannot provide assurance that its assumptions will be correct and
that these estimates will be achieved. Actual results could differ materially
from the Company's expectations as a result of numerous factors, including the
availability and cost of personnel trained in this area, unforeseen
circumstances that would cause the Company to allocate its resources elsewhere
and similar uncertainties.
Year 2000 Risks
The Company faces both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on the Company's ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion. The decentralized nature of the Company's business
may compound this risk if it is unable to coordinate efforts across its global
operations on a timely basis. The Company believes that its Year 2000 Program
will successfully address these risks, however, the Company cannot provide
assurance that this program will be completed in a timely manner.
Notwithstanding its Year 2000 Program, the Company also faces external risks
that may be beyond its control. The Company's international operations and its
relationships with foreign third parties create additional risks for the
Company, as many countries outside the United States have been less attuned to
the Year 2000 issue. These risks include the possibility that infrastructural
systems, such as electricity, water, natural gas or telephony, will fail in some
or all of the regions in which the Company operates, as well as the danger that
the internal systems of its foreign suppliers, service providers and customers
will fail. The Company's business also requires considerable travel, and its
ability to perform services under its customer contracts could be negatively
affected if air travel is disrupted by the Year 2000 issue.
In addition, the Company's business depends heavily on the healthcare industry,
particularly on third party physician investigators. The healthcare industry,
and physicians' groups in particular, to date may not have focused on the Year
2000 issue to the same degree as some other industries, especially outside of
major metropolitan centers. As a result, the Company faces increased risk that
its physician investigators will be unable to provide it with the data that the
Company needs to perform under its contracts on time, if at all. Thus, the
clinical study involved could be slowed or brought to a halt. Also, the failure
of its customers to address the Year 2000 issue could negatively impact their
ability to utilize the Company's services. While it intends to develop
contingency plans to address certain of these risks, the Company cannot assure
you that any developed plans will sufficiently insulate it from the effects of
these risks. Any disruptions resulting from the realization of these risks would
affect the Company's ability to perform its services. If the Company is unable
to receive or process information, or if third parties are unable to provide
information or services to it, the Company may not be able to meet milestones or
obligations under its customer contracts, which could have a material adverse
effect on its business and financial results.
Contingencies
Until it has completed its remediation, testing and deployment plans, the
Company believes it is premature to develop contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue.
12
13
Recent Events
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. The acquisition of
TAG was accounted for as a purchase.
On February 27, 1998, the Company acquired More Biomedical Contract Research
Organization Ltd. ("More Biomedical"), a contract research organization based in
Taiwan. The Company acquired More Biomedical in exchange for 16,600 shares of
the Company's Common Stock. The acquisition was accounted for as a pooling of
interests.
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. The acquisition of Cardiac Alert was accounted for as a pooling of
interests.
On May 31, 1998, the Company acquired ClinData International Pty Limited
("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. The acquisition of ClinData was accounted for as a
pooling of interests.
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of QED
will be accounted for as a pooling of interests.
The Company's 1998 financial statements have been restated to include More
Biomedical, Cardiac Alert, ClinData, Simirex and QED from January 1, 1998, but
the financial statements for 1997 and prior years have not been restated because
the effect of such restatement would be immaterial.
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" which is effective for fiscal years beginning
after December 15, 1997. Statement No. 130 establishes standards for reporting
and displaying comprehensive income and its components in financial statements.
The Company will adopt Statement No. 130 in the first quarter 1998 and will
provide the financial statement disclosures as required. The application of the
new rules will not have an impact on the Company's financial position or results
from operations.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for fiscal years beginning after December 15, 1997. Statement No. 131
changes the way public companies report segment information in annual financial
statements and also requires
13
14
Recently Issued Accounting Standards -- Continued
those companies to report selected segment information in interim financial
statements to shareholders. Statement No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
The Company will adopt Statement No. 131 in 1998, which may result in additional
disclosures. The application of the new rules will not have an impact on the
Company's financial position or results from operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). Statement No. 133 requires that upon adoption, all derivative instruments
be recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt Statement No. 133 until
required to do so on January 1, 2000.
14
15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Net revenue ..................................... $ 852,900 $ 600,100 $ 368,056
Costs and expenses:
Direct ........................................ 448,920 308,886 192,899
General and administrative .................... 277,238 206,251 126,969
Depreciation and amortization ................. 37,930 25,681 17,586
Non-recurring costs:
Restructuring .............................. -- 13,102 2,373
Special pension contribution ............... -- 2,329 2,329
-------- -------- ---------
764,088 556,249 342,156
-------- -------- ---------
Income from operations .......................... 88,812 43,851 25,900
Other income (expense):
Interest income ............................... 8,472 7,206 2,562
Interest expense .............................. (8,764) (9,716) (3,846)
Non-recurring transaction costs ............... -- (17,118) --
Other ......................................... (1,985) 18 39
-------- -------- ---------
(2,277) (19,610) (1,245)
-------- -------- ---------
Income before income taxes ...................... 86,535 24,241 24,655
Income taxes .................................... 30,852 14,808 9,310
-------- -------- ---------
Net income ...................................... 55,683 9,433 15,345
Non-equity dividend ............................. -- (1,785) (719)
-------- -------- ---------
Net income available for common shareholders .... $ 55,683 $ 7,648 $ 14,626
========= ========= =========
Basic net income per share ...................... $ 0.76 $ 0.11 $ 0.23
Diluted net income per share .................... $ 0.74 $ 0.11 $ 0.23
Shares used in computing net income per share:
Basic ........................................ 73,739 69,148 63,171
Diluted ...................................... 75,275 71,785 64,946
See accompanying notes.
15
16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------
1997 1996
---- ----
Assets
Current assets:
Cash and cash equivalents ................ $ 80,247 $ 74,474
Accounts receivable and unbilled services 219,438 193,346
Investments .............................. 44,372 37,623
Prepaid expenses ......................... 22,276 10,164
Other current assets ..................... 24,456 4,907
-------- --------
Total current assets ............. 390,789 320,514
Property and equipment:
Land, buildings and leasehold improvements 83,383 51,125
Equipment and software ................... 116,065 69,153
Furniture and fixtures ................... 29,124 31,723
Motor vehicles ........................... 39,875 30,827
-------- --------
268,447 182,828
Less accumulated depreciation ............ 81,481 56,132
-------- --------
186,966 126,696
Intangibles and other assets:
Intangibles .............................. 72,395 71,170
Investments .............................. 69,089 25,083
Deferred income taxes .................... 68,651 --
Deposits and other assets ................ 26,137 11,156
-------- --------
236,272 107,409
-------- --------
Total assets ..................... $814,027 $554,619
======== ========
See accompanying notes.
16
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
DECEMBER 31,
------------
1997 1996
---- ----
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit .................................................... $ 10,485 $ 9,051
Accounts payable ................................................... 36,385 37,612
Accrued expenses ................................................... 62,818 56,891
Unearned income .................................................... 89,069 86,606
Income taxes payable ............................................... 132 4,081
Current portion of obligations held under capital
leases .......................................................... 15,019 11,943
Current portion of long-term debt .................................. 23 2,204
Other current liabilities .......................................... 11,871 12,339
--------- ---------
Total current liabilities .................................. 225,802 220,727
Long-term liabilities:
Obligations held under capital leases, less current
portion ......................................................... 8,269 5,577
Long-term debt and obligation, less current portion ................ 162,200 165,769
Deferred income taxes .............................................. 25,963 4,952
Other liabilities .................................................. 3,154 7,066
--------- ---------
199,586 183,364
--------- ---------
Total liabilities .......................................... 425,388 404,091
Commitments and contingencies
Shareholders' Equity:
Preferred stock, none issued and outstanding ....................... -- --
Common Stock and additional paid-in capital, 75,304,156
and 70,116,106 shares issued and outstanding at December 31, 1997
and 1996, respectively .......................................... 336,144 140,356
Retained earnings .................................................. 60,684 10,807
Other equity ....................................................... (8,189) (635)
--------- ---------
Total shareholders' equity ................................. 388,639 150,528
--------- ---------
Total liabilities and shareholders' equity ................. $ 814,027 $ 554,619
========= =========
See accompanying notes.
17
18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Operating activities:
Net income ................................................ $ 55,683 $ 9,433 $ 15,345
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ........................... 37,930 26,298 17,586
Non-recurring transaction costs ......................... -- 17,118 --
Net loss (gain) on sale of property and equipment ....... 665 21 (216)
Provision for deferred income tax expense ............... 10,296 916 2,050
Change in operating assets and liabilities:
Accounts receivable and unbilled services ............. (30,270) (72,598) (38,814)
Prepaid expenses and other assets ..................... (16,108) (12,371) (737)
Accounts payable and accrued expenses ................. 11,555 30,537 17,950
Unearned income ....................................... 815 47,816 20,545
Income taxes payable and other current liabilities .... 9,023 3,810 157
Change in fiscal year of pooled entity .................. (581) (9,378) --
Other ................................................... 60 (41) 199
--------- --------- --------
Net cash provided by operating activities ................. 79,068 41,561 34,065
Investing activities
Proceeds from disposition of property and equipment ..... 4,642 2,284 4,500
Purchase of investments held-to-maturity ................ -- (95,939) --
Maturities of investments held-to-maturity .............. 35,579 43,345 --
Purchase of investments available-for-sale .............. (137,597) (19,020) --
Proceeds from sale of investments available-for-sale .... 51,278 8,960 --
Purchase of other investments ........................... (12,011) -- --
Acquisition of property and equipment ................... (79,283) (40,583) (26,548)
Acquisition of businesses, net of cash acquired ......... (11,751) (35,108) (16,571)
Payment of non-recurring transaction costs .............. (5,648) (11,440) --
Change in fiscal year of pooled entity .................. (17) 2,606 --
Other ................................................... -- -- (110)
--------- --------- --------
Net cash used in investing activities ..................... $(154,808) $(144,895) $(38,729)
18
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
Financing activities
Increase in lines of credit, net ......................... $ 660 $ 2,544 $ 3,943
Proceeds from issuance of debt ........................... -- 139,650 568
Repayment of debt ........................................ (7,727) (57,271) (1,432)
Principal payments on capital lease obligations .......... (16,778) (9,627) (6,691)
Issuance of common stock ................................. 108,834 3,678 56,746
Issuance of debt for capitalization of pooled entity ..... -- 45,197 --
Recapitalization of pooled entity ........................ -- (29,230) --
Non-equity dividend ...................................... -- (1,756) (677)
Dividend paid by pooled entity ........................... (1,632) (1,390) (9,162)
Change in fiscal year of pooled entity ................... 58 1,399 --
Other .................................................... (56) (295) (6,047)
--------- --------- --------
Net cash provided by financing activities .................. 83,359 92,899 37,248
Effect of foreign currency exchange rate changes on cash ... (1,846) 340 (26)
--------- --------- --------
Increase (decrease) in cash and cash equivalents ........... 5,773 (10,095) 32,558
Cash and cash equivalents at beginning of year ............. 74,474 84,569 52,011
--------- --------- --------
Cash and cash equivalents at end of year ................... $ 80,247 $ 74,474 $ 84,569
========= ========= ========
Supplemental Cash Flow Information
Interest paid ............................................ $ 8,891 $ 9,415 $ 2,734
Income taxes paid ........................................ 16,774 12,740 9,969
Non-cash Investing and Financing Activities
Capitalized leases ....................................... 23,027 13,210 11,881
Equity impact of mergers and acquisitions ................ 1,134 (23,253) 11,803
Equity impact from exercise of non-qualified stock options 24,049 2,920 --
Tax effect of pooled transactions ......................... $ 62,700 $ -- $ --
See accompanying notes.
19
20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
EMPLOYEE
STOCK
OWNERSHIP
ADDITIONAL PLAN LOAN CURRENCY
COMMON PAID-IN RETAINED GUARANTEE TRANSLATION
STOCK CAPITAL EARNINGS & OTHER ADJUSTMENTS TOTAL
----- ------- -------- ------- ----------- -----
Balance, December 31, 1993, as $209 $ 63,138 $ 26,294 $(1,958) $ 1,332 $ 89,015
previously reported .............
Adjustments for pooling of interests 10 277 829 62 -- 1,178
---- --------- -------- ------- ------- ---------
Balance, December 31, 1994 ......... 219 63,415 27,123 (1,896) 1,332 90,193
Issuance of common stock ........... 10 56,893 -- -- -- 56,903
Principal payments on ESOP
loan ............................. -- -- -- 401 -- 401
Common stock issued for
acquisitions ..................... 4 11,799 31 -- -- 11,834
Issuance of common stock for other
than cash ....................... 2 220 -- -- -- 222
Reduction of liability under
stock option plan, net of
tax .............................. -- 693 -- -- -- 693
Dividends paid by pooled
entity ........................... -- -- (9,162) -- -- (9,162)
Non-equity dividend ................ -- -- (719) -- -- (719)
Two-for-one stock split ............ 107 (107) -- -- -- --
Other equity transactions .......... -- (135) -- -- 368 233
Net income ......................... -- -- 15,345 -- -- 15,345
---- --------- -------- ------- ------- ---------
Balance, December 31, 1995 ......... 342 132,778 32,618 (1,495) 1,700 165,943
Common stock issued for
acquisitions ..................... 3 516 608 -- -- 1,127
Issuance of common stock ........... 13 3,835 -- -- -- 3,848
Issuance of common stock for other
than cash ........................ 1 135 -- -- -- 136
Principal payments on ESOP
loan ............................. -- -- -- 420 -- 420
Effect due to change in fiscal
year of pooled company ........... -- -- 324 -- -- 324
Recapitalization of pooled
entity ........................... -- (202) (29,028) -- -- (29,230)
Tax benefit from the exercise
of non-qualified stock
options .......................... -- 2,920 -- -- -- 2,920
Dividends paid by pooled entity .... -- -- (1,381) -- -- (1,381)
Non-equity dividend ................ -- -- (1,785) -- -- (1,785)
Other equity transactions .......... -- 15 18 (17) (1,243) (1,227)
Net income ......................... -- -- 9,433 -- -- 9,433
---- --------- -------- ------- ------- ---------
Balance, December 31, 1996 ......... 359 139,997 10,807 (1,092) 457 150,528
Issuance of common stock ........... 24 112,741 -- -- -- 112,765
Principal payments on ESOP loan .... -- -- -- 536 -- 536
Common stock issued for
acquisitions ..................... -- 244 (352) -- -- (108)
Issuance of common stock for other
than cash ........................ 1 19 -- -- -- 20
Effect due to change in fiscal year
of pooled entity ................. -- -- (3,775) -- 117 (3,658)
Two-for-one stock split ............ 369 (369) -- -- -- 0
Tax effect of pooling of interests . -- 62,700 -- -- -- 62,700
Tax benefit from the exercise of
non-qualified stock options ..... -- 20,118 -- -- -- 20,118
Dividend paid by pooled entity .... -- (72) (1,679) -- -- (1,751)
Other equity transactions .......... -- 13 -- (104) (8,103) (8,194)
Net income ......................... -- -- 55,683 -- -- 55,683
---- --------- -------- ------- ------- ---------
Balance, December 31, 1997 ......... $753 $ 335,391 $ 60,684 $ (660) $(7,529) $ 388,639
==== ========= ======== ======= ======= =========
See accompanying notes.
20
21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Company is a leader in providing full-service contract research,
sales, marketing and healthcare policy consulting and health information
management services to the worldwide pharmaceutical, biotechnology, medical
device and healthcare industries.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts and operations of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Revenues, costs and expenses are recorded at average rates of exchange
during the year. Translation adjustments resulting from this process are
charged or credited to equity. Gains and losses on foreign currency
transactions are included in other income (expense).
REVENUE RECOGNITION
Many of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. The
Company is also party to fee-for-service and unit-of-service contracts. The
Company recognizes net revenue based upon (1) labor costs expended as a
percentage of total labor costs expected to be expended (percentage of
completion) for fixed price contracts, (2) contractual per diem or hourly rate
basis as work is performed under fee-for-service contracts or (3) completion of
units of service for unit-of-service contracts.
The Company's contracts provide for price renegotiation upon scope of
work changes. The Company recognizes revenue related to these scope changes
when the underlying services are performed and realization is assured. Most
contracts are terminable upon 15 - 90 days' notice by the customer. In the
event of termination, contracts typically require payment for services rendered
through the date of termination, as well as for subsequent services rendered to
close out the contract. Any anticipated losses resulting from contract
performance are charged to earnings in the period identified.
CONCENTRATION OF CREDIT RISK
Substantially all net revenue is earned by performing services under
contracts with various pharmaceutical, biotechnology, medical device and
healthcare companies. The concentration of credit risk is equal to the
oustanding accounts receivable and unbilled services balances, less the
unearned income related thereto, and such risk is subject to the financial and
industry conditions of the Company's customers. The Company does not require
collateral or other securities to support customer receivables. Credit losses
have consistently been within management's expectations. One customer accounted
for 11.5% of consolidated net revenue in 1996.
UNBILLED SERVICES AND UNEARNED INCOME
In general, prerequisites for billings and payments are established by
contractual provisions including predetermined payment schedules, submission of
appropriate billing detail or the achievement of contract milestones, depending
on the type of contract. Unbilled services arise when services have been
rendered but clients have not been billed. Similarly, unearned income
represents prebillings for services that have not yet been rendered.
21
22
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company does
not report in the accompanying balance sheets cash held for clients for
investigator payments in the amount of $9.5 million and $4.6 million at
December 31, 1997 and 1996, respectively, that pursuant to agreements with
these clients, remains the property of the clients.
The Company's investments in debt and marketable equity securities are
classified as held-to-maturity and available-for-sale. Investments classified
as held-to-maturity are recorded at amortized cost. Investments classified as
available-for-sale are measured at market value and net unrealized gains and
losses are recorded as a component of stockholders' equity until realized. In
addition, the Company has $13.1 million and $1.5 million in deposits and other
assets at December 31, 1997 and 1996, respectively, that represents investments
in equity securities for which there are not readily available market values.
Any gains or losses on sales of investments are computed by specific
identification.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost and are
depreciated using the straight-line method over the shorter of the asset's
estimated useful life or the lease term ranging from three to 50 years as
follows:
Buildings and leasehold improvements 3 - 50 years
Equipment and software 3 - 10 years
Furniture and fixtures 5 - 10 years
Motor vehicles 3 - 5 years
INTANGIBLE ASSETS
Intangibles consist principally of the excess cost over the fair value
of net assets acquired ("goodwill") and are being amortized on a straight-line
basis over periods from ten to 40 years. Accumulated amortization totaled $12.8
million and $10.5 million at December 31, 1997 and 1996, respectively.
The carrying values of intangible assets are reviewed if the facts and
circumstances suggest impairment. If this review indicates that carrying values
will not be recoverable, as determined based on undiscounted cash flows over
the remaining amortization period, the Company would reduce carrying values by
the estimated shortfall of discounted cash flows.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128, "Earnings per Share" which established new standards
for computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements and has restated all prior year net income per share information.
Basic net income per share was determined by dividing net income available for
common shareholders by the weighted average number of common shares outstanding
during each year. Diluted net income per share reflects the potential dilution
that could occur assuming conversion or exercise of all convertible securities
and issued and unexercised stock options. A reconciliation of the net income
available for common shareholders and number of shares used in computing basic
and diluted net income per share is in Note 4.
INCOME TAXES
Income tax expense includes U.S. and international income taxes.
Certain items of income and expense are not reported in tax returns and
financial statements in the same year. The tax effects of these differences are
reported as deferred income taxes. Tax credits are accounted for as a reduction
of tax expense in the year in which the credits reduce taxes payable.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs relating principally to new software
applications and computer technology are charged to expense as incurred. These
expenses totaled $2.8 million, $2.3 million and $1.9 million in 1997, 1996 and
1995, respectively.
22
23
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
EMPLOYEE STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" APB 25 and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
FOREIGN CURRENCY HEDGING
The Company uses foreign exchange contracts and options 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 recognizes changes in value
in income only when contracts are settled or options are exercised. There were
several foreign exchange contracts relating to service contracts open at
December 31, 1997, all of which are immaterial to the Company.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been
reclassified to conform with the 1997 financial statement presentation. The
reclassifications had no effect on previously reported net income available to
common shareholders, shareholders' equity or net income per share.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income" which is effective for fiscal years beginning after December 15, 1997.
Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The Company
will adopt Statement No. 130 in the first quarter of 1998 and will provide the
financial statement disclosures as required. The application of the new rules
will not have an impact on the Company's financial position or results from
operations.
In June 1997, FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which is effective for
fiscal years beginning after December 15, 1997. Statement No. 131 changes the
way public companies report segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements to shareholders. Statement No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt Statement No. 131
in 1998, which will result in additional disclosures. The application of the
new rules will not have an impact on the Company's financial position or
results from operations.
2. SHAREHOLDERS' EQUITY
The Company is authorized to issue 25 million shares of preferred
stock, $.01 per share par value. At December 31, 1997, 200 million common
shares of $.01 par value were authorized.
In October 1997, the Board of Directors authorized a two-for-one split
of the Company's Common Stock in the form of a 100% stock dividend. A total of
36,920,627 shares of Common Stock were issued in connection with the split. The
stated par value of each share was not changed from $.01. A total of $369,000
was reclassified from additional paid-in capital to Common Stock. All
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of Common Stock have been restated to
reflect the stock split.
In March 1997, the Company completed a stock offering of 11,040,000
shares of its Common Stock. Of the shares sold, 2,830,000 shares were sold by
the Company and 8,210,000 shares by certain selling shareholders. The offering
provided the Company with approximately $84.3 million, net of expenses.
In April 1996, in anticipation of a planned initial public offering,
Innovex was recapitalized by the purchase of the entire issued share capital of
Innovex Holdings Limited (the former holding company of the Innovex Group) from
its shareholders in exchange for a combination of newly issued Ordinary Shares,
Preferred Ordinary Shares (the "Preferred Shares"), loan notes and cash. In
exchange for its holdings in Innovex Holdings Limited, the principal
shareholder received 67,994,225
23
24
2. SHAREHOLDERS' EQUITY -- CONTINUED
newly issued Ordinary Shares of Innovex Limited, approximately $26.0 million of
loan notes and approximately $2.4 million of cash. In exchange for their
respective holdings, certain investors received 14,285,720 newly issued
Preferred Shares, and certain members of management received 4,637,080 Ordinary
Shares. Pursuant to an investment agreement, Innovex also issued 28,533,345
additional preferred shares and created and issued 11 million 7.5% preference
shares (the "Preference Shares") and approximately $10.7 million of loan stock.
In connection with the Preference Shares, the Company paid $846,000 of
non-equity dividends in 1996. Prior to the recapitalization, Innovex paid a
dividend of $9.2 million to the principal shareholder and made a special pension
contribution of $2.3 million. In connection with the Innovex merger, the Company
has paid $56.8 million of Innovex obligations.
3. MERGERS AND ACQUISITIONS
On June 2, 1997, the Company acquired Butler in exchange for 428,610
shares of the Company's Common Stock. On February 2, 1998, the Company acquired
Pharma in exchange for 132,000 shares of the Company's Common Stock. On February
26, 1998, the Company acquired T2A in exchange for 311,899 shares of the
Company's Common Stock. On August 24, 1998, the Company acquired Royce in
exchange for 664,194 shares of the Company's Common Stock. On September 9, 1998,
the Company acquired DAS in exchange for 358,897 shares of the Company's Common
Stock. These transactions were accounted for by the pooling of interests method
and are included in the accompanying restated consolidated financial statements.
The following are reconciliations of net revenue and net income
available for common shareholders previously reported by the Company for the
years ended December 31, 1997, 1996 and 1995, with the combined amounts
currently presented in the financial statements for those years:
YEAR ENDED DECEMBER 31, 1997
----------------------------
AS PREVIOUSLY CONSOLIDATED,
(IN THOUSANDS) REPORTED T2A PHARMA ROYCE DAS AS RESTATED
---------- --- ------ ----- --- ------------
NET REVENUE $814,476 $ 22,161 $3,652 $7,363 $5,248 $852,900
NET INCOME AVAILABLE
FOR COMMON SHAREHOLDERS $ 55,316 $ (313) $ 186 $ 196 $ 298 $ 55,683
YEAR ENDED DECEMBER 31, 1996
----------------------------
AS PREVIOUSLY CONSOLIDATED,
(IN THOUSANDS) REPORTED T2A BUTLER PHARMA ROYCE DAS AS RESTATED
---------- --- ------ ------ ----- --- ------------
NET REVENUE $554,227 $26,115 $10,917 $3,400 $ 2,090 $3,351 $600,100
NET INCOME AVAILABLE FOR
COMMON SHAREHOLDERS $ 7,097 $ 148 $ 313 $ 257 $ (220) $ 53 $ 7,648
YEAR ENDED DECEMBER 31, 1995
----------------------------
AS PREVIOUSLY CONSOLIDATED,
(IN THOUSANDS) REPORTED T2A PHARMA ROYCE DAS AS RESTATED
---------- --- ------ ----- --- ------------
NET REVENUE $337,006 $ 25,477 $2,479 $1,283 $1,811 $368,056
NET INCOME AVAILABLE FOR
COMMON SHAREHOLDERS $ 15,349 $ (910) $ 126 $ 65 $ (4) $ 14,626
On June 11, 1997, the Company acquired 100% of the stock of MAC, a
leading international strategic medical communications consultancy, for
1,131,394 shares of the Company's Common Stock. On July 2, 1997, the Company
acquired CVA, a contract research organization that is a leader in stroke
clinical trials, through an exchange of 100% of CVA'S stock for 467,936 shares
of the Company's Common Stock. On August 29, 1997, the Company acquired
Clindepharm in exchange for 477,966 shares of the Company's Common Stock. These
transactions were accounted for by the pooling of interests method and were
previously included in the Company's historical consolidated financial
statements.
24
25
3. MERGERS AND ACQUISITIONS -- CONTINUED
The following is a summary of the net revenue and net income available
for common shareholders from the beginning of the year through the date of
combination for companies acquired in transactions accounted for as poolings of
interests in 1997 (in thousands):
(In thousands) MAC CVA Clindepharm Others
--- --- ----------- ------
Net revenue $ 5,733 $ 2,382 $ 3,437 $ 9,034
Net income available for
common shareholders $ 1,013 $ 332 $ 1,062 $ 1,153
On November 29, 1996, the Company acquired 100% of the outstanding
stock of Innovex, an international contract pharmaceutical organization based
in Marlow, U.K., for 18,428,478 shares of the Company's Common Stock and the
exchange of options to purchase 1,572,452 shares of the Company's Common Stock.
On November 22, 1996, the Company acquired BRI, a global contract research
organization, through an exchange of 100% of BRI's stock for 3,229,724 shares
of the Company's Common Stock. Related to the Innovex and BRI transactions, the
Company recognized approximately $17.1 million in non-recurring transaction
costs and approximately $10.7 million in non-recurring restructuring costs.
These transactions were accounted for by the pooling of interests method and
were previously included in the Company's previously reported historical
financial statements.
On May 13, 1996, the Company acquired the operating assets of
Lewin-VHI, Inc., a healthcare consulting company, for approximately $30 million
in cash. The Company recorded approximately $20 million related to the excess
cost over the fair value of net assets acquired. The acquisition was accounted
for as a purchase and accordingly, the financial statements include the results
of operations of the business from the date of acquisition.
In addition to the above mergers and acquisitions, the Company has
completed other mergers and acquisitions all of which are immaterial to the
financial statements. For such immaterial pooling of interests transactions,
the Company's financial statements for the year of the transaction have been
restated to include the pooled companies from January 1 of that year, but the
financial statements for years prior to the year of the transaction have not
been restated because the effect of such restatement would be immaterial.
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):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
Net income available for common shareholders:
Net income $55,683 $ 9,433 $ 15,345
Non-equity dividend -- (1,785) (719)
------- -------- --------
Net income available for common shareholders -
basic and diluted net income per share $55,683 $ 7,648 $ 14,626
======= ======== ========
Weighted average shares:
Basic net income per share - weighted average shares 73,739 69,148 63,171
Effect of dilutive securities:
Stock options 1,536 2,637 1,775
------- -------- --------
Diluted net income per share - adjusted weighted-average shares
and assumed conversions 75,275 71,785 64,946
======= ======== ========
Basic net income per share $ 0.76 $ 0.11 $ 0.23
======= ======== ========
Diluted net income per share $ 0.74 $ 0.11 $ 0.23
======= ======== ========
Options to purchase 1.8 million shares of common stock with exercise
prices ranging between $35.25 and $41.375 per share were outstanding during
1997 but were not included in the computation of diluted net income per share
because the options' exercise price was greater than the average market price
of the common shares and, therefore, the effect would be antidilutive.
25
26
4. NET INCOME PER SHARE -- CONTINUED
The conversion of the Company's 4.25% Convertible Subordinated Notes
("Notes") into approximately 3.5 million shares of common stock was not
included in the computation of diluted net income per share because the effect
would be antidilutive.
For additional disclosures regarding the outstanding stock options and
the Notes, see "Employee Benefit Plans" and "Credit Arrangements and
Obligations."
5. CREDIT ARRANGEMENTS AND OBLIGATIONS
On May 23, 1996, the Company completed a private placement of $143.75
million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. Net
proceeds to the Company amounted to approximately $139.7 million. The Notes are
convertible into 3,474,322 shares of Common Stock, at the option of the holder,
at a conversion price of $41.37 per share, subject to adjustment under certain
circumstances, at any time after August 21, 1996. The Notes are redeemable, at
the option of the Company, beginning May 31, 1999. Interest is payable on the
notes semi-annually on May 31 and November 30 each year.
The Company has a (pound)15.0 million (approximately $25.2 million)
line of credit which is guaranteed by certain of the Company's U.K.
subsidiaries. Interest is charged at the bank's base rate (7.25% at December
31, 1997), plus 1%, with a minimum of 5.5%. The line of credit had an
outstanding balance of (pound)1.5 million (approximately $2.5 million) and
(pound)4.7 million (approximately $6.6 million) at December 31, 1997 and 1996,
respectively.
The Company has a (pound)5.0 million (approximately $8.4 million) line
of credit with a second U.K. bank. The line of credit is charged interest at
the bank's published base rate (7.25% at December 31, 1997) plus 1.5%. The line
of credit had an outstanding balance of (pound)4.7 million (approximately $7.8
million) and (pound)1.4 million (approximately $2.4 million) at December 31,
1997 and 1996, respectively.
The Company has a $350,000 line of credit with a U.S. bank. The line
of credit is charged interest at prime plus 1%. The line of credit had an
outstanding balance of $150,000 at December 31, 1997.
In March 1995, Quintiles Scotland Limited, a wholly-owned subsidiary
of the Company, acquired assets of a drug development facility in Edinburgh,
Scotland from Syntex Pharmaceuticals Limited, a member of the Roche group based
in Basel, Switzerland for a purchase commitment valued at (pound)13.0 million
(approximately $21.0 million), with payment due in December 1999. As of
December 31, 1997 and 1996, the Company has committed to purchasing
approximately (pound)1.5 million (approximately $2.3 million) and
(pound) 600,000 (approximately $852,000), respectively, under foreign exchange
contracts. The Company is obligated to purchase up to an additional (pound)5.9
million through December 28, 1999 in varying amounts as the daily
dollar-to-pound exchange rate ranges between $1.5499 and $1.6800.
Long-term debt and obligation consist of the following (in thousands):
DECEMBER 31,
------------
1997 1996
---- ----
4.25% Convertible Subordinated Notes due 2000 ......$143,750 $143,750
Employee Stock Ownership Plan notes payable due
1997 ............................................... -- 1,138
Other Notes Payable ................................ 23 4,744
Long-Term Obligation ............................... 20,985 21,823
-------- --------
164,758 171,455
Less: Current Portion ......................... 23 2,204
Unamortized Issuance Costs ........... 2,535 3,482
-------- --------
$162,200 $165,769
======== ========
Maturities of long-term debt and obligation at December 31, 1997 are
as follows (in thousands):
1998 $ 23
1999 20,985
2000 143,750
---------
$ 164,758
=========
26
27
6. INVESTMENTS
The following is a summary as of December 31, 1997 of held-to-maturity
securities and available-for-sale securities by contractual maturity where
applicable (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE
---------------------------- ---- ----- ------ -----
U.S. Government Securities --
Maturing in one year or less $ 5,892 $ 15 $ -- $ 5,907
Maturing between one and three years 2,814 16 -- 2,830
State and Municipal Securities --
Maturing in one year or less 2,688 9 -- 2,697
Maturing between one and three years 2,329 17 -- 2,346
Other 2,312 97 -- 2,409
---------- ---------- ----------- ----------
$ 16,035 $ 154 $ -- $ 16,189
========== ========== =========== ==========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
------------------ ---- ----- ------ -----
SECURITIES:
-----------
U.S. Government Securities --
Maturing in one year or less $ 2,499 $ -- $ -- $ 2,499
Maturing between one and three years 52,061 -- (57) 52,004
Maturing between three and five years 7,000 5 -- 7,005
State and Municipal Securities --
Maturing in one year or less 3,060 -- -- 3,060
Maturing between one and three years -- -- -- --
Maturing between three and five years 2,595 30 -- 2,625
Money Funds 30,301 -- (68) 30,233
--------- ---------- ----------- ----------
$ 97,516 $ 35 $ (125) $ 97,426
========= ========== =========== ==========
The following is a summary as of December 31, 1996 of held-to-maturity
securities and available-for-sale securities by contractual maturity where
applicable (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY COST GAINS LOSSES VALUE
---------------- ---- ----- ------ -----
SECURITIES:
-----------
U.S. Government Securities --
Maturing in one year or less $ 5,707 $ -- $ -- $ 5,707
Maturing between one and three years 9,951 -- -- 9,951
State and Municipal Securities --
Maturing in one year or less 22,327 -- -- 22,327
Maturing between one and three years 5,065 -- -- 5,065
Other 8,564 -- -- 8,564
--------- ---------- ----------- ----------
$ 51,614 $ -- $ -- $ 51,614
========= ========== =========== ==========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
------------------ ---- ----- ------ -----
SECURITIES:
-----------
U.S. Government Securities --
Maturing between one and three years $ 10,008 $ 59 $ -- $ 10,067
Money Funds 1,019 6 -- 1,025
--------- ---------- ----------- ----------
$ 11,027 $ 65 -- $ 11,092
========= ========== =========== ==========
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28
7. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
------------
1997 1996
---- ----
Trade:
Billed $ 129,397 $ 129,834
Unbilled services 80,108 54,798
--------- ---------
209,505 184,632
Other 11,753 10,760
Allowance for doubtful
accounts (1,820) (2,046)
--------- ---------
$ 219,438 $ 193,346
========= =========
The Company provides professional services involved in the
development, testing, approval, sale and marketing of new drugs. Substantially
all of the Company's accounts receivable are due from companies in the
pharmaceutical and biotechnology industries located in the Americas and Europe.
The percentage of accounts receivable and unbilled services by region is as
follows:
DECEMBER 31,
------------
REGION 1997 1996
------ ---- ----
Americas
United States 46% 44%
Other 1 1
--------- ---------
Americas 47 45
Europe and Africa:
United Kingdom 36 38
Western Europe 14 15
Eastern Europe 0 0
South Africa 1 0
--------- ---------
Europe and Africa 51 53
Asia - Pacific 2 2
--------- ---------
100% 100%
========= =========
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
------------
1997 1996
---- ----
Compensation and payroll taxes .............. $ 30,754 $ 24,551
Transaction and restructuring costs ......... 2,751 16,047
Other ....................................... 29,313 16,293
--------- ----------
$ 62, 818 $ 56,891
========= ==========
9. LEASES
The Company leases certain office space and equipment under operating
leases. The leases expire at various dates through 2049 with options to cancel
certain leases at five-year increments. Some leases contain renewal options.
Annual rental expenses under these agreements were approximately $25.4 million,
$22.5 million and $11.3 million for the years ended December 31, 1997, 1996 and
1995, respectively. The Company leases certain assets, primarily vehicles,
under capital leases. Capital lease amortization is included with depreciation
and amortization expenses and accumulated depreciation in the accompanying
financial statements.
28
29
9. LEASES -- CONTINUED
The following is a summary of future minimum payments under
capitalized leases and under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1997 (in
thousands):
CAPITAL OPERATING
LEASES LEASES
--------- ---------
1998 ......................................... $ 16,802 $ 29,625
1999 ......................................... 8,255 23,997
2000 ......................................... 9 19,504
2001 ......................................... -- 14,844
2002 ......................................... -- 13,095
Thereafter ................................... -- 47,512
-------- --------
Total minimum lease payments ................. 25,066 $148,577
========
Amounts representing interest ................ 1,778
--------
Present value of net minimum payments......... 23,288
Current portion............................... 15,019
--------
Long-term capital lease obligations........... $ 8,269
========
10. INCOME TAXES
The components of income tax expense are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Current:
Federal .............................. $11,201 $ 5,185 $ 4,313
State ................................ 2,655 1,735 856
Foreign .............................. 6,783 6,582 2,216
------- -------- --------
20,639 13,502 7,385
Deferred Expense (benefit):
Federal .............................. 7,717 (632) 744
Foreign .............................. 2,496 1,938 1,181
------- -------- --------
$30,852 $ 14,808 $ 9,310
======= ======== ========
Tax benefits of $62.7 million from goodwill arising in connection with
a taxable pooling of interests business combination and $20.1 million from
non-qualified stock options exercised were allocated directly to contributed
capital.
The Company's consolidated effective tax rate differed from the
statutory rate as set forth below (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- -------- --------
Federal taxes at statutory rate $30,288 $ 8,485 $ 8,629
State and local income taxes net of federal benefit 1,745 1,101 635
Non-deductible transaction costs -- 4,761 --
Foreign earnings taxed at different rates 608 226 154
Foreign losses for which no benefit has been recognized -- -- 646
Utilization of net operating loss carryforwards (636) -- (1,520)
Non-taxable income (1,521) -- --
Other 368 235 766
------- -------- --------
$ 30,852 $ 14,808 $ 9,310
======== ======== ========
Income before income taxes from foreign operations was approximately
$4.4 million, $24.9 million and $10.2 million for the years 1997, 1996 and
1995, respectively. Income from foreign operations was approximately $35.5
million, $26.1 million and $13.2 million for the years 1997, 1996 and 1995,
respectively. The difference between income from operations and income before
income taxes is due primarily to intercompany charges which eliminate upon
consolidation. Undistributed earnings of the Company's foreign subsidiaries
amounted to approximately $38.2 million at December 31, 1997. Those earnings
are considered
29
30
10. INCOME TAXES -- CONTINUED
to be indefinitely reinvested, and accordingly, no U.S. federal and state
income taxes have been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various countries.
The tax effects of temporary differences that give rise to significant
portions of deferred tax (assets) liabilities are presented below (in
thousands):
YEAR ENDED
DECEMBER 31,
------------
1997 1996
---- ----
Deferred tax liabilities:
Depreciation and amortization $ 24,031 $ 16,359
Prepaid expenses 1,335 1,034
Other 2,733 418
-------- --------
Total deferred tax liabilities 28,099 17,811
Deferred tax assets:
Net operating loss carryforwards (17,532) (7,028)
Accrued expenses and unearned income (7,104) (5,345)
Goodwill net of amortization (101,095) (675)
Non-deductible transaction costs -- (2,206)
Other (4,783) (2,445)
-------- --------
Total deferred tax assets (130,514) (17,699)
Valuation allowance for deferred tax assets 54,879 4,840
-------- --------
Net deferred tax assets (75,635) (12,859)
-------- --------
Net deferred tax (assets) liabilities $(47,536) $ 4,952
======== ========
The increase in the Company's valuation allowance for deferred tax
assets to $54.9 million at December 31, 1997 from $4.8 million at December 31,
1996 is primarily due to projected foreign tax credit limitations. In
connection with the Innovex acquisition, the Company established an initial
deferred tax asset of $108 million to reflect the tax benefits arising from the
deductibility of goodwill recorded for tax purposes. The Innovex business
combination was accounted for as a pooling of interests for financial reporting
purposes, and no goodwill was recorded. In addition, the Company recorded a
$45.3 million valuation allowance related to this taxable goodwill to reflect
uncertainties that might affect the realization of this deferred tax asset.
These uncertainties include the projection of future taxable and foreign source
income, the interplay of U.S. tax statutes and the Company's ability to
minimize foreign tax credit limitations. Based on its analysis, the Company
believes it is more likely than not that a portion of the deferred tax asset
related to this taxable goodwill will not be recognized. The resulting net
asset of $62.7 million was recorded as an increase to additional paid-in
capital.
The Company's deferred income tax expense results from the following
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
Excess (deficiency) of tax over financial reporting:
Depreciation and amortization $ 14,936 $ 9,414 $ 1,681
Net operating loss carryforwards (6,693) (1,907) 1,025
Accrued expenses and unearned income (874) (4,368) 256
Benefit plans -- -- (656)
Other items, net 2,843 (1,834) (381)
------- ---------- --------
$ 10,212 $ 1,305 $ 1,925
======== ========== ========
The U.K. subsidiaries qualify for Scientific Research Allowances
(SRAs) for 100% of capital expenditures on certain assets under the Inland
Revenue Service guidelines. For 1997, 1996 and 1995, these allowances were $28
million, $11 million and $6 million, respectively, which helped to generate net
operating loss carryforwards of $26 million to be used to offset taxable income
in that country. Assuming the U.K. subsidiaries continue to invest in qualified
capital expenditures at an adequate level, the portion of the deferred tax
liability relating to the U.K. subsidiaries may be deferred indefinitely.
Innovex has German net operating loss carryforwards that do not expire of $3
million to be used to offset taxable income in that country. Quintiles
Transnational has U.S. state net operating loss carryforwards of approximately
$8 million which will be available through 2002. In addition, Innovex, Inc. has
U.S. federal net operating loss carryforwards of approximately $4 million which
will expire beginning 2005.
30
31
11. EMPLOYEE BENEFIT PLANS
The Company has numerous employee benefit plans which cover
substantially all eligible employees in the countries in which the plans are
offered. Contributions are primarily discretionary, except in some countries
where contributions are contractually required. Plans include Approved Profit
Sharing Schemes in the U.K. and Ireland which are funded with Company stock, a
defined contribution plan funded by Company stock in Australia, Belgium and
Canada, defined contribution plans in Belgium, Holland, Sweden, and Great
Britain, a profit sharing scheme in France, and defined benefit plans in
Germany and the U.K. The defined benefit plan in Germany is an unfunded plan
which is provided for in the balance sheet. In addition, the Company sponsors a
supplemental non-qualified deferred compensation plan, covering certain
management employees.
The Company has a leveraged Employee Stock Ownership Plan ("ESOP")
which provides benefits to eligible employees. Contributions and related
compensation expenses for this plan totaled $568,000, $585,000 and $734,000 in
1997, 1996 and 1995, respectively. Interest paid by the Company on the ESOP
loan was approximately $80,000, $130,000 and $157,000 for 1997, 1996 and 1995,
respectively. Shares allocated to participants totaled 1,773,000 at December
31, 1997. Unallocated shares totaled 152,100 as of December 31, 1997 with a
fair market value of $5.8 million.
The Company has an employee savings and investment plan (401(k) Plan)
available to all eligible employees meeting certain specified criteria. The
Company matches employee deferrals at varying percentages, set at the
discretion of the Board of Directors. For the years ended December 31, 1997,
1996 and 1995, the Company expensed $1.5 million, $539,000 and $177,000,
respectively as matching contributions.
On July 25, 1996, the Company's Board of Directors adopted the
Quintiles Transnational Corp. Employee Stock Purchase Plan (the "Purchase
Plan") which is intended to provide eligible employees an opportunity to
acquire the Company's Common Stock. Participating employees have the option to
purchase shares at 85% of the lower of the closing price per share of common
stock on the first or last day of the calendar quarter. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended. The Board of Directors has
reserved 200,000 shares of common stock for issuance under the Purchase Plan.
During 1997 and 1996, 81,024 shares and 9,576 shares, respectively, were
purchased under the Purchase Plan. At December 31, 1997, 109,400 shares were
available for issuance under the Purchase Plan.
The Company has stock option plans to provide incentives to eligible
employees, officers, and directors in the form of incentive stock options,
non-qualified stock options, stock appreciation rights, and restricted stock.
The Board of Directors determines the option price (not to be less than fair
market value of incentive options) at the date of grant. The majority of
options, granted under the Executive Compensation Plan, typically vest 25% per
year over four years, and expire ten years from the date of grant. Other
options including options granted and exchanged as a result of acquisitions
have various vesting schedules and expiration periods.
Information with respect to these option plans is as follows:
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
------ --------------
Options outstanding January 1, 1995 1,762,730 $ 3.91
Granted 1,162,476 13.42
Exercised (311,740) 2.58
Canceled (39,160) 5.17
---------
Outstanding at December 31, 1995 2,574,306 8.09
Granted 4,146,568 34.27
Exercised (1,334,836) 2.49
Canceled (416,264) 35.92
---------
Outstanding at December 31, 1996 4,969,774 15.52
Granted 2,234,387 36.82
Exercised (1,565,827) 7.78
Canceled (269,550) 24.34
---------
Outstanding at December 31, 1997 5,368,784 $ 26.21
=========
31
32
11. EMPLOYEE BENEFIT PLANS -- CONTINUED
Pro forma information regarding net income and net income per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement No. 123. The fair value for each option was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
---------------------- ----------------------------
1997 1996 1995 1997 1996 1995
Expected dividend yield 0% 0% 0% 0% -- --
Risk-free interest rate 6% 6% 6% 5.1%
Expected volatility 40% 40% 40% 34.4% -- --
Expected life (in years from
vest) 1 1 1 0.25 -- --
For options outstanding and exercisable at December 31, 1997 the
following number of options, range of exercise prices, weighted average
exercise prices and weighted average contractual lives existed:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
------- --------------- -------------- ---------------- ------- --------------
646,196 $ 0.20 - $ 4.75 $ 3.31 4.6 635,696 $ 3.29
557,886 $ 4.88 - $ 9.50 7.92 6.5 342,886 6.95
762,060 $10.69 - $20.68 18.64 7.1 274,174 17.46
721,574 $22.61 - $32.69 31.19 7.1 271,794 31.34
684,062 $33.13 - $33.13 33.13 9.0 311,628 33.13
616,469 $33.88 - $36.63 35.66 8.6 8,387 35.87
239,693 $36.75 - $38.19 37.91 9.1 212,953 37.98
1,002,162 $38.25 - $38.25 38.25 10.0 0 n.a.
130,682 $38.50 - $41.13 38.88 6.3 54,712 38.52
8,000 $41.38 - $41.38 41.38 9.7 5,000 41.38
--------- ---------
5,368,784 $ 26.21 7.8 2,117,230 $ 18.33
========= =========
The Black-Scholes valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair values of
the Purchase Plan and stock option plans are amortized to expense over the
vesting period. The grant date Black-Scholes weighted-average value was $13.37,
$4.41 and $4.38 per share for 1997, 1996 and 1995.
The Company's pro forma information follows (in thousands except for
net income (loss) per share information):
YEAR ENDED
DECEMBER 31,
------------
1997 1996 1995
---- ---- ----
Net income available for common shareholders $ 55,683 $ 7,648 $14,626
Pro forma net income (loss) available for common
shareholders 40,647 (2,591) 13,872
Pro forma basic net income (loss) per share 0.55 (0.04) 0.22
Pro forma diluted net income (loss) per share $ 0.54 $ (0.04) $ 0.21
32
33
12. OPERATIONS
The table below presents the Company's operations by geographical location.
The Company has determined the geographical groupings based upon (1) customer
service activities, (2) operational management, (3) business development
activities and (4) customer contract coordination. The Company's operations
within each geographical region are further broken down to show each country or
group of related countries which accounts for 10% or more of the totals.
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
Net revenue:
Americas:
United States $ 412,324 $ 251,478 $ 135,071
Other 7,325 2,908 1,090
--------- --------- ---------
Americas 419,649 254,386 136,161
Europe and Africa:
United Kingdom 250,608 200,658 131,794
Western Europe 147,509 128,650 93,114
Eastern Europe 3,467 1,394 0
South Africa 8,974 2,301 0
--------- --------- ---------
Europe and Africa 410,558 333,003 224,908
Asia-Pacific: 22,693 12,711 6,987
--------- --------- ---------
$ 852,900 $ 600,100 $ 368,056
========= ========= =========
Income (loss) from operations:
Americas:
United States $ 51,344 $ 16,854 $ 12,741
Other 1,761 612 (133)
--------- --------- ---------
Americas 53,105 17,466 12,608
Europe and Africa:
United Kingdom 18,072 13,746 8,487
Western Europe 13,561 11,649 5,245
Eastern Europe 417 83 0
South Africa 3,404 891 0
--------- --------- ---------
Europe and Africa 35,454 26,369 13,730
Asia-Pacific: 253 16 (438)
--------- --------- ---------
$ 88,812 $ 43,851 $ 25,900
========= ========= =========
Identifiable Assets:
Americas:
United States $ 527,050 $ 278,615 $ 154,692
Other 5,151 2,413 540
--------- --------- ---------
Americas 532,201 281,028 155,232
Europe and Africa:
United Kingdom 181,065 182,539 135,618
Western Europe 76,760 77,799 56,251
Eastern Europe 2,849 795 0
South Africa 4,269 3,514 0
--------- --------- ---------
Europe and Africa 264,943 264,647 191,869
Asia-Pacific: 16,883 8,944 5,176
--------- --------- ---------
$ 814,027 $ 554,619 $ 352,277
========= ========= =========
33
34
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------- ---------------- ---------------- ----------------
Net revenue $188,635 $203,490 $216,311 $244,464
Income from operations 19,201 21,392 22,794 25,425
Net income available for
common shareholders 11,600 12,974 14,288 16,821
Basic net income per share 0.16 0.18 0.19 0.22
Diluted net income per share $ 0.16 $ 0.17 $ 0.19 $ 0.22
Range of stock prices $26.625 - 39.000 $21.500 - 35.000 $35.032 - 43.688 $31.000 - 43.500
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------- ---------------- ---------------- ----------------
Net revenue $125,360 $142,873 $153,152 $178,715
Income from operations 8,353 13,262 14,976 7,260
Net income available for
common shareholders 4,950 7,691 8,681 (13,674)
Basic net income per share 0.07 0.11 0.13 (0.20)
Diluted net income per share $ 0.07 $ 0.11 $ 0.12 $ (0.20)
Range of stock prices $18.500 - 34.625 $28.250 - 41.000 $26.250 - 41.625 $29.125 - 41.625
The following pro forma quarterly financial information reflects results
of operations excluding non-recurring costs (in thousands):
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------- ---------------- ---------------- ----------------
Net revenue $188,635 $203,490 $216,311 $244,464
Income from operations 19,201 21,392 22,794 25,425
Net income available for
common shareholders $ 11,600 $ 12,974 $ 14,288 $ 16,821
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------- ---------------- ---------------- ----------------
Net revenue $125,360 $142,873 $153,152 $178,715
Income from operations 13,055 13,262 14,976 17,989
Net income available for
common shareholders $ 8,538 $ 7,691 $ 8,681 $ 10,494
14. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
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. The
acquisition of TAG was accounted for as a purchase.
On February 27, 1998, the Company acquired More Biomedical Contract
Research Organization Ltd. ("More Biomedical"), a contract research
organization based in Taiwan. The Company acquired More Biomedical in exchange
for 16,600 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests.
34
35
14. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS'
REPORT--CONTINUED
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. The acquisition of Cardiac Alert was accounted for as a pooling
of interests.
On May 31, 1998, the Company acquired ClinData International Pty Limited
("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. The acquisition of ClinData was accounted for as a
pooling of interests.
On October 8, 1998, the Company acquired Simirex Inc. and Simirex
International Ltd. ("Simirex"), a New Jersey-based provider of clinical
packaging services for the U.S. pharmaceutical industry. The acquisition of
Simirex will be accounted for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc.
("QED"), a New York-based provider of integrated product marketing and
communication services for pharmaceutical companies in the U.S. market. The
acquisition of QED will be accounted for as a pooling of interests.
The Company's 1998 financial statements have been restated to include More
Biomedical, Cardiac Alert, ClinData, Simirex, and QED from January 1, 1998, but
the financial statements for 1997 and prior years have not been restated because
the effect of such restatement would be immaterial.
On December 14, 1998, the Company entered into a definitive agreement to
acquire PMSI and its core company, Scott-Levin. The acquisition of PMSI is
expected to be accounted for as a purchase.
On December 15, 1998, the Company entered into a definitive agreement to
acquire ENVOY in a stock exchange transaction. The acquisition of ENVOY is
expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst
Marion Roussel's Kansas City-based Drug Innovation and Approval facility.
35
36
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUINTILES TRANSNATIONAL CORP.
We have audited the accompanying consolidated balance sheets of Quintiles
Transnational Corp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 consolidated financial statements of BRI
International, Inc. and Innovex Limited, each of which was combined with the
Company in 1996 in transactions accounted for as poolings of interests. The two
businesses represent 32.4% and 47.4% of the consolidated assets and net
revenues for 1995, respectively. Those statements were audited by other
auditors whose reports have been provided to us, and our opinion, insofar as it
relates to amounts included for BRI International, Inc. and Innovex Limited for
1995, is based on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Quintiles Transnational Corp.
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Raleigh, North Carolina
January 26, 1998,
except for Note 3, as to which the date is
September 9, 1998
36
37
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 41,480 $ 80,247
Accounts receivable and unbilled services 290,871 219,438
Investments 48,165 44,372
Prepaid Expenses 25,785 22,276
Other current assets 23,101 24,456
--------- ---------
Total current assets 429,402 390,789
Property and equipment 290,353 268,447
Less accumulated depreciation 90,949 81,481
--------- ---------
199,404 186,966
Intangibles and other assets:
Intangibles 72,097 72,395
Investments 87,918 69,089
Deferred income taxes 68,658 68,651
Deposits and other assets 26,779 26,137
--------- ---------
255,452 236,272
--------- ---------
Total assets $ 884,258 $ 814,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 100,584 $ 99,203
Credit arrangements, current 35,130 25,527
Unearned income 109,961 89,069
Income taxes and other current liabilities 15,113 12,003
--------- ---------
Total current liabilities 260,788 225,802
Long-term liabilities:
Credit arrangements, less current portion 156,312 149,484
Long-term obligation 21,309 20,985
Deferred income taxes and other liabilities 30,398 29,117
--------- ---------
208,019 199,586
--------- ---------
Total liabilities 468,807 425,388
Shareholders' equity:
Common stock and additional paid-in capital,
76,365,746 and 73,853,867 shares issued and
outstanding at March 31, 1998 and
December 31, 1997, respectively 343,222 336,144
Retained earnings 79,506 60,684
Other equity (7,277) (8,189)
--------- ---------
Total shareholders' equity 415,451 388,639
--------- ---------
Total liabilities and shareholders' equity $ 884,258 $ 814,027
========= =========
See accompanying notes.
37
38
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED
MARCH 31
1998 1997
--------- ---------
(In thousands, except per share data)
Net revenue $ 259,551 $ 188,635
Costs and expenses:
Direct 136,396 98,196
General and administrative 83,560 63,075
Depreciation and amortization 12,351 8,163
--------- ---------
Total costs and expenses 232,307 169,434
--------- ---------
Income from operations 27,244 19,201
Other expense, net (435) (754)
--------- ---------
Income before income taxes 26,809 18,447
Income taxes 8,552 6,847
--------- ---------
Net income $ 18,257 $ 11,600
========= =========
Basic net income per share $ 0.24 $ 0.16
========= =========
Diluted net income per share $ 0.23 $ 0.16
========= =========
See accompanying notes.
38
39
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31
1998 1997
----------- -----------
(In thousands)
OPERATING ACTIVITIES
Net income $ 18,257 $ 11,600
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 12,351 8,163
Net loss on sale of property and equipment 328 --
Provision for deferred income tax expense 6,565 (965)
Change in operating assets and liabilities (57,883) (11,383)
Other 9,142 (19)
Change in fiscal year of pooled entity -- 313
--------- ---------
Net cash (used in) provided by operating activities (11,240) 7,709
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 801 163
Acquisition of property and equipment (18,155) (18,243)
Acquisition of intangible assets 911 (5,141)
Payment of dividend (385) --
Security investments, net (22,694) 3,228
Change in fiscal year of pooled entity -- 8
--------- ---------
Net cash used in investing activities (39,522) (19,985)
FINANCING ACTIVITIES
Proceeds from borrowings and line of credit 38,227 3,528
Principal payments on credit arrangements (31,861) (11,256)
Proceeds from issuance of common stock 6,272 87,371
Other -- (60)
Change in fiscal year of pooled entity -- 124
--------- ---------
Net cash provided by financing activities 12,638 79,707
Effect of foreign currency exchange rate changes on cash (643) (1,619)
--------- ---------
(Decrease) increase in cash and cash equivalents (38,767) 65,812
Cash and cash equivalents at beginning of period 80,247 74,474
--------- ---------
Cash and cash equivalents at end of period $ 41,480 $ 140,286
========= =========
See accompanying notes.
39
40
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
March 31, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Current Report on Form
8-K, dated January 27, 1999 of Quintiles Transnational Corp. (the "Company").
The balance sheet at December 31, 1997 has been derived from the audited
financial statements of the Company. The balance sheet does not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements.
2. Mergers
On February 2, 1998, the Company acquired Pharma Networks, N.V. ("Pharma") in
exchange for 132,000 shares of the Company's Common Stock. On February 26, 1998,
the Company acquired T2A S.A. ("T2A") in exchange for 311,899 shares of the
Company's Common Stock. On August 24, 1998, the Company acquired the Royce
Consultancy Limited ("Royce") in exchange for 664,194 shares of the Company's
Common Stock. On September 9, 1998, the Company acquired Data Analysis Systems,
Inc ("DAS") in exchange for 358,897 shares of the Company's Common Stock. These
transactions were accounted for by the pooling of interests method and the
Company's financial statements for 1998 and prior years have been restated to
include the results of these pooled companies.
On February 27, 1998, the Company acquired More Biomedical Contract Research
Organization Ltd. ("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") in exchange for 70,743 shares of the
Company's Common Stock. On May 31, 1998, the Company acquired ClinData
International Pty Limited ("ClinData") in exchange for 123,879 shares of the
Company's Common Stock. These transactions were accounted for by the pooling of
interests method. The Company's 1998 financial statements have been restated to
include the results of these pooled companies from January 1, 1998, but the
financial statements for 1997 and prior years have not been restated because the
effect of such restatement would be immaterial.
40
41
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
On February 4, 1998, the Company acquired Technology Assessment Group ("TAG") in
exchange for 460,366 shares of the Company's Common Stock. The acquisition of
TAG was accounted for as a purchase.
3. Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net income $ 18,257 $ 11,600
========= =========
Weighted average shares:
Basic weighted average shares 76,195 71,338
Effect of dilutive securities - Stock options 1,577 1,913
--------- ---------
Diluted weighted average shares 77,772 73,251
========= =========
Basic net income per share $ 0.24 $ 0.16
Diluted net income per share $ 0.23 $ 0.16
4. Comprehensive Income
The Company adopted Financial Accounting Standard Board Statement No. 130,
"Reporting Comprehensive Income" in the first quarter of 1998. The adoption of
Statement No. 130 did not have an impact on the Company's financial position or
results from operations.
The following table represents the Company's comprehensive income for the three
months ended March 31, 1998 and 1997 (in thousands):
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Net income $ 18,257 $ 11,600
Other comprehensive income:
Unrealized (loss) gain on marketable securities,
net of tax (81) 5
Foreign currency adjustment 988 (8,615)
--------- ---------
Comprehensive income $ 19,164 $ 2,990
========= =========
41
42
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
5. Subsequent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of QED
will be accounted for as a pooling of interests.
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's consolidated financial data for periods subsequent to January 1,
1998 have been restated to include the results of business combinations
completed from that date through September 30, 1998, that were accounted for by
the pooling of interests method. The financial data prior to January 1, 1998
have been restated to include Pharma, T2A, Royce and DAS. The financial data
prior to January 1, 1998 have not been restated to include More Biomedical,
Cardiac Alert and ClinData because the effect of such restatement would be
immaterial.
Results of Operations
Net revenue for the first quarter of 1998 was $259.6 million, an increase of
$70.9 million or 37.6% over first quarter of 1997 net revenue of $188.6 million.
Growth occurred across each of the Company's geographic regions. Factors
contributing to the growth included an increase of contract service offerings,
the provision of increased services rendered under existing contracts and the
initiation of services under contracts awarded subsequent to the first quarter
of 1997.
42
43
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $136.4
million or 52.6% of net revenue for the first quarter of 1998 versus $98.2
million or 52.1% of net revenue for the first quarter of 1997. The increase in
direct costs as a percentage of net revenue was primarily attributable to the
increase in net revenue generated from contract sales and marketing services,
which incur a higher level of direct costs (but lower general and administrative
expenses) relative to net revenue than contract research services.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $83.6 million or
32.2% of net revenue for the first quarter of 1998 versus $63.1 million or 33.4%
of net revenue for the first quarter of 1997. The $20.5 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 $12.4 million or 4.8% of net revenue for the
first quarter of 1998 versus $8.2 million or 4.3% of net revenue for the first
quarter of 1997.
Income from operations was $27.2 million or 10.5% of net revenue for the first
quarter of 1998 versus $19.2 million or 10.2% of net revenue for the first
quarter of 1997.
Other expense decreased to $435,000 for the first quarter of 1998 from $754,000
in the first quarter of 1997, primarily due to decreases in net interest
expense.
The effective tax rate for the first quarter of 1998 was 31.9% versus a 37.1%
effective tax rate for the first quarter of 1997. Higher proportion of profits
were generated in countries with lower tax rates and where net operating losses
could be utilized. Since the Company conducts operations on a global basis, its
effective tax rate may vary.
Liquidity and Capital Resources
Cash outflows from operations were $11.2 million for the three months ended
March 31, 1998 versus cash inflows of $7.7 million for the comparable period of
1997. Investing activities, for the three months ended March 31, 1998, consisted
primarily of capital asset purchases and investment security purchases and
maturities. These investing activities required an outlay of cash of $39.5
million for the three months ended March 31, 1998 compared to an outlay of $20.0
million for investing activities during the same period in 1997.
43
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources -- Continued
As of March 31, 1998, total working capital was $168.6 million versus $165.0
million as of December 31, 1997. Net receivables from clients (accounts
receivable and unbilled services net of unearned income) increased to $180.9
million at March 31, 1998 as compared to $130.4 million at the end of 1997.
During the quarter, accounts receivable increased to $172.0 million from $139.3
million, and unbilled services increased to $118.8 million from $80.1 million
offset by an increase in unearned income to $110.0 million from $89.1 million.
The number of days revenue outstanding in accounts receivable and unbilled
services, net of unearned income, increased to 54 days at March 31, 1998 as
compared to 42 days at December 31, 1997. Although the number of days revenue
outstanding has historically dropped at the end of the fiscal year and risen
during the following quarter, the increase from December 31, 1997 to March 31,
1998 was greater than usually experienced by the Company. In particular, the
increase in unbilled services was unusually high due to a delay in billings
caused by the implementation of new financial software systems during the
quarter. Management has taken actions designed to reduce the number of days
outstanding in the second quarter of 1998.
The Company has a (pound)15.0 million (approximately $25.2 million) unsecured
line of credit with a U.K. bank and a (pound)5.0 million (approximately $8.4
million) unsecured line of credit with a second U.K. bank. At March 31, 1998,
the Company had (pound)7.9 million (approximately $13.2 million) available under
these arrangements.
On August 7, 1998, the Company entered into a $150 million senior unsecured
credit facility ("$150.0 million facility") with a U.S. bank. Based upon its
current financing plan, the Company believes the $150.0 million facility would
be available to retire its long-term credit arrangements and obligations, if
necessary.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents, together with future cash flows from operations and
borrowings under its line of credit agreements will be sufficient to meet its
foreseeable cash needs in connection with its operations. As part of its
business strategy, the Company reviews many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, the
Company is continually evaluating new acquisition and expansion possibilities.
The Company may from time to time seek to obtain debt or equity financing in its
ordinary course of business or to facilitate possible acquisitions or expansion.
Impact of Year 2000
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause
44
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
disruptions of the Company's operations, including, among other things, a
temporary inability to process information; receive information, services or
products from third parties; interface with customers in the performance of
contracts; or operate or communicate in some or all of the regions in which it
operates. The Company's computing infrastructure is based on industry standard
systems. The Company does not depend on large legacy systems and does not use
mainframes. Rather, the scope of its Year 2000 Program includes unique software
systems and tools in each of its service groups, especially its contract
research service group, embedded systems in its laboratory and manufacturing
operations, facilities such as elevators and fire alarms in over 70 offices
(which also involve embedded technology) and numerous supplier and other
business relationships. The Company has identified critical systems within each
service group and is devoting its resources to address these items first.
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established a
Year 2000 Program Management Office, staffed by consultants, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for the Company's Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
The Company is in the process of assessing those systems, facilities and
business relationships which it believes may be vulnerable to the Year 2000
issue and which it believes could impact its operations. Although the Company
cannot control whether and how third parties will address the Year 2000 issue,
its assessment also will include a limited evaluation of certain services on
which it is substantially dependent, and the Company plans to develop
contingency plans for possible deficiencies in those services. For example, the
Company believes that among its most significant third party service providers
are physician investigators who participate in clinical studies conducted
through its contract research services; consequently, the Company is developing
a specialized process to assess and address Year 2000 issues arising from these
relationships. The Company does not plan to assess how its customers, such as
pharmaceutical and large biotechnology companies, are dealing with the Year 2000
issue.
As the Company completes the assessment of its systems, it is developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. The Company will utilize both
internal and external resources to implement these plans. The Company's
strategic healthcare communications services are less dependent on information
technology than its other services, and the Company expects to complete all
phases of the program with respect to those services in 1998. The Company
expects to address most systems relating to its healthcare consulting
45
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
services in 1998, with completion expected in the first half of 1999. The
Company also expects to address most of its contract sales systems in 1998, and
complete deployment in the first half of 1999. The Company's contract research
services utilize numerous systems, which it must address independently on
disparate schedules, depending on the magnitude and complexity of the individual
system. The Company anticipates that critical deployment of these systems (or
migration to replacement systems where necessary) will occur primarily in 1999.
The Company expects to complete the core components of its Year 2000 Program
before there is a significant risk that internal Year 2000 problems will have a
material impact on its operations.
Costs
The Company estimates that the aggregate costs of its Year 2000 Program will be
approximately $14 million, including costs already incurred. A significant
portion of these costs, approximately $6 million, are not likely to be
incremental costs, but rather will represent the redeployment of existing
resources. This reallocation of resources is not expected to have a significant
impact on the Company's day-to-day operations. The Company incurred total Year
2000 Program costs of $3.6 million through December 31, 1997, of which
approximately $2.6 million represented incremental expense. The Company's
estimates regarding the cost, timing and impact of addressing the Year 2000
issue are based on numerous assumptions of future events, including the
continued availability of certain resources, its ability to meet deadlines and
the cooperation of third parties. The Company cannot provide assurance that its
assumptions will be correct and that these estimates will be achieved. Actual
results could differ materially from the Company's expectations as a result of
numerous factors, including the availability and cost of personnel trained in
this area, unforeseen circumstances that would cause the Company to allocate its
resources elsewhere and similar uncertainties.
Year 2000 Risks
The Company faces both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on the Company's ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion. The decentralized nature of the Company's business
may compound this risk if it is unable to coordinate efforts across its global
operations on a timely basis. The Company believes that its Year 2000 Program
will successfully address these risks, however, the Company cannot provide
assurance that this program will be completed in a timely manner.
Notwithstanding its Year 2000 Program, the Company also faces external risks
that may be beyond its control. The Company's international operations and its
relationships with foreign third parties create additional risks for the
Company, as many countries outside the United States have been less attuned to
the Year 2000 issue. These risks include the possibility that infrastructural
systems, such as electricity, water, natural gas or telephony, will fail in some
or all of the regions in which the Company operates, as well as the danger that
the internal
46
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
systems of its foreign suppliers, service providers and customers will fail. The
Company's business also requires considerable travel, and its ability to perform
services under its customer contracts could be negatively affected if air travel
is disrupted by the Year 2000 issue.
In addition, the Company's business depends heavily on the healthcare industry,
particularly on third party physician investigators. The healthcare industry,
and physicians' groups in particular, to date may not have focused on the Year
2000 issue to the same degree as some other industries, especially outside of
major metropolitan centers. As a result, the Company faces increased risk that
its physician investigators will be unable to provide it with the data that the
Company needs to perform under its contracts on time, if at all. Thus, the
clinical study involved could be slowed or brought to a halt. Also, the failure
of its customers to address the Year 2000 issue could negatively impact their
ability to utilize the Company's services. While it intends to develop
contingency plans to address certain of these risks, the Company cannot assure
you that any developed plans will sufficiently insulate it from the effects of
these risks. Any disruptions resulting from the realization of these risks would
affect the Company's ability to perform its services. If the Company is unable
to receive or process information, or if third parties are unable to provide
information or services to it, the Company may not be able to meet milestones or
obligations under its customer contracts, which could have a material adverse
effect on its business and financial results.
Contingencies
Until it has completed its remediation, testing and deployment plans, the
Company believes it is premature to develop contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue.
Recent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of QED
will be accounted for as a pooling of interests.
47
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Recent Events -- Continued
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
48
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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 $ 46,785 $ 80,247
Accounts receivable and unbilled services 309,307 219,438
Investments 51,960 44,372
Prepaid Expenses 25,764 22,276
Other current assets 10,871 24,456
--------- ---------
Total current assets 444,687 390,789
Property and equipment 316,202 268,447
Less accumulated depreciation 101,394 81,481
--------- ---------
214,808 186,966
Intangibles and other assets:
Intangibles 70,545 72,395
Investments 75,084 69,089
Deferred income taxes 68,619 68,651
Deposits and other assets 29,381 26,137
--------- ---------
243,629 236,272
--------- ---------
Total assets $ 903,124 $ 814,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 5,905 $ 10,485
Accounts payable and accrued expenses 107,188 99,203
Credit arrangements, current 11,213 15,042
Unearned income 125,942 89,069
Income taxes and other current liabilities 14,760 12,003
--------- ---------
Total current liabilities 265,008 225,802
Long-term liabilities:
Credit arrangements, less current portion 155,624 149,484
Long-term obligation 23,676 20,985
Deferred income taxes and other liabilities 22,964 29,117
--------- ---------
202,264 199,586
--------- ---------
Total liabilities 467,272 425,388
Shareholders' equity:
Common stock and additional paid-in capital,
76,635,718 and 75,304,156 shares issued and
outstanding at June 30, 1998 and
December 31, 1997, respectively 346,874 336,144
Retained earnings 98,721 60,684
Other equity (9,743) (8,189)
--------- ---------
Total shareholders' equity 435,852 388,639
--------- ---------
Total liabilities and shareholders' equity $ 903,124 $ 814,027
========= =========
See accompanying notes.
49
50
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 $ 285,354 $ 203,490 $ 544,905 $ 392,125
Costs and expenses:
Direct 148,689 107,208 285,085 205,404
General and administrative 93,067 65,981 176,627 129,056
Depreciation and amortization 13,914 8,909 26,265 17,072
--------- --------- --------- ---------
255,670 182,098 487,977 351,532
--------- --------- --------- ---------
Income from operations 29,684 21,392 56,928 40,593
Other expense, net (493) (372) (928) (1,126)
--------- --------- --------- ---------
Income before income taxes 29,191 21,020 56,000 39,467
Income taxes 9,446 8,046 17,998 14,893
--------- --------- --------- ---------
Net income $ 19,745 $ 12,974 $ 38,002 $ 24,574
========= ========= ========= =========
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.
50
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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 $ 38,002 $ 24,575
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 26,265 17,072
Net loss on sale of property and equipment 554 --
Provision for deferred income tax expense (1,520) (3,275)
Change in operating assets and liabilities (38,608) (16,506)
Other -- (43)
Change in fiscal year of pooled entity -- (578)
--------- ---------
Net cash provided by operating activities 24,693 21,245
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 1,480 820
Acquisition of property and equipment (44,525) (39,202)
Acquisition of intangible assets, net of cash acquired 2,069 (3,504)
Payment of non-recurring transaction costs -- (10,269)
Payment of dividend (836) --
Security investments, net (13,734) (5,571)
Change in fiscal year of pooled entity -- (17)
--------- ---------
Net cash used in investing activities (55,546) (57,743)
FINANCING ACTIVITIES
Decrease in lines of credit, net (3,657) (7,826)
Principal payments on credit arrangements (8,224) (9,070)
Issuance of common stock 10,196 88,756
Other -- (60)
Dividend paid by pooled entity -- (1,563)
Change in fiscal year of pooled entity -- 57
--------- ---------
Net cash (used in) provided by financing activities (1,685) 70,294
Effect of foreign currency exchange rate changes on cash (924) (1,424)
--------- ---------
(Decrease) increase in cash and cash equivalents (33,462) 33,372
Cash and cash equivalents at beginning of period 80,247 74,474
--------- ---------
Cash and cash equivalents at end of period $ 46,785 $ 107,846
========= =========
See accompanying notes.
51
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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 Current
Report on Form 8-K, dated January 27, 1999 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") in
exchange for 132,000 shares of the Company's Common Stock. On February 26, 1998,
the Company acquired T2A S.A. ("T2A") in exchange for 311,899 shares of the
Company's Common Stock. On August 24, 1998, the Company acquired the Royce
Consultancy Limited ("Royce") in exchange for 664,194 shares of the Company's
Common Stock. On September 9, 1998, the Company acquired Data Analysis Systems,
Inc ("DAS") in exchange for 358,897 shares of the Company's Common Stock. These
transactions were accounted for by the pooling of interests method and the
Company's financial statements for 1998 and prior years have been restated to
include the results of these pooled companies.
On February 27, 1998, the Company acquired More Biomedical Contract Research
Organization Ltd. ("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") in exchange for 70,743 shares of the
Company's Common Stock. On May 31, 1998, the Company acquired ClinData
International Pty Limited ("ClinData") in exchange for 123,879 shares of the
Company's Common Stock. These transactions were accounted for by the pooling of
interests method. The Company's 1998 financial statements have been restated to
include the results of these pooled companies from January 1, 1998, but the
financial statements for 1997 and prior have not been restated because the
effect of such restatement would be immaterial.
52
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
On February 4, 1998, the Company acquired Technology Assessment Group ("TAG") in
exchange for 460,366 shares of the Company's Common Stock. The acquisition of
TAG was accounted for as a purchase.
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 $19,745 $12,974 $38,002 $24,574
======= ======= ======= =======
Weighted average shares:
Basic weighted average shares 76,530 73,861 76,363 72,591
Effect of dilutive securities - Stock options 1,608 1,523 1,600 1,702
------- ------- ------- -------
Diluted weighted average shares 78,138 75,384 77,963 74,293
======= ======= ======= =======
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
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.
53
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
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 $ 19,745 $ 12,974 $ 38,002 $ 24,574
Other comprehensive income:
Unrealized gain on marketable securities,
net of tax 113 154 32 159
Foreign currency adjustment (2,658) 2,541 (1,670) (6,074)
-------- -------- -------- ---------
Comprehensive income $ 17,200 $ 15,669 $ 36,364 $ 18,659
======== ======== ======== =========
6. Subsequent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("Q.E.D."),
a New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of
Q.E.D. will be accounted for as a pooling of interests.
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
54
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
7. Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). Statement No. 133 requires that upon adoption, all derivative instruments
be recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt Statement No.
133 until required to do so on January 1, 2000.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's consolidated financial data for periods subsequent to January 1,
1998 have been restated to include the results of business combinations
completed from that date through September 30, 1998 that were accounted for by
the pooling of interests method. The financial data prior to January 1, 1998
have been restated to include Pharma, T2A, Royce and DAS. The financial data
prior to January 1, 1998 have not been restated for More Biomedical, Cardiac
Alert and ClinData because the effect of such restatement would be immaterial.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Net revenue for the second quarter of 1998 was $285.4 million, an increase of
$81.9 million or 40.2% over second quarter of 1997 net revenue of $203.5
million. Growth occurred across each of the Company's 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 $148.7
million or 52.1% of net revenue for the second quarter of 1998 versus $107.2
million or 52.7% of net revenue for the second quarter of 1997.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $93.1 million or
32.6% of net revenue for the second quarter of 1998 versus $66.0 million or
32.4% of net revenue for the second quarter of 1997. The $27.1 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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
Depreciation and amortization were $13.9 million or 4.9% of net revenue for the
second quarter of 1998 versus $8.9 million or 4.4% of net revenue for the second
quarter of 1997.
Income from operations was $29.7 million or 10.4% of net revenue for the second
quarter of 1998 versus $21.4 million or 10.5% of net revenue for the second
quarter of 1997.
The effective tax rate for the second quarter of 1998 was 32.4% versus a 38.3%
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.
Six Months Ended June 30, 1998 and 1997
Net revenue for the six months ended June 30, 1998 was $544.9 million, an
increase of $152.8 million or 39.0% over net revenue of $392.1 million for the
six months ended June 30, 1997. Growth occurred across each of the Company's
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 $285.1
million or 52.3% of net revenue for the six months ended June 30, 1998 versus
$205.4 million or 52.4% of net revenue for the six months ended June 30, 1997.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $176.6 million or
32.4% of net revenue for the six months ended June 30, 1998 versus $129.1
million or 32.9% of net revenue for the six months ended June 30, 1997. The
$47.6 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 $26.3 million or 4.8% of net revenue for the
six months ended June 30, 1998 versus $17.1 million or 4.4% of net revenue for
the six months ended June 30, 1997.
Income from operations was $56.9 million or 10.4% of net revenue for the six
months ended June 30, 1998 versus $40.6 million or 10.4% 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
37.7% 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 $24.7 million for the six months ended June
30, 1998 versus cash inflows of $21.2 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 $55.5
million for the six months ended June 30, 1998 compared to an outlay of $57.7
million for investing activities during the same period in 1997.
As of June 30, 1998, total working capital was $179.7 million versus $171.1
million as of December 31, 1997. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) increased to $183.4
million at June 30, 1998 as compared to $130.4 million at the end of 1997.
During the first half of 1998, accounts receivable increased to $171.1 million
from $138.5 million, and unbilled services increased to $138.2 million from
$55.0 million offset by an increase in unearned income to $125.9 million from
$89.1 million. The number of days revenue outstanding in accounts receivable and
unbilled services, net of unearned income, increased to 51 days at June 30,
1998, as compared to 42 days at December 31, 1997. The increase in number of
days outstanding is primarily due to the increase in unbilled services caused by
the implementation of new financial software systems during the period.
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.
On August 7, 1998, the Company entered into a $150 million senior unsecured
credit facility ("$150 million facility") with a U.S. bank. Based upon its
current financing plan, the Company believes the $150 million facility would be
available to retire its long-term credit arrangements and obligations, if
necessary.
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.
57
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of the Company's operations, including,
among other things, a temporary inability to process information; receive
information, services or products from third parties; interface with customers
in the performance of contracts; or operate or communicate in some or all of the
regions in which it operates. The Company's computing infrastructure is based on
industry standard systems. The Company does not depend on large legacy systems
and does not use mainframes. Rather, the scope of its Year 2000 Program includes
unique software systems and tools in each of its service groups, especially its
contract research service group, embedded systems in its laboratory and
manufacturing operations, facilities such as elevators and fire alarms in over
70 offices (which also involve embedded technology) and numerous supplier and
other business relationships. The Company has identified critical systems within
each service group and is devoting its resources to address these items first.
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established a
Year 2000 Program Management Office, staffed by consultants, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for the Company's Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
The Company is in the process of assessing those systems, facilities and
business relationships which it believes may be vulnerable to the Year 2000
issue and which it believes could impact its operations. Although the Company
cannot control whether and how third parties will address the Year 2000 issue,
its assessment also will include a limited evaluation of certain services on
which it is substantially dependent, and the Company plans to develop
contingency plans for possible deficiencies in those services. For example, the
Company believes that among its most significant third party service providers
are physician investigators who participate in clinical studies conducted
through its contract research services; consequently, the Company is developing
a specialized process to assess and address Year 2000 issues arising from these
relationships. The Company does not plan to assess how its customers, such as
pharmaceutical and large biotechnology companies, are dealing with the Year 2000
issue.
As the Company completes the assessment of its systems, it is developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. The Company will utilize both
internal and external resources to implement these plans. The Company's
strategic
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
healthcare communications services are less dependent on information technology
than its other services, and the Company expects to complete all phases of the
program with respect to those services in 1998. The Company expects to address
most systems relating to its healthcare consulting services in 1998, with
completion expected in the first half of 1999. The Company also expects to
address most of its contract sales systems in 1998, and complete deployment in
the first half of 1999. The Company's contract research services utilize
numerous systems, which it must address independently on disparate schedules,
depending on the magnitude and complexity of the individual system. The Company
anticipates that critical deployment of these systems (or migration to
replacement systems where necessary) will occur primarily in 1999. The Company
expects to complete the core components of its Year 2000 Program before there is
a significant risk that internal Year 2000 problems will have a material impact
on its operations.
Costs
The Company estimates that the aggregate costs of its Year 2000 Program will be
approximately $14 million, including costs already incurred. A significant
portion of these costs, approximately $6 million, are not likely to be
incremental costs, but rather will represent the redeployment of existing
resources. This reallocation of resources is not expected to have a significant
impact on the Company's day-to-day operations. The Company incurred total Year
2000 Program costs of $3.6 million through December 31, 1997, of which
approximately $2.6 million represented incremental expense. The Company's
estimates regarding the cost, timing and impact of addressing the Year 2000
issue are based on numerous assumptions of future events, including the
continued availability of certain resources, its ability to meet deadlines and
the cooperation of third parties. The Company cannot provide assurance that its
assumptions will be correct and that these estimates will be achieved. Actual
results could differ materially from the Company's expectations as a result of
numerous factors, including the availability and cost of personnel trained in
this area, unforeseen circumstances that would cause the Company to allocate its
resources elsewhere and similar uncertainties.
Year 2000 Risks
The Company faces both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on the Company's ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion. The decentralized nature of the Company's business
may compound this risk if it is unable to coordinate efforts across its global
operations on a timely basis. The Company believes that its Year 2000 Program
will successfully address these risks, however, the Company cannot provide
assurance that this program will be completed in a timely manner.
Notwithstanding its Year 2000 Program, the Company also faces external risks
that may be beyond its control. The Company's international operations and its
relationships with foreign third parties create additional risks for the
Company, as many countries outside the United States have been less attuned to
the
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
Year 2000 issue. These risks include the possibility that infrastructural
systems, such as electricity, water, natural gas or telephony, will fail in some
or all of the regions in which the Company operates, as well as the danger that
the internal systems of its foreign suppliers, service providers and customers
will fail. The Company's business also requires considerable travel, and its
ability to perform services under its customer contracts could be negatively
affected if air travel is disrupted by the Year 2000 issue.
In addition, the Company's business depends heavily on the healthcare industry,
particularly on third party physician investigators. The healthcare industry,
and physicians' groups in particular, to date may not have focused on the Year
2000 issue to the same degree as some other industries, especially outside of
major metropolitan centers. As a result, the Company faces increased risk that
its physician investigators will be unable to provide it with the data that the
Company needs to perform under its contracts on time, if at all. Thus, the
clinical study involved could be slowed or brought to a halt. Also, the failure
of its customers to address the Year 2000 issue could negatively impact their
ability to utilize the Company's services. While it intends to develop
contingency plans to address certain of these risks, the Company cannot assure
you that any developed plans will sufficiently insulate it from the effects of
these risks. Any disruptions resulting from the realization of these risks would
affect the Company's ability to perform its services. If the Company is unable
to receive or process information, or if third parties are unable to provide
information or services to it, the Company may not be able to meet milestones or
obligations under its customer contracts, which could have a material adverse
effect on its business and financial results.
Contingencies
Until it has completed its remediation, testing and deployment plans, the
Company believes it is premature to develop contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue.
Recent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of QED
will be accounted for as a pooling of interests.
60
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Recent Events -- Continued
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). Statement No. 133 requires that upon adoption, all derivative instruments
be recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt Statement No.
133 until required to do so on January 1, 2000.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1998 1997
------------- ----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 88,499 $ 80,247
Accounts receivable and unbilled services 295,425 219,438
Investments 44,448 44,372
Prepaid expenses 26,931 22,276
Other current assets 10,738 24,456
--------- ---------
Total current assets 466,041 390,789
Property and equipment 353,095 268,447
Less accumulated depreciation 113,939 81,481
--------- ---------
239,156 186,966
Intangibles and other assets:
Intangibles 71,369 72,395
Investments 59,514 69,089
Deferred income taxes 68,683 68,651
Deposits and other assets 33,189 26,137
--------- ---------
232,755 236,272
--------- ---------
Total assets $ 937,952 $ 814,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 366 $ 10,485
Accounts payable and accrued expenses 118,819 99,203
Credit arrangements, current 13,519 15,042
Unearned income 120,827 89,069
Income taxes and other current liabilities 14,843 12,003
--------- ---------
Total current liabilities 268,374 225,802
Long-term liabilities:
Credit arrangements, less current portion 153,879 149,484
Long-term obligations 24,172 20,985
Deferred income taxes and other liabilities 26,580 29,117
--------- ---------
204,631 199,586
--------- ---------
Total liabilities 473,005 425,388
Shareholders' equity:
Common stock and additional paid-in capital,
76,765,856 and 75,304,156 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 348,804 336,144
Retained earnings 119,634 60,684
Other equity (3,491) (8,189)
--------- ---------
Total shareholders' equity 464,947 388,639
--------- ---------
Total liabilities and shareholders' equity $ 937,952 $ 814,027
========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands, except per share data)
Net revenue $ 303,474 $ 216,311 $ 848,379 $ 608,436
Costs and expenses:
Direct 159,284 115,972 444,369 321,376
General and administrative 98,298 67,866 274,925 196,922
Depreciation and amortization 14,166 9,679 40,431 26,751
--------- --------- --------- ---------
271,748 193,517 759,725 545,049
--------- --------- --------- ---------
Income from operations 31,726 22,794 88,654 63,387
Other expense, net (989) (874) (1,917) (2,000)
--------- --------- --------- ---------
Income before income taxes 30,737 21,920 86,737 61,387
Income taxes 9,825 7,632 27,823 22,525
--------- --------- --------- ---------
Net income $ 20,912 $ 14,288 $ 58,914 $ 38,862
========= ========= ========= =========
Basic net income per share $ 0.27 $ 0.19 $ 0.77 $ 0.53
========= ========= ========= =========
Diluted net income per share $ 0.27 $ 0.19 $ 0.76 $ 0.52
========= ========= ========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
--------- ---------
(In thousands)
OPERATING ACTIVITIES
Net income $ 58,914 $ 38,862
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 40,431 26,751
Provision for deferred income tax expense (1,484) (143)
Change in operating assets and liabilities (23,767) (30,188)
Other 241 (70)
Change in fiscal year of pooled entity -- (581)
--------- ---------
Net cash provided by operating activities 74,335 34,631
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 4,505 2,950
Acquisition of property and equipment (72,296) (59,770)
Acquisition of intangible assets, net of cash acquired 2,067 (3,445)
Payment of non-recurring transaction costs -- (10,269)
Payment of dividend (866) --
Security investments, net 9,722 (30,994)
Change in fiscal year of pooled entity -- (17)
--------- ---------
Net cash used in investing activities (56,868) (101,545)
FINANCING ACTIVITIES
(Decrease) increase in lines of credit, net (9,015) 6,132
Principal payments on credit arrangements (13,256) (28,732)
Issuance of common stock, net 12,212 95,689
Other -- (90)
Dividend paid by pooled entity -- (1,633)
Change in fiscal year of pooled entity -- 57
--------- ---------
Net cash (used in) provided by financing activities (10,059) 71,423
Effect of foreign currency exchange rate changes on cash 844 (1,645)
--------- ---------
Increase in cash and cash equivalents 8,252 2,864
Cash and cash equivalents at beginning of period 80,247 74,474
--------- ---------
Cash and cash equivalents at end of period $ 88,499 $ 77,338
========= =========
See accompanying notes.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
September 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 nine month periods ended
September 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 Current
Report on Form 8-K, dated January 27, 1999 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") in
exchange for 132,000 shares of the Company's Common Stock. On February 26, 1998,
the Company acquired T2A S.A. ("T2A") in exchange for 311,899 shares of the
Company's Common Stock. On August 24, 1998, the Company acquired the Royce
Consultancy Limited ("Royce") in exchange for 664,194 shares of the Company's
Common Stock. On September 9, 1998, the Company acquired Data Analysis Systems,
Inc ("DAS") in exchange for 358,897 shares of the Company's Common Stock. These
transactions were accounted for by the pooling of interests method and the
Company's financial statements for 1998 and prior years have been restated to
include the results of these pooled companies.
On February 27, 1998, the Company acquired More Biomedical Contract Research
Organization Ltd. ("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") in exchange for 70,743 shares of the
Company's Common Stock. On May 31, 1998, the Company acquired ClinData
International Pty Limited ("ClinData") in exchange for 123,879 shares of the
Company's Common Stock. These transactions were accounted for by the pooling of
interests method. The Company's 1998 financial statements have been restated to
include the results of these pooled companies from January 1, 1998, but the
financial statements for 1997 and prior have not been restated because the
effect of such restatement would be immaterial.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
On February 4, 1998, the Company acquired Technology Assessment Group ("TAG") in
exchange for 460,366 shares of the Company's Common Stock. The acquisition of
TAG was accounted for as a purchase.
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- -------- -------- --------
Net income $ 20,912 $ 14,288 $ 58,914 $ 38,862
======== ======== ======== ========
Weighted average shares:
Basic weighted average shares 76,724 74,376 76,476 73,283
Effect of dilutive securities - Stock options 1,384 1,675 1,511 1,684
------- ------- -------- --------
Diluted weighted average shares 78,108 76,051 77,987 74,967
======= ======= ======== ========
Basic net income per share $ 0.27 $ 0.19 $ 0.77 $ 0.53
Diluted net income per share $ 0.27 $ 0.19 $ 0.76 $ 0.52
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
The following table represents the Company's comprehensive income for the three
and nine months ended September 30, 1998 and 1997 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- -------- ------- --------
Net income $20,912 $ 14,288 $58,914 $ 38,862
Other comprehensive income:
Unrealized gain (loss) on marketable
securities, net of tax 165 (142) 197 17
Foreign currency adjustment 6,056 (2,464) 4,386 (8,538)
------- -------- ------- --------
Comprehensive income $27,133 $ 11,682 $63,497 $ 30,341
======= ======== ======= ========
6. Subsequent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("Q.E.D."),
a New York- based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of
Q.E.D. will be accounted for as a pooling of interests.
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
7. Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). Statement No. 133 requires that upon adoption, all derivative instruments
be recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt Statement No.
133 until required to do so on January 1, 2000.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's consolidated financial data for periods subsequent to January 1,
1998 have been restated to include the results of business combinations
completed from that date through September 30, 1998 that were accounted for by
the pooling of interests method. The financial data prior to January 1, 1998
have been restated to include Pharma, T2A, Royce and DAS. The financial data
prior to January 1, 1998 have not been restated to include More Biomedical,
Cardiac Alert and ClinData because the effect of such restatement would be
immaterial.
Results of Operations
Three Months Ended September 30, 1998 and 1997
Net revenue for the third quarter of 1998 was $303.5 million, an increase of
$87.2 million or 40.3% over third quarter of 1997 net revenue of $216.3 million.
Growth occurred across each of the Company's geographic regions with
particularly strong growth in the Americas contract research services. 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 third quarter
of 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $159.3
million or 52.5% of net revenue for the third quarter of 1998 versus $116.0
million or 53.6% of net revenue for the third quarter of 1997.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $98.3 million or
32.4% of net revenue for the third quarter of 1998 versus $67.9 million or 31.4%
of net revenue for the third quarter of 1997. The $30.4 million increase in
general and administrative expenses was primarily due to an increase in
personnel, facilities and
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
locations and outside services resulting from the Company's growth. Also
included in the increase is approximately $1.2 million of incremental costs
related to the Company's Year 2000 Program.
Depreciation and amortization were $14.2 million or 4.7% of net revenue for the
third quarter of 1998 versus $9.7 million or 4.5% of net revenue for the third
quarter of 1997.
Income from operations was $31.7 million or 10.5% of net revenue for the third
quarter of 1998 versus $22.8 million or 10.5% of net revenue for the third
quarter of 1997.
The effective tax rate for the third quarter of 1998 was 32.0% versus a 34.8%
effective tax rate for the third quarter of 1997. The effective tax rate
reduction resulted from the reversal of prior year valuation allowances relating
to certain net operating losses that the Company now feels are more likely than
not to be utilized. Since the Company conducts operations on a global basis, its
effective tax rate may vary.
Nine Months Ended September 30, 1998 and 1997
Net revenue for the nine months ended September 30, 1998 was $848.4 million, an
increase of $239.9 million or 39.4% over net revenue of $608.4 million for the
nine months ended September 30, 1997. Growth occurred across each of the
Company's 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 nine months ended September 30, 1997.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $444.4
million or 52.4% of net revenue for the nine months ended September 30, 1998
versus $321.4 million or 52.8% of net revenue for the nine months ended
September 30, 1997.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $274.9 million or
32.4% of net revenue for the nine months ended September 30, 1998 versus $196.9
million or 32.4% of net revenue for the nine months ended September 30, 1997.
The $78.0 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. Also included in the increase is
approximately $1.2 million of incremental costs related to the Company's Year
2000 Program.
Depreciation and amortization were $40.4 million or 4.8% of net revenue for the
nine months ended September 30, 1998 versus $26.8 million or 4.4% of net revenue
for the nine months ended September 30, 1997.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
Income from operations was $88.7 million or 10.4% of net revenue for the nine
months ended September 30, 1998 versus $63.4 million or 10.4% of net revenue for
the nine months ended September 30, 1997.
The effective tax rate for the nine months ended September 30, 1998 was 32.1%
versus a 36.7% effective tax rate for the nine months ended September 30, 1997.
The effective tax rate reduction resulted from the reversal of prior year
valuation allowances relating to certain net operating losses that the Company
now feels are more likely than not to be utilized. Since the Company conducts
operations on a global basis, its effective tax rate may vary.
Liquidity and Capital Resources
Cash inflows from operations were $74.3 million for the nine months ended
September 30, 1998 versus cash inflows of $34.6 million for the comparable
period of 1997. Investing activities, for the nine months ended September 30,
1998, consisted primarily of capital asset purchases and investment security
purchases and maturities. Capital asset purchases required an outlay of cash of
$72.3 million for the nine months ended September 30, 1998 compared to an outlay
of $59.8 million for the same period in 1997.
As of September 30, 1998, total working capital was $197.7 million versus $165.0
million as of December 31, 1997. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $174.6 million at
September 30, 1998 as compared to $130.4 million at the end of 1997. As of
September 30, 1998, accounts receivable were $171.6 million versus $138.5
million as of December 31, 1997. Unbilled services were $123.8 million at
September 30, 1998 versus $55.0 million at December 31, 1997, offset by unearned
income balances of $120.8 million and $89.1 million, respectively. The number of
days revenue outstanding in accounts receivable and unbilled services, net of
unearned income, was 45 days at September 30, 1998, as compared to 42 days at
December 31, 1997.
The Company has a (pound)15.0 million (approximately $25.4 million) unsecured
line of credit with a U.K. bank and a (pound)5.0 million (approximately $8.5
million) unsecured line of credit with a second U.K. bank. At September 30,
1998, the Company had (pound)19.8 million (approximately $33.6 million)
available under these arrangements.
On August 7, 1998, the Company entered into a $150 million senior unsecured
credit facility ("$150.0 million facility") with a U.S. bank. At September 30,
1998, the Company had the full $150 million available under this credit
facility. Based upon its current financing plan, the Company believes the $150.0
million facility would be available to retire its long-term credit arrangements
and obligations, if necessary.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources -- Continued
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
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of the Company's operations, including,
among other things, a temporary inability to process information; receive
information, services or products from third parties; interface with customers
in the performance of contracts; or operate or communicate in some or all of the
regions in which it operates. The Company's computing infrastructure is based on
industry standard systems. The Company does not depend on large legacy systems
and does not use mainframes. Rather, the scope of its Year 2000 Program includes
unique software systems and tools in each of its service groups, especially its
contract research service group, embedded systems in its laboratory and
manufacturing operations, facilities such as elevators and fire alarms in over
70 offices (which also involve embedded technology) and numerous supplier and
other business relationships. The Company has identified critical systems within
each service group and is devoting its resources to address these items first.
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established a
Year 2000 Program Management Office, staffed by consultants, which develops
procedures and instructions at a centralized level and oversees performance of
the projects that make up the program. Project teams organized by service group
and geographic region are responsible for implementation of the individual
projects.
The framework for the Company's Year 2000 Program prescribes broad inventory,
assessment and planning phases which generally guide its projects. Each project
generally includes launch, analysis, remediation, testing and deployment phases.
The Company is in the process of assessing those systems, facilities and
business relationships which it believes may be vulnerable to the Year 2000
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
issue and which it believes could impact its operations. Although the Company
cannot control whether and how third parties will address the Year 2000 issue,
its assessment also will include a limited evaluation of certain services on
which it is substantially dependent, and the Company plans to develop
contingency plans for possible deficiencies in those services. For example, the
Company believes that among its most significant third party service providers
are physician investigators who participate in clinical studies conducted
through its contract research services; consequently, the Company is developing
a specialized process to assess and address Year 2000 issues arising from these
relationships. The Company does not plan to assess how its customers, such as
pharmaceutical and large biotechnology companies, are dealing with the Year 2000
issue.
As the Company completes the assessment of its systems, it is developing plans
to renovate, replace or retire them, as appropriate, if they are affected by the
Year 2000 issue. Such plans generally include testing of new or renovated
systems upon completion of the remedial actions. The Company will utilize both
internal and external resources to implement these plans. The Company's
strategic healthcare communications services are less dependent on information
technology than its other services, and the Company expects to complete all
phases of the program with respect to those services in 1998. The Company
expects to address most systems relating to its healthcare consulting services
in 1998, with completion expected in the first half of 1999. The Company also
expects to address most of its contract sales systems in 1998, and complete
deployment in the first half of 1999. The Company's contract research services
utilize numerous systems, which it must address independently on disparate
schedules, depending on the magnitude and complexity of the individual system.
The Company anticipates that critical deployment of these systems (or migration
to replacement systems where necessary) will occur primarily in 1999. The
Company expects to complete the core components of its Year 2000 Program before
there is a significant risk that internal Year 2000 problems will have a
material impact on its operations.
Costs
The Company estimates that the aggregate costs of its Year 2000 Program will be
approximately $14 million, including costs already incurred. A significant
portion of these costs, approximately $6 million, are not likely to be
incremental costs, but rather will represent the redeployment of existing
resources. This reallocation of resources is not expected to have a significant
impact on the Company's day-to-day operations. The Company incurred total Year
2000 Program costs of $3.6 million through December 31, 1997, of which
approximately $2.6 million represented incremental expense. The Company's
estimates regarding the cost, timing and impact of addressing the Year 2000
issue are based on numerous assumptions of future events, including the
continued availability of certain resources, its ability to meet deadlines and
the cooperation of third parties. The Company cannot provide assurance that its
assumptions will be correct and that these estimates will be achieved. Actual
results could differ materially from the Company's expectations as a result of
numerous factors, including the availability and cost of personnel trained in
this area, unforeseen circumstances that would cause the Company to allocate its
resources elsewhere and similar uncertainties.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 -- Continued
Year 2000 Risks
The Company faces both internal and external risks from the Year 2000 issue. If
realized, these risks could have a material adverse effect on the Company's
business, results of operations or financial condition. The Company's primary
internal risk is that its systems will not be Year 2000 compliant on time. The
magnitude of this risk depends on the Company's ability to achieve compliance of
both internally and externally developed systems or to migrate to alternate
systems in a timely fashion. The decentralized nature of the Company's business
may compound this risk if it is unable to coordinate efforts across its global
operations on a timely basis. The Company believes that its Year 2000 Program
will successfully address these risks, however, the Company cannot provide
assurance that this program will be completed in a timely manner.
Notwithstanding its Year 2000 Program, the Company also faces external risks
that may be beyond its control. The Company's international operations and its
relationships with foreign third parties create additional risks for the
Company, as many countries outside the United States have been less attuned to
the Year 2000 issue. These risks include the possibility that infrastructural
systems, such as electricity, water, natural gas or telephony, will fail in some
or all of the regions in which the Company operates, as well as the danger that
the internal systems of its foreign suppliers, service providers and customers
will fail. The Company's business also requires considerable travel, and its
ability to perform services under its customer contracts could be negatively
affected if air travel is disrupted by the Year 2000 issue.
In addition, the Company's business depends heavily on the healthcare industry,
particularly on third party physician investigators. The healthcare industry,
and physicians' groups in particular, to date may not have focused on the Year
2000 issue to the same degree as some other industries, especially outside of
major metropolitan centers. As a result, the Company faces increased risk that
its physician investigators will be unable to provide it with the data that the
Company needs to perform under its contracts on time, if at all. Thus, the
clinical study involved could be slowed or brought to a halt. Also, the failure
of its customers to address the Year 2000 issue could negatively impact their
ability to utilize the Company's services. While it intends to develop
contingency plans to address certain of these risks, the Company cannot assure
you that any developed plans will sufficiently insulate it from the effects of
these risks. Any disruptions resulting from the realization of these risks would
affect the Company's ability to perform its services. If the Company is unable
to receive or process information, or if third parties are unable to provide
information or services to it, the Company may not be able to meet milestones or
obligations under its customer contracts, which could have a material adverse
effect on its business and financial results.
Contingencies
Until it has completed its remediation, testing and deployment plans, the
Company believes it is premature to develop contingency plans to address what
would happen if its execution of these plans were to fail to address the Year
2000 issue.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Recent Events
On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The acquisition of Simirex will be accounted
for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The acquisition of
Serval will be accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The acquisition of QED
will be accounted for as a pooling of interests.
On December 14, 1998, the Company entered into a definitive agreement to acquire
Pharmaceutical Marketing Services Inc. ("PMSI") and its core company,
Scott-Levin. The acquisition of PMSI is expected to be accounted for as a
purchase.
On December 15, 1998, the Company entered into a definitive agreement to acquire
ENVOY Corporation ("ENVOY") in a stock exchange transaction. The acquisition of
ENVOY is expected to be accounted for as a pooling of interests.
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's Kansas City-based Drug Innovation and Approval facility.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("Statement No.
133"). Statement No. 133 requires that upon adoption, all derivative instruments
be recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged items; effects of
certain changes in fair value are recorded in other comprehensive income pending
recognition in earnings. The Company will not adopt Statement No.
133 until required to do so on January 1, 2000.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of businesses acquired.
None.
(b) Pro forma financial information.
None.
(c) Exhibits.
Exhibit Number Description of Exhibit
-------------- ----------------------
23.01 Consent of Ernst & Young LLP
23.02 Consent of PricewaterhouseCoopers LLP
23.03 Consent of KPMG
27.01 Restated Financial Data Schedule for
the Year Ended December 31, 1995
27.02 Restated Financial Data Schedule for
the Year Ended December 31, 1996
27.03 Restated Financial Data Schedule for
the Year Ended December 31, 1997
27.04 Restated Financial Data Schedule for
the Three Months Ended March 31, 1997
27.05 Restated Financial Data Schedule for
the Six Months Ended June 30, 1997
27.06 Restated Financial Data Schedule for
the Nine Months Ended September 30, 1997
27.07 Restated Financial Data Schedule for
the Three Months Ended March 31, 1998
27.08 Restated Financial Data Schedule for
the Six Months Ended June 30, 1998
27.09 Restated Financial Data Schedule for
the Nine Months Ended September 30, 1998
99.01 Report of PricewaterhouseCoopers LLP
99.02 Report of KPMG
99.03 Press release, dated January 26, 1999
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76
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 hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /S/ RACHEL R. SELISKER
---------------------------------------
Dated: January 27, 1999 Rachel R. Selisker
Chief Financial Officer and Executive Vice
President Finance
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77
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
23.01 Consent of Ernst & Young LLP
23.02 Consent of PricewaterhouseCoopers LLP
23.03 Consent of KPMG
27.01 Restated Financial Data Schedule for
the Year Ended December 31, 1995
27.02 Restated Financial Data Schedule for
the Year Ended December 31, 1996
27.03 Restated Financial Data Schedule for
the Year Ended December 31, 1997
27.04 Restated Financial Data Schedule for
the Three Months Ended March 31, 1997
27.05 Restated Financial Data Schedule for
the Six Months Ended June 30, 1997
27.06 Restated Financial Data Schedule for
the Nine Months Ended September 30, 1997
27.07 Restated Financial Data Schedule for
the Three Months Ended March 31, 1998
27.08 Restated Financial Data Schedule for
the Six Months Ended June 30, 1998
27.09 Restated Financial Data Schedule for
the Nine Months Ended September 30, 1998
99.01 Report of PricewaterhouseCoopers LLP
99.02 Report of KPMG
99.03 Press release, dated January 26, 1999
77