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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
Commission File Number 0-22510
CLINTRIALS RESEARCH INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1406017
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification number)
11000 WESTON PARKWAY
CARY, NORTH CAROLINA 27513
(Address of principal executive offices) (Zip Code)
(919) 460-9005
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of April 20, 1999, there were 18,017,172 shares of ClinTrials Research Inc.
common stock outstanding.
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CLINTRIALS RESEARCH INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT 27 18
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 10,989 $ 10,867
Accounts receivable, net of allowance for doubtful
accounts of $2,506 in 1999 and $2,548 in 1998 27,701 30,179
Advance payments to investigators 41 492
Income taxes receivable 1,771 3,614
Other current assets 2,120 1,938
--------- ---------
Total current assets 42,622 47,090
Property, plant and equipment:
Land, buildings and leasehold improvements 20,661 20,324
Equipment 31,084 30,500
Furniture and fixtures 4,965 4,570
--------- ---------
56,710 55,394
Less accumulated depreciation 17,161 15,620
--------- ---------
39,549 39,774
Excess of purchase price over net assets acquired 33,806 33,655
Other assets 2,727 2,577
--------- ---------
$ 118,704 $ 123,096
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,071 $ 7,332
Advance billings 10,304 12,562
Payables to investigators 2,955 1,806
Accrued expenses 8,547 7,714
Income taxes payable 411 361
Current maturities of long-term debt -- 89
--------- ---------
Total current liabilities 28,288 29,864
Deferred income taxes 3,729 3,411
Long-term debt 444 265
Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value - 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock, $.01 par value - 50,000,000 shares
authorized; issued and outstanding 18,017,172 in
1999 and 18,230,172 in 1998 180 182
Additional paid-in capital 126,493 127,329
Accumulated deficit (34,386) (31,445)
Accumulated other comprehensive income(loss) (6,044) (6,510)
--------- ---------
Total stockholders' equity 86,243 89,556
--------- ---------
$ 118,704 $ 123,096
========= =========
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR LOSS PER SHARE)
1999 1998
-------- --------
Revenue:
Service revenue $ 28,077 $ 29,277
Less: Subcontractor costs 4,374 5,629
-------- --------
Net service revenue 23,703 23,648
Costs and expenses:
Direct costs 15,075 16,527
Selling, general and administrative costs 9,470 9,628
Depreciation and amortization 1,603 1,454
Interest income, net of interest expense of $6
in 1999 and $6 in 1998 (104) (328)
Gain on sale of Ovation (484) --
Nashville lease termination costs 845 --
-------- --------
Loss before income taxes (2,702) (3,633)
Provision (benefit) for income taxes 239 (1,393)
-------- --------
Net loss $ (2,941) $ (2,240)
======== ========
Loss per share:
Basic $ (0.16) $ (0.12)
Diluted $ (0.16) $ (0.12)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,024 18,185
Diluted 18,024 18,185
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,941) $ (2,240)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,896 1,708
Gain on sale of Ovation (484) --
Changes in operating assets and liabilities 3,155 (5,962)
Other -- 8
-------- --------
Net cash provided by (used in) operating activities 1,626 (6,486)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (1,267) (1,043)
Costs associated with option to acquire MPI (146) (1,552)
-------- --------
Net cash used in investing activities (1,413) (2,595)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 43
Proceeds received on long-term debt borrowings 85 382
-------- --------
Net cash provided by financing activities 85 425
Effect of exchange rate changes on cash (176) 116
-------- --------
Net increase(decrease) in cash and cash equivalents 122 (8,540)
Cash and cash equivalents at beginning of period 10,867 28,275
-------- --------
Cash and cash equivalents at end of period $ 10,989 $ 19,735
======== ========
See notes to condensed consolidated financial statements
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CLINTRIALS RESEARCH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
ClinTrials Research Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included. Certain
prior year amounts have been reclassified to conform to the current year
presentation. Operating results for the three months ended March 31, 1999, are
not necessarily indicative of the results that may be expected for other
quarters or the entire year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
presentation of both Basic Earnings per Share ("Basic EPS") and Diluted Earnings
per Share ("Diluted EPS"). Basic EPS is based on the weighted average number of
shares of common stock outstanding during the period while diluted EPS also
includes the dilutive effect of common stock equivalents. Diluted loss per share
for the three months ended March 31, 1999 and 1998 does not include the dilutive
effect of common stock equivalents (stock options and warrants) of 781,000 and
276,000, respectively, as their effect would be anti-dilutive. The Company's
stock is currently traded in the Nasdaq Stock Market and sale information is
included on the Nasdaq National Market Issues System under the symbol "CCRO".
3. COMPREHENSIVE INCOME (LOSS)
FASB SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") establishes
rules for reporting and displaying comprehensive income and its components.
Accumulated other comprehensive income (loss) for the Company consists entirely
of accumulated foreign currency translation adjustments and is a separate
component of stockholders' equity under SFAS No. 130.
The components of comprehensive income (loss), net of related tax, for the three
months ended March 31, 1999 and 1998 are as follows (in thousands):
1999 1998
------- -------
Net loss $(2,941) $(2,240)
Foreign currency translation adjustments 466 543
------- -------
Comprehensive loss $(2,475) $(1,697)
======= =======
4. SEGMENT REPORTING
FASB SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") establishes standards for reporting information
about operating segments in annual financial statements and interim financial
reports to stockholders as well as standards for disclosure concerning related
products and services, and geographic areas.
The Company is a full-service contract research organization ("CRO") serving the
pharmaceutical, biotechnology and medical device industries. These research
services comprise two reportable operating segments - Clinical and Preclinical.
Clinical services consist of designing, monitoring, and managing trials of new
pharmaceutical and biotechnology products on humans, and providing clinical data
management, biostatistical, product registration, and pharmacoeconomic services.
Clinical service
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activities and revenues are performed and earned primarily in the United States
and Europe. The Company's European operations are headquartered in Maidenhead,
U.K. with its primary satellite offices in Brussels, Belgium and Glasgow,
Scotland. The operating results of the Company in the individual European
countries are immaterial and therefore European operations as a whole are
disclosed below. Preclinical services are comprised of designing and conducting
trials of new pharmaceutical and biotechnology products based primarily upon
animal models to produce data required to assess and evaluate efficacy in and
potential risks to humans. Preclinical services are performed in Montreal,
Quebec, Canada. Activity which is not included in the Clinical or Preclinical
segments is shown as "Other" which includes operations not directly related to
the business segments and corporate expenses.
Financial data by segment for the three months ended March 31, 1999 and 1998 is
summarized below (in thousands). Segment assets have not materially changed
since December 31, 1998.
U.S. EUROPE TOTAL CANADA
CLINICAL CLINICAL CLINICAL PRECLINICAL OTHER TOTALS
-------- -------- -------- ----------- ----- ------
March 31, 1999
- --------------
Net revenues from external customers $ 8,659 $ 4,188 $ 12,847 $10,856 $ -0- $23,703
Segment profit (loss) (2,270) (704) (2,974) 1,616 (1,087) (2,445)
March 31, 1998
- --------------
Net revenues from external customers $ 11,358 $ 2,499 $ 13,857 $ 9,791 $ -0- $23,648
Segment profit (loss) (882) (3,278) (4,160) 1,238 (1,039) (3,961)
Segment profit (loss) excludes other income (expense) and income taxes and
reconciles to consolidated net loss as follows (in thousands):
1999 1998
------- -------
Segment profit (loss) $(2,445) $(3,961)
Interest income, net 104 328
Gain on sale of Ovation 484 --
Nashville lease termination costs (845) --
------- -------
Loss before income taxes $(2,702) $(3,633)
======= =======
5. PROVISION (BENEFIT) FOR INCOME TAXES
The effective tax rate was 8.8% for the three months ended March 31, 1999,
compared to an effective tax benefit rate of 38.3% for the three months ended
March 31, 1998. The effective tax rate changed primarily because the Company
fully realized its available tax loss carrybacks in 1998. Due to the
restrictions that accounting standards place on deferred tax assets associated
with loss carryforwards, the Company recorded a valuation allowance of $1.6
million in the three months ended March 31, 1999 for its deferred tax assets
related to the Company's potential tax benefit of such loss carryforwards
associated with its operating loss in the first quarter of 1999.
6. CREDIT FACILITIES AND DEBT
The Company has a $15.0 million domestic credit facility which has expansion
capabilities to $40.0 million provided the Company meets certain financial
requirements. Credit availability under the Company's domestic line of credit
and foreign line of credit (the "Credit Facilities") totals approximately $18.3
million. The lines are collateralized by certain of the Company's assets and
bear interest at a fluctuating rate based either on the respective banks' prime
interest rate or the London Interbank Offered Rate ("LIBOR"), as elected by the
Company. On March 31, 1999 and 1998, there were no borrowings outstanding under
the Company's lines of credit. Commitment availability at March 31, 1999 has
been reduced by issued letters of credit of approximately $710,000. Borrowings
available under the lines of credit are subject to certain financial and
operating covenants.
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The Company's Canadian subsidiary has approximately $444,000 of borrowings
outstanding from the Canadian government which bears no interest and is
repayable in four equal annual installments beginning in 2000 and ending in
2003.
7. CONTINGENCIES
In 1991, a customer commenced legal action against the predecessor of the
Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two research studies. Judgment was rendered in February
1997 by the Superior Court of Montreal against the Company's preclinical
subsidiary in the amount of approximately $530,000 plus interest to accrue from
September 1991. The Company's preclinical subsidiary, now responsible for this
action, has reserves adequate to cover the current judgment amount. The
Company's preclinical subsidiary has appealed the amount of the judgment and the
subsidiary's insurance company has appealed the portion of the judgment which
obligates the insurance company to pay the insurance claim related to this
litigation. The Company believes it is entitled, subject to certain limitations,
to indemnification from a former owner of the predecessor for a portion of this
claim. In the opinion of management, the ultimate resolution of such pending
legal proceedings will not have a material effect on the Company's financial
position or results of operations.
8. RESTRUCTURING CHARGE
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with lease commitments
following the Company's restructuring decision to consolidate facilities. The
1998 restructuring charge consists of the following (in thousands):
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 3/31/99
------ ----------
Write down of assets in connection with closure of
Lexington facility $1,983 $ --
Lease costs associated with consolidation of
facilities 1,976 440
Severance costs 2,132 --
Other 273 --
------ ----
$6,364 $440
====== ====
9. SALE OF OVATION
On January 4, 1999, the Company sold its pharmacoeconomic subsidiary, Ovation,
back to the principals from whom the shares were originally purchased, as part
of the Company's ongoing consolidation of U.S. operations into it's Research
Triangle Park, North Carolina ("RTP") facility. Pharmacoeconomic services are
now performed out of the Company's RTP facility as the Company retains the right
to use the ClinTrials Ovation name. The Company received 213,000 shares of the
Company's stock in the sales transaction and recorded a gain on the sale of
$484,000.
10. NASHVILLE LEASE TERMINATION COSTS
The Company entered into an agreement to terminate the lease of its Nashville
office and accrued $845,000 in the first quarter of 1999 for costs related to
the termination of this lease. The termination of this lease relieves the
Company of approximately $11.0 million of future minimum lease payments. The
Company will relocate its Corporate office to Research Triangle Park, North
Carolina in the second quarter of 1999.
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11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") which is required to be
adopted in years beginning after June 15, 1999. The Company plans to adopt SFAS
No. 133 effective January 1, 2000. The Company's Canadian subsidiary enters into
foreign exchange forward contracts to hedge its United States dollar denominated
contracts in backlog. The Company does not anticipate that the adoption of SFAS
No. 133 will have a significant effect on the financial position of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
The information set forth and discussed below for the three months ended March
31, 1999 and 1998 is derived from the Condensed Consolidated Financial
Statements included elsewhere herein. The financial information set forth and
discussed below is unaudited but, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The Company's results of operations for a
particular quarter may not be indicative of the results that may be expected for
other quarters or the entire year.
The Company's Form 10-Q includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import. Such statements include
statements concerning the Company's ability to obtain new business and to
accurately estimate the timing of recognition of revenue in the backlog due to
variability in size, scope and duration of projects, regulatory delays, study
results which lead to reductions or cancellations of projects, other decisions
totally within the control of its clients and its ability to immediately affect
the level of operating expenses, as well as statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations. Such statements are subject to various
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements because of a number of
factors, including those identified in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that such statements included in this document will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The
forward-looking statements are made as of the date of this document and the
Company assumes no obligation to update such statements or to update the reasons
that actual results could differ from those projected in the forward-looking
statements.
OVERVIEW
The Company is a full-service contract research organization ("CRO") serving the
pharmaceutical, biotechnology and medical device industries. The Company
designs, monitors and manages preclinical and clinical trials, provides clinical
data management and biostatistical services and offers product registration and
pharmacoeconomic services throughout the United States, Canada and Europe. The
Company generates substantially all of its revenue from the preclinical and
clinical testing of new pharmaceutical and biotechnology products.
The Company's contracts are typically fixed-price contracts which range in
duration from a few months to a few years. The contracts usually require a
portion of the contract amount to be paid at or near the time the trial is
initiated with the remaining contract amount paid in intervals based upon the
completion of certain negotiated performance requirements or milestones and, to
a lesser extent, on a date certain basis. The Company's contracts generally may
be terminated with or without cause. In the event of termination, the Company is
typically entitled to all sums owed for work performed through the notice of
termination and all costs associated with termination of the study. In addition,
at times some of the Company's contracts provide for an early termination fee,
the amount of which usually declines as the trial progresses. Termination or
delay in the performance of a contract may occur for various reasons, including,
but not limited to, unexpected or undesired results, inadequate patient
enrollment or investigator recruitment, production problems resulting in
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shortages of the drug, adverse patient reactions to the drug, or the client's
decision to de-emphasize a particular trial.
Revenue for contracts is recorded in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 81-1
"Accounting for Performance of Construction-Type and Certain Product-Type
Contracts" as costs are incurred and includes estimated earned fees or profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost type of percentage-of-completion method of
accounting). Additionally, the Company may begin work on a project before a
contract is signed for customers with whom the Company has formed a strategic
alliance or has a long-term relationship. Revenue is recognized in the same
manner as signed contracts based upon terms verbally agreed with the customer.
Revenue is affected by the mix of trials conducted and the degree to which labor
and facilities are utilized. The Company recognizes revenue related to contract
modifications when realization is assured and the amounts can be reasonably
determined. When estimated contract costs indicate that a loss will be incurred
on a contract, the entire loss is provided for in such period. The Company
routinely subcontracts with third party investigators in connection with
multi-site clinical trials and with other third party service providers for
laboratory analysis and other specialized services. Subcontractor costs are
passed through to clients and, in accordance with industry practice, are
included in gross service revenue. Subcontractor costs are accrued on a
straight-line basis over the investigator phase of the contract. Subcontractor
services may vary significantly from contract to contract; therefore, changes in
gross service revenue may not be indicative of trends in revenue growth.
Accordingly, the Company views net service revenue, which consists of gross
service revenue less subcontractor costs, as its primary measure of revenue
growth. The Company has had, and is expected to continue to have, certain
clients from which at least 10% of the Company's overall revenue is generated
over multiple contracts. Such concentrations of business are not uncommon within
the CRO industry.
The Company's core European operation consists of offices in Maidenhead, United
Kingdom and Brussels, Belgium. The Company expanded its ability to perform
global clinical trials by opening offices in Australia, Chile, France, and
Israel in 1996 and Italy and Scotland in 1997.
RESTRUCTURING CHARGE
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with lease commitments
following the Company's restructuring decision to consolidate facilities. The
1998 restructuring charge consists of the following (in thousands):
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 3/31/99
------ ----------
Write down of assets in connection with closure of
Lexington facility $1,983 $ --
Lease costs associated with consolidation of
facilities 1,976 440
Severance costs 2,132 --
Other 273 --
------ ----
$6,364 $440
====== ====
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RESULTS OF OPERATIONS
The Company's operating segments consist of preclinical trials which are
performed by the Company's Canadian subsidiary and clinical trials which are
performed primarily in the United States and Europe. Summarized below (in
thousands) is the Company's net revenue and segment profit (loss) for the three
months ended March 31, 1999 and 1998 for each reportable segment as defined by
Financial Accounting Standards Board Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
"Other" includes operations not directly related to the segments and corporate
expenses. See Segment Reporting note to condensed consolidated financial
statements of the Company.
1999 1998
-------- --------
Net Revenue:
U.S. Clinical $ 8,659 $ 11,358
Europe Clinical 4,188 2,499
-------- --------
Total Clinical 12,847 13,857
Canada Preclinical 10,856 9,791
-------- --------
Total Company $ 23,703 $ 23,648
======== ========
Segment profit (loss):
U.S. Clinical $ (2,270) $ (882)
Europe Clinical (704) (3,278)
-------- --------
Total Clinical (2,974) (4,160)
Canada Preclinical 1,616 1,238
Other (1,087) (1,039)
-------- --------
Total Company $ (2,445) $ (3,961)
======== ========
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net loss for the three months ended March 31, 1999 was $2.9 million, or $0.16
diluted loss per share, compared to a net loss in the same period of 1998 of
$2.2 million or $0.12 diluted loss per share. The increase in the net loss is
primarily attributable to the valuation allowance recorded in 1999 on deferred
tax assets associated with loss carryforwards resulting from the Company's 1999
operating loss (discussed below) and Nashville lease termination costs partially
offset by improved operating margins and a gain on the sale of its
pharmacoeconomic subsidiary, Ovation.
Net service revenue increased slightly to $23.7 million in the three months
ended March 31, 1999 from $23.6 million in the same period in 1998 as increased
revenues in Europe clinical and Canada preclinical offset a decrease in U.S.
clinical revenues.
Direct costs decreased 8.8% to $15.1 million in the three months ended March 31,
1999 from $16.5 million in the same period in 1998. Direct costs decreased as a
percentage of net service revenue to 63.6% from 69.9%. Direct costs are based on
the mix of contracts in progress and as a percentage of net revenue may
fluctuate from period to period dependent upon the mix of contracts in the
backlog. In addition, direct costs will fluctuate due to changes in labor and
facility utilization.
Selling, general and administrative costs decreased 1.6% to $9.5 million in the
three months ended March 31, 1999 from $9.6 million in the same period in 1998.
Selling, general and administrative costs decreased as a percentage of net
service revenue to 40.0% from 40.7%. Selling, general and administrative costs,
which primarily includes compensation for administrative employees and costs
related to facilities, information technology and marketing, are relatively
fixed in the near term while revenue is subject to fluctuation, therefore,
variations in the timing of contracts or the progress of clinical trials (both
delays and accelerations) may cause significant variations in quarterly
operating results.
Depreciation and amortization expense increased 10.2% to $1.6 million in the
three months ended March 31, 1999 from $1.5 million in the same period in 1998
as increased depreciation resulting from 1998 and 1999 capital expenditures was
offset by a decrease
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in depreciation and amortization for the Company's Lexington facility closed in
April 1998.
Interest income, net of interest expense, was $0.1 million in the first quarter
of 1999 compared to $0.3 million in the same period of 1998.
In the first quarter of 1999, the Company recorded a $484,000 gain in connection
with the sale of its pharmacoeconomic subsidiary, Ovation, in exchange for
213,000 shares of the Company's common stock. The Company also accrued $845,000
in the first quarter of 1999 for costs related to the termination of its
Nashville office lease. The Company will relocate its Corporate office to
Research Triangle Park, North Carolina in the second quarter of 1999.
The Company's provision for income taxes was $0.2 million in the three months
ended March 31, 1999 as compared to an income tax benefit of $1.4 million in the
first quarter of 1998. The effective tax rate in the first quarter of 1999 was
8.8% compared to an effective tax benefit rate of 38.3% in the same period in
1998. The effective tax rate changed primarily because the Company fully
realized its available tax loss carrybacks in 1998. Due to the restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company recorded a valuation allowance of $1.6 million in the
first quarter of 1999 for its deferred tax assets related to the Company's
potential tax benefit associated with its operating loss in the first quarter of
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and long-term
basis include the payment of salaries, office rent and travel expenses, as well
as capital expenditures. The Company has historically financed these
expenditures, as well as acquisitions, with cash flow from operations, issuances
of equity securities and borrowings under its lines of credit. The Company
utilizes its working capital to finance these expenditures pending receipt of
its receivables. Contract receipts from the Company's clients vary according to
the terms of each contract.
Prerequisites for billings are generally established by contractual provisions
that include predetermined date certain payment schedules (which may include
payment at or near the time the trial is initiated), the achievement of
negotiated performance requirements or milestones, or the submission of required
billing detail. Unbilled receivables arise from those contracts under which
services performed exceed billings which are rendered upon the achievement of
certain negotiated performance requirements or on a date-certain basis. Advance
billings represent contractual billings for services not yet rendered. As of
March 31, 1999, the Company's advance billings were $10.3 million and its
accounts receivables of $27.7 million included $14.7 million of unbilled
receivables. The Company expects to bill and collect these unbilled receivables
within one year of revenue recognition. Cash receipts do not correspond to costs
incurred and revenue recognition (which is typically based on cost-to-cost type
of percentage of completion accounting) and therefore, the Company's cash flow
is influenced by the interaction of changes in receivables and advance billings.
The Company typically receives a low volume of large-dollar cash receipts. The
number of days sales outstanding in accounts receivable (which includes unbilled
receivables) was 99 days at March 31, 1999, compared to 115 days at December 31,
1998 and 109 days at March 31, 1998. The number of days sales outstanding in
accounts receivable (which includes unbilled receivables) net of advance
billings was 60 days at March 31, 1999, compared to 75 days at December 31, 1998
and March 31, 1998.
The Company had cash and cash equivalents of $11.0 million at March 31, 1999 as
compared to $10.9 million at December 31, 1998.
During the three months ended March 31, 1999, net cash provided by operating
activities totaled $1.6 million, primarily due to a decrease in income tax
receivables of $1.8 million, and an increase in net payables to investigators of
$1.6 million, partially offset by a loss before noncash items of $1.5 million
and a decrease in accounts payable and accrued expenses of $0.4 million.
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Cash used in investing activities of $1.4 million during three months ended
March 31, 1999 consisted of capital expenditures of $1.3 million and costs
associated with an option to acquire MPI Research, LLC ("MPI") of $0.1 million.
Capital expenditures have primarily been made for computer system additions and
upgrades, personal computer equipment and expenditures on facility improvements.
In addition to the $1.3 million of capital expenditures incurred in the first
quarter of 1999, capital expenditures are estimated to be approximately $5.7
million in the remainder of 1999.
The Company has a $15.0 million domestic credit facility which has expansion
capabilities to $40.0 million provided the Company meets certain financial
requirements. Credit availability under the Company's domestic line of credit
and its foreign line of credit (the "Credit Facilities") totals approximately
$18.3 million. There were no borrowings outstanding under the lines of credit at
March 31, 1999. Commitment availability at March 31, 1999 has been reduced by
issued letters of credit of approximately $710,000. The lines of credit are
collateralized by certain of the Company's assets and amounts outstanding would
bear interest at a fluctuating rate based either on the respective banks' prime
interest rate or the London Interbank Offered Rate ("LIBOR"), as elected by the
Company. Borrowings available under the lines of credit are subject to certain
financial and operating covenants. The Company's Canadian subsidiary has
approximately $444,000 of borrowings outstanding from the Canadian government
which bears no interest and is repayable in four annual installments beginning
in 2000 and ending in 2003.
The Company expects to continue expanding its operations through internal growth
and strategic acquisitions. The Company expects such activities will be funded
from existing cash and cash equivalents, cash flow from operations, and
available borrowings under its Credit Facilities. Although pressure on cash
reserves is expected, the Company estimates that its sources of cash will be
sufficient to fund the Company's current operations, including planned capital
expenditures, over the next year. There may be acquisition or other growth
opportunities which require additional external financing, and the Company may
from time to time seek to obtain additional funds from public or private
issuances of equity or debt securities. There can be no assurances that such
financings will be available on terms acceptable to the Company.
QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate as a result of factors
such as delays experienced in implementing or completing particular clinical
trials and termination of clinical trials, the costs associated with integrating
acquired operations, foreign currency exchange fluctuations, as well as the
costs associated with opening new offices. Since a high percentage of the
Company's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the timing of contracts or the progress of
clinical trials (both delays and accelerations) may cause significant variations
in quarterly operating results. Results of one quarter are not necessarily
indicative of results for the next quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133") which is required to be adopted in fiscal years beginning after June 15,
1999. The Company plans to adopt SFAS No. 133 effective January 1, 2000. The
Company's Canadian subsidiary enters into forward exchange currency contracts to
hedge its United States dollar denominated contracts in backlog. The Company
does not anticipate that the adoption of SFAS No. 133 will have a significant
effect on the financial position of the Company.
YEAR 2000 ISSUE
The Company is engaged in a major effort to minimize the impact of the Year 2000
date change on its products, services, information systems, laboratories and
facilities. The Company has targeted September 30, 1999 for completion of these
efforts and plans to have all clinical systems Year 2000 compliant by mid-year,
1999.
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The year 2000 challenge is a priority within the Company at every level. Primary
Year 2000 global preparedness responsibility rests with a Year 2000 Project
Manager. The Year 2000 Project Manager is augmented by a group, which has been
assigned specific Year 2000 responsibilities in addition to their regular
assignments. The Year 2000 assignments take priority over their regular
assignments.
The overall strategy for Year 2000 compliance at the Company is, wherever
possible, to replace potentially non-compliant software and hardware with new
compliant systems. The one exception to this strategy is the Company's clinical
data management systems and supporting subsystems. The Company's clinical data
management systems were successfully upgraded and tested for Year 2000
compliance in April 1999 and are currently being utilized. Since all of these
systems fall under Good Clinical Practices regulations there was extensive
testing and documentation of the upgrade process.
The inventory and assessment phase of the Year 2000 assessment program has
largely been completed with respect to its information systems, laboratories and
facilities. The Company has commenced the remediation phase of this effort
through a combination of product upgrades and replacement. Plans have been
developed to facilitate the completion of this work, as well as the related
testing and deployment, by September 30, 1999.
Currently, approximately 70% of the Company's information technology
infrastructure has been determined to be Year 2000 ready and is deployed for
use. Approximately, 65% of the applications requiring Year 2000 remediation that
are supported by the Company's information technology group are now Year 2000
ready and have been deployed or are awaiting deployment. The Company is
monitoring the progress of readiness efforts across the Company, with a special
emphasis in the early identification of any areas where progress to date could
indicate difficulty in meeting the Company's target dates. The Company is
developing specific contingency plans, as appropriate.
The Company is also assessing the Year 2000 readiness of the facilities that it
owns or leases worldwide. The Company plans to complete remediation efforts by
September 30, 1999 and to complete development of applicable contingency plans
by August 1, 1999.
To ensure the continued delivery of third party products and services the
Company's procurement organization has analyzed the Company's supplier's base
and has sent surveys to approximately 70 suppliers. Follow-up efforts have
commenced to obtain feedback from critical suppliers. To supplement this effort,
the Company plans to conduct readiness reviews of the Year 2000 status of
suppliers ranked most critical based on their relationships with the Company,
the product/service provided, and/or the content of their survey responses.
Almost all of the Company's suppliers are still deeply engaged in executing
their Year 2000 readiness efforts and, as a result, the Company cannot, at this
time, fully evaluate the Year 2000 risks to its supply chain. The Company will
continue to monitor the Year 2000 status of its suppliers to minimize this risk
and will develop appropriate contingent responses as the risk becomes clearer.
The risk resulting from the failure of third parties in the public and private
sector to attain Year 2000 readiness is the same as other firms in the Company's
industry or other business enterprises in general. The following are
representative of the types of risks that could result in the event of one or
more of the Company's information systems, laboratories, or facilities failed to
be Year 2000 ready, or similar major failures by one or more major third party
suppliers to the Company:
Information Systems - could include interruptions or disruptions of
business and transaction processing such as customer billing, payroll,
accounts payable and other operating and information processing, until
systems can be remedied or replaced;
Laboratory Facilities - could include interruptions or disruptions of
data management processes and facilities with delays in delivery of
services, until non-compliant conditions or components can be remedied
or replaced; and
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Major Suppliers to the Company - could include interruptions or
disruptions of the supply of raw materials, supplies and Year 2000
ready components which could cause interruptions or disruptions and
delays in delivery of services, until the third party suppliers
remedied the problem or contingency measures can be implemented.
Risks of major failures of the Company's principal services and products could
include late delivery of study reports to customers, the cost and resources for
the Company to remedy problems where the Company is obligated or undertakes such
action, and delays in startup of new studies.
The Company believes it is taking the necessary steps to resolve its Year 2000
issues; however, given the possible consequences of failure to resolve
significant Year 2000 issues, there can be no assurance that any one or more
such failures would not have material adverse effects on the Company. The
current estimate of total Year 2000 project costs is $8.7 million. During the
year ended December 31, 1998, the Company spent $2.5 million to purchase
hardware and software and used internal resources of $1.1 million (primarily
salary costs) and during the three months ended March 31, 1999, the Company
spent $0.8 million to purchase hardware and software and used internal resources
of $0.9 million (primarily salary costs) on its Year 2000 issues. Year 2000
compliance costs incurred in the quarter ended March 31, 1998 were not
significant. During the remainder of 1999, the Company estimates it will spend
$1.4 million on hardware and software and devote $2.0 million in internal
resources to complete its Year 2000 compliance project. Work projects have been
prioritized to largely address Year 2000 readiness. As a result, most of these
costs represent costs that would have been incurred in any event. These amounts
cover costs of the Year 2000 readiness work for inventory, assessment,
remediation, testing and deployment including fees and charges of contractors
for outsourced work and consultants' fees. Costs for previously contemplated
updates and replacements of the Company's internal systems and information
systems infrastructure have been included in these estimates when such upgrades
or replacements have been accelerated.
While the Year 2000 cost estimates include additional costs, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, services or financial condition.
The actual outcomes and results could be affected by future factors including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remediate software code problems, critical
suppliers, subcontractors meeting their commitments to be Year 2000 ready and
provide Year 2000 ready products, and timely actions by customers.
FOREIGN CURRENCY
The Company conducts business in several foreign countries and approximately 63%
and 52% of the Company's net revenue for the three months ended March 31, 1999
and 1998, respectively, were derived from the Company's operations outside the
United States. Since its acquisition in 1996, the Company's preclinical
operations in Canada has generated more than 70% of the Company's non-U.S.
revenue. Accordingly, exposure exists to potentially adverse movement in foreign
currency rates. The Company uses foreign exchange forward contracts to hedge the
risk of changes in foreign currency exchange rates associated with contracts in
which the expenses for providing services are incurred in the functional
currency of the Company's foreign subsidiary, but payments on contracts are made
by the client in another currency. The objective of these contracts is to reduce
the effect of foreign currency exchange rate fluctuations on the Company's
foreign subsidiary's operating results.
Additionally, the Company's consolidated financial statements are denominated in
U.S. dollars and, accordingly, changes in the exchange rates between the
Company's subsidiaries' local currency and the U.S. dollar will affect the
translation of such subsidiaries' financial results into U.S. dollars for
purposes of reporting the Company's consolidated financial results. Translation
adjustments are reported with accumulated other comprehensive income (loss) as a
separate component of stockholders'
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equity. Such adjustments may in the future be material to the Company's
financial statements.
INCOME TAXES
The Company's financial statements do not reflect U.S. or additional foreign
taxes on the possible distribution of undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Should the
Company determine the need to distribute these undistributed earnings of foreign
subsidiaries, it would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to various
countries.
In the second quarter of 1998, the Company fully realized the income tax benefit
on its available U.S. income tax loss carrybacks. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company recorded a valuation allowance of $1.6 million in the
first quarter of 1999 for its deferred tax assets related to the Company's
potential tax benefit of such loss carryforward associated with its operating
losses in such period. The Company expects to record a valuation allowance for
the remainder of 1999 on deferred tax assets that may result from the potential
tax benefit on loss carryforwards associated with the Company's expected
operating loss in fiscal 1999.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO.
27 Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLINTRIALS RESEARCH INC.
Date: April 28, 1999 By: /s/ S. COLIN NEILL
S. Colin Neill
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
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