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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1999
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Commission file number 340-23520
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QUINTILES TRANSNATIONAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
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(Address of principal executive offices) (Zip Code)
(919) 998-2000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding as of
April 30, 1999 was 112,102,642.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
March 31, 1999 and December 31, 1998 3
Condensed consolidated statements of
income - Three months ended March 31, 1999
and 1998 4
Condensed consolidated statements of
cash flows - Three months ended
March 31, 1999 and 1998 5
Notes to condensed consolidated financial
statements - March 31, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities - Not Applicable --
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information - Not Applicable --
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
Exhibit Index 22
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 197,307 $ 155,469
Accounts receivable and unbilled services 390,541 358,319
Investments 114,973 32,241
Prepaid expenses 38,465 26,000
Other current assets 22,138 24,113
----------- -----------
Total current assets 763,424 596,142
Property and equipment 469,145 424,952
Less accumulated depreciation 162,956 153,870
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306,189 271,082
Intangibles and other assets:
Intangibles 274,331 155,618
Investments 79,267 65,456
Deferred income taxes 71,090 71,401
Deposits and other assets 42,039 41,981
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466,727 334,456
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Total assets $ 1,536,340 $ 1,201,680
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 4,359 $ 921
Accounts payable and accrued expenses 200,168 172,280
Credit arrangements, current 106,020 33,670
Unearned income 152,290 144,932
Income taxes and other current liabilities 21,459 5,448
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Total current liabilities 484,296 357,251
Long-term liabilities:
Credit arrangements, less current portion 164,528 145,945
Long-term obligations 2,840 23,830
Deferred income taxes and other liabilities 35,118 31,000
----------- -----------
202,486 200,775
----------- -----------
Total liabilities 686,782 558,026
Shareholders' equity:
Common stock and additional paid-in capital,
111,942,601 and 106,726,390 shares issued and
outstanding at March 31, 1999 and December 31,
1998, respectively 767,257 559,450
Retained earnings 100,706 93,348
Accumulated other comprehensive income (14,637) (5,329)
Other equity (3,768) (3,815)
----------- -----------
Total shareholders' equity 849,558 643,654
----------- -----------
Total liabilities and shareholders' equity $ 1,536,340 $ 1,201,680
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31
1999 1998
---- ----
(in thousands)
Net revenue $ 408,098 $ 309,068
Costs and expenses:
Direct 210,466 160,851
General and administrative 123,493 95,367
Depreciation and amortization 25,129 21,879
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359,088 278,097
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Income from operations 49,010 30,971
Transaction costs (22,363) (532)
Other income (expense) 426 (290)
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Total other expense, net (21,937) (822)
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Income before income taxes 27,073 30,149
Income taxes 19,370 11,277
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Net income $ 7,703 $ 18,872
========= =========
Basic net income per share $ 0.07 $ 0.19
========= =========
Diluted net income per share $ 0.07 $ 0.17
========= =========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31
1999 1998
--------- --------
(In thousands)
OPERATING ACTIVITIES
Net income $ 7,703 $ 18,872
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 25,129 21,879
Non-recurring transaction costs 22,463 -
Provision for deferred income tax expense 2,526 6,521
Change in operating assets and liabilities (32,976) (47,715)
Other 415 333
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Net cash provided by (used in) operating activities 25,260 (110)
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 1,024 795
Acquisition of property and equipment (57,229) (19,646)
Cash acquired in stock transactions, Note 2 87,386 1,582
Payment of non-recurring transaction costs (2,878) -
Payment of dividend - (385)
Purchases of marketable securities, net (12,753) (22,695)
--------- --------
Net cash provided by (used in) investing activities 15,550 (40,349)
FINANCING ACTIVITIES
Increase in lines of credit, net 3,305 10,926
Principal payments on credit arrangements (3,427) (4,325)
Issuance of common stock, net 3,416 6,422
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Net cash provided by financing activities 3,294 13,023
Effect of foreign currency exchange rate changes on cash (2,266) (399)
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Increase (decrease) in cash and cash equivalents 41,838 (27,835)
Cash and cash equivalents at beginning of period 155,469 89,384
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Cash and cash equivalents at end of period $ 197,307 $ 61,549
========= ========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
March 31, 1999
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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1998 of Quintiles Transnational Corp. (the
"Company").
The balance sheet at December 31, 1998 has been derived from the audited
consolidated financial statements of the Company, as restated for the ENVOY
Corporation ("ENVOY") and Niehaus and Botha, pooling of interests transactions
(see Note 2) consummated in the first quarter of 1999. The financial statements
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
2. Mergers and Acquisitions
On January 1, 1999, the Company acquired substantial assets of Hoechst Marion
Roussel's ("HMR") Kansas City-based Drug Innovation and Approval facility for
approximately $93 million in cash, most of which is expected to be paid in the
second half of 1999 when the acquisition of the physical facility is completed.
As a part of this transaction, the Company was awarded a $436 million contract
for continued support and completion of ongoing HMR development projects over a
five-year period. In addition, HMR will offer the Company the opportunity to
provide all U.S. outsourcing services up to an additional $144 million over the
same period.
On February 17, 1999, the Company acquired Oak Grove Technologies, Inc. ("Oak
Grove"), a leader in providing current Good Manufacturing Practice compliance
services to the pharmaceutical, biotechnology and medical device industries. The
Company acquired Oak Grove in exchange for 87,948 shares of the Company's Common
Stock. The acquisition of Oak Grove has been accounted for as a purchase.
On March 29, 1999, the Company acquired Pharmaceutical Marketing Services Inc.
("PMSI") and its core company, Scott-Levin, a leader in pharmaceutical market
information and research services in the U.S. The Company acquired PMSI in
exchange for approximately 4,993,787 shares of the Company's Common Stock.
Outstanding PMSI options became options to acquire approximately 440,426 shares
of the Company's Common Stock. In addition, the Company agreed to pay contingent
value payments to former PMSI
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
stockholders who deferred receipt of one-half of the shares of the Company's
Common Stock they were entitled to receive in the transaction until June 14,
1999. For each deferred share of the Company's Common Stock, the contingent
value payment, if any, will be calculated based on the difference between
$38.71875 and the average closing price of the Company's Common Stock for 10
days selected at random out of the 20 trading days ending on June 11, 1999. The
Company will account for the contingent value payments when settled. The total
purchase price of the PMSI acquisition approximates $201.8 million. The Company
recorded approximately $111.5 million related to the excess cost over the fair
value of net assets required. The acquisition of PMSI has been accounted for as
a purchase.
On March 30, 1999, the Company acquired ENVOY, a Tennessee-based provider of
healthcare electronic data interchange and data mining services. The Company
acquired ENVOY in exchange for approximately 28,465,160 shares of the Company's
Common Stock. Outstanding ENVOY options became options to acquire approximately
3,914,583 shares of the Company's Common Stock. The acquisition of ENVOY has
been accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include the historical financial data of
ENVOY.
On March 31, 1999, the Company acquired Medlab Pty Ltd and the assets of the
Niehaus & Botha ("N & B") partnership, a South African based clinical
laboratory, in exchange for 271,146 shares of the Company's Common Stock. The
acquisition of N & B has been accounted for as a pooling of interests, and as
such, all historical financial data have been restated to include the historical
financial data of N & B.
Reconciliation of results of operations previously reported by the separate
entities prior to the mergers and as restated for the combined company follows
(in thousands, except per share data):
COMPANY ENVOY N & B CONSOLIDATED
------- ----- ----- ------------
For the three months ended
March 31, 1999:
Net revenue $ 350,906 $ 54,468 $ 2,724 $408,098
Net income (loss) 10,484 (3,316) 535 7,703
Basic net income per share 0.13 0.07
Diluted net income per share $ 0.13 $ 0.07
For the three months ended
March 31, 1998:
Net revenue $ 263,874 $ 42,524 $ 2,670 $309,068
Net income (loss) 18,902 75 (105) 18,872
Basic net income per share 0.25 0.19
Diluted net income per share $ 0.24 $ 0.17
3. Significant Customers
One customer accounted for 10.2% of consolidated net revenue for the three
months ended March 31, 1999. These revenues were earned by the Company's product
development and commercialization segments. No customer accounted for greater
than 10% of consolidated net revenue for the three months ended March 31, 1998.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) - Continued
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
March 31,
1999 1998
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Net income $ 7,703 $ 18,872
======== ========
Weighted average shares:
Basic weighted average shares 107,027 101,499
Effect of dilutive securities - Stock options 2,702 6,720
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Diluted weighted average shares 109,729 108,219
======== ========
Basic net income per share $ 0.07 $ 0.19
Diluted net income per share $ 0.07 $ 0.17
Options to purchase approximately 2.0 million shares of common stock with
exercise prices ranging between $45.125 and $56.25 per share were outstanding
during the three months ended March 31, 1999 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.
The conversion of the Company's 4.25% Convertible Subordinated 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.
5. Comprehensive Income
The following table represents the Company's comprehensive income for the three
months ended March 31, 1999 and 1998 (in thousands):
Three Months Ended
March 31,
1999 1998
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Net income $ 7,703 $ 18,872
Other comprehensive income:
Unrealized loss on marketable
securities, net of tax (232) (81)
Foreign currency adjustment (9,076) 1,014
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Comprehensive (loss) income $(1,605) $ 19,805
======= ========
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) - Continued
6. Credit Arrangements
As a result of the acquisition of PMSI, the Company has a forward sale
arrangement with CIBC Oppenheimer ("CIBC") pursuant to which the Company
transferred all of the IMS Health common stock in exchange for cash and a note
payable of $73.0 million. All of the Company's 1.2 million shares of IMS Health
common stock are being held by CIBC as collateral against the Company's
obligation to deliver these shares in August 1999.
7. Commitments and Contingencies
In February 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit naming as
defendants Richard L. Borison, Bruce I. Diamond, 14 pharmaceutical companies and
Quintiles Laboratories Limited, a subsidiary of the Company. The complaint
alleges that certain drug trials conducted by Drs. Borison and Diamond in which
Plaintiff alleges he participated between 1988 and 1996 were not properly
conducted or supervised, that Plaintiff had violent adverse reactions to many of
the drugs and that his schizophrenia was aggravated by the drug trials.
Consequently, Plaintiff alleges that he was subject to severe mortification,
injured feelings, shame, public humiliations, victimization, emotional turmoil
and distress. The complaint alleges claims for battery, fraudulent inducement to
participate in the drug experiments, medical malpractice, negligence in
conducting the experiments, and intentional infliction of emotional distress.
Plaintiff seeks to recover his actual damages in unspecified amounts, medical
expenses, litigation costs, and punitive damages. Nowhere in the complaint are
found any specific allegations against Quintiles Laboratories Limited nor any
specific factual connection between the Company and the Plaintiff's claims. The
Company believes the claims alleged against it are vague and meritless, and the
recovery sought is baseless. The Company intends to vigorously defend itself
against these claims.
Three class action complaints were filed in 1998, and later consolidated into a
single action against ENVOY and certain of its executive officers. The complaint
alleges, among other things, that from February 12, 1997 to August 18, 1998 the
defendants issued materially false and misleading statements about ENVOY, its
business, operations and financial position and failed to disclose material
facts necessary to make defendants' statements not false and misleading in
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated thereunder, and also asserts additional
claims under Tennessee common law for fraud and negligent misrepresentation. The
complaint alleges that ENVOY failed to disclose that its financial statements
were not prepared in accordance with generally accepted accounting principles
due to the improper write-off of certain acquired in-process technology,
resulting in ENVOY's stock trading at allegedly artificially inflated prices.
The Plaintiffs in this action seek unspecified compensatory damages, attorney's
fees and other relief. The Company believes that these claims are without merit
and intends to defend the allegations vigorously. Neither the likelihood of an
unfavorable outcome nor the amount of the ultimate liability, if any, with
respect to these claims can be determined at this time.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) -- Continued
8. Segments
The following table presents the Company's operations by reportable segment. The
Company is managed through three reportable segments, namely, the product
development service group, the commercialization service group and the
QUINTERNET(TM) informatics service group. Management has distinguished these
segments based on the normal operations of the Company. The product development
group is primarily responsible for all phases of clinical research and outcomes
research consulting. The commercialization group is primarily responsible for
sales force deployment and strategic marketing services. The QUINTERNET(TM)
informatics group is primarily responsible for electronic data interchange and
related informatics and includes ENVOY, which was acquired in the first quarter
of 1999. The Company does not include non- recurring costs ($3.7 million and
$5.1 million for the three months ended March 31, 1999 and 1998, respectively),
interest income (expense) and income tax (benefit) in segment profitability.
Overhead costs are allocated based upon management's best estimate of efforts
expended in managing the segments. There are not any significant intersegment
revenues.
Three Months Ended March 31,
1999 1998
---- ----
(in thousands)
Net revenue:
Product development $224,213 $155,448
Commercialization 129,416 111,096
QUINTERNET(TM) informatics 54,469 42,524
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$408,098 $309,068
======== ========
Income from operations:
Product development $ 27,817 $ 17,813
Commercialization 12,242 10,263
QUINTERNET(TM) informatics 12,672 7,960
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$ 52,731 $ 36,036
======== ========
As of
March 31, 1999 December 31, 1998
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Total assets:
Product development $ 698,588 $ 751,071
Commercialization 242,150 267,091
QUINTERNET(TM) informatics 595,602 183,518
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$1,536,340 $1,201,680
========== ==========
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company's consolidated financial data have been restated to include ENVOY
and N & B.
Three Months Ended March 31, 1999 and 1998
Net revenue for the first quarter of 1999 was $408.1 million, an increase of
$99.0 million or 32.0% over the first quarter of 1998 net revenue of $309.1
million. Growth occurred across each of the Company's three segments. 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 1998. Net revenue for the product development group increased 44.2% to $224.2
million for the first quarter of 1999 as compared to $155.4 million for the
first quarter of 1998. Net revenue for the commercialization group increased
16.5% to $129.4 million for the first quarter of 1999 as compared to $111.1
million for the first quarter of 1998. The product development and
commercialization groups experienced particularly strong growth in the Asia
Pacific region. Net revenue for the QUINTERNET(TM) informatics group increased
28.1% to $54.5 million for the first quarter of 1999 as compared to $42.5
million for the first quarter of 1998. Along with this increase, the
QUINTERNET(TM) informatics group experienced an increase in the volume of
transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $210.5
million or 51.6% of net revenue for the first quarter of 1999 versus $160.9
million or 52.0% of net revenue for the first quarter of 1998.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $123.5 million or
30.3% of net revenue for the first quarter of 1999 versus $95.4 million or 30.9%
of net revenue for the first quarter of 1998. The $28.1 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. Also included in the increase is approximately $2.8 million of
incremental costs related to the Company's Year 2000 Program.
Depreciation and amortization were $25.1 million or 6.2% of net revenue for the
first quarter of 1999 versus $21.9 million or 7.1% of net revenue for the first
quarter of 1998. Included is amortization of certain acquired intangible assets
of $3.7 million and $5.1 million for the three months ended March 31, 1999 and
1998, respectively. These intangible assets have been fully amortized as of
March 31, 1999. Excluding these expenses, depreciation and amortization were
$21.4 million or 5.2% of net revenue for the first quarter of 1999 versus $16.8
million or 5.4% of net revenue for the first quarter of 1998. The $4.6 million
increase is primarily due to the increase in the capitalized asset base of the
Company.
Income from operations was $49.0 million or 12.0% of net revenue for the first
quarter of 1999 versus $31.0 million or 10.0% of net revenue for the first
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $52.7 million or 12.9% net revenue
for the first quarter of 1999 versus $36.0 million or 11.7% of net revenue for
the first quarter of 1998. Income from
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Results of Operations -- Continued
operations for the product development group increased to $27.8 million or 12.4%
of net revenue for the first quarter of 1999 from $17.8 million or 11.5% of net
revenue for the first quarter of 1998. Income from operations for the
commercialization group increased slightly as a percentage of net revenue to
$12.2 million or 9.5% of net revenue for the first quarter of 1999 from $10.3
million or 9.2% of net revenue for the first quarter of 1998. Excluding the
amortization of certain acquired intangible assets as discussed above, income
from operations for the QUINTERNET(TM) informatics group increased to $12.7
million or 23.3% of net revenue for the first quarter of 1999 from $8.0 million
or 18.7% of net revenue for the first quarter of 1998. This increase primarily
results from the efficiencies realized due to the increase in the volume of
transactions processed.
The effective tax rate for the first quarter of 1999 was 71.5% versus a 37.4%
effective tax rate for the first quarter of 1998. Excluding the amortization of
certain acquired intangible assets as discussed above and transaction costs
which are not generally deductible for tax purposes, the effective tax rate for
the first quarter of 1999 was 36.4% as compared to a 31.5% effective tax rate
for the first quarter of 1998. The effective tax rate increase resulted
primarily from profits generated in locations with higher tax rates. Since the
Company conducts operations on a global basis, its effective tax rate may vary.
Liquidity and Capital Resources
Cash inflows from operations were $25.3 million for the three months ended March
31, 1999 versus cash outflows of $110,000 for the comparable period of 1998.
Investing activities, for the three months ended March 31, 1999, consisted
primarily of capital asset purchases and investment security purchases and
maturities. Capital asset purchases required an outlay of cash of $57.2 million
for the three months ended March 31, 1999 compared to an outlay of $19.6 million
for the same period in 1998. Capital asset expenditures for the three months
ended March 31, 1999 included approximately $35 million for the HMR Drug
Innovation and Approval Facility acquisition. The remainder of the purchase
price, approximately $58 million, is expected to be paid in the second half of
1999 when the acquisition of the physical facility is completed.
As of March 31, 1999, total working capital was $279.1 million versus $238.9
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $238.3 million at
March 31, 1999 as compared to $213.4 million at the end of 1998. As of March 31,
1999, accounts receivable were $234.8 million versus $230.5 million at December
31, 1998. Unbilled services were $155.7 million at March 31, 1999 versus $127.8
million at December 31, 1998, offset by unearned income balances of $152.3
million and $144.9 million, respectively. The number of days revenue outstanding
in accounts receivable and unbilled services, net of unearned income, was 44
days at March 31, 1999, as compared to 45 days at December 31, 1998.
In connection with its March 1999 acquisition of PMSI, the Company agreed to pay
contingent value payments to former PMSI stockholders who deferred receipt of
one-half of the shares of the Company's Common Stock they were entitled to
receive in the transaction until June 14, 1999. For each deferred share of the
Company's Common Stock, the contingent value payment, if any, will be calculated
based on the
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Liquidity and Capital Resources -- Continued
difference between $38.71875 and the average closing price of the Company's
Common Stock for 10 days selected at random out of the 20 trading days ending on
June 11, 1999. The Company plans to make the contingent value payments, if any,
from cash from operations or borrowings under existing lines of credit.
The Company has a pound 15.0 million (approximately $24.3 million) unsecured
line of credit with a U.K. bank and a pound 5.0 million (approximately $8.1
million) unsecured line of credit with a second U.K. bank. At March 31, 1999,
the Company had pound 17.3 million (approximately $28.0 million) available under
these arrangements.
The Company has a $150 million senior unsecured credit facility ("$150.0 million
facility") with a U.S. bank. At March 31, 1999, 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 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.
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 such as
real-time transaction processing for pharmacies and other healthcare providers
and payors; 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 scope of the
Company's Year 2000 Program includes unique software systems and tools in each
of its service groups, especially its product development service group,
embedded systems in its laboratory and manufacturing operations, mainframe
systems in its QUINTERNET(TM) informatics service group, facilities such as
elevators and fire alarms in over 133 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
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
State of Readiness -- Continued
a Year 2000 Program Management Office, staffed by consultants and internal
staff, 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 and external organizations (such as
pharmacies, insurance providers and medical offices) linked to the
QUINTERNET(TM) informatics 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 addressed
most systems relating to its healthcare consulting services in 1998, with
completion expected in the first half of 1999. The Company also addressed most
of its commercialization systems in 1998, and expects to have substantially
completed this program during mid-1999. The Company's product development
services utilize numerous systems, which it must address individually on
disparate schedules, depending on the magnitude and complexity of the particular
system. The Company anticipates that remediation or replacement of these systems
will be substantially complete by mid-1999, with migration occurring primarily
in the second half of 1999. The Company has evaluated the state of readiness of
its recent acquisitions, including ENVOY and PMSI which form the core of the
Company's informatics services, and has integrated these acquisitions into its
Year 2000 Program. The Company's informatics services utilize real-time and
batch systems linked to external organizations, and PC based audit and
syndicated data systems. The Company anticipates that the remediation and
testing of these systems will be substantially complete by mid-1999, and that
testing with external organizations will occur primarily in the second half of
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,
including recent acquisitions, will be approximately $20.7 million, including
costs already incurred. A significant portion of these costs, approximately $8.1
million, are not likely to be incremental costs, but rather will represent the
redeployment
14
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Costs -- Continued
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 $8.6 million through March 31, 1999, of which
approximately $6.4 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,
including third party physician investigators, pharmacies, insurance providers
and medical offices. 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. The failure due to a Year 2000
issue of an external organization on whose services Quintiles relies
significantly could also adversely impact the Company's ability to process
transactions in its informatics services. 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
15
16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Year 2000 Risks -- Continued
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
The Company is in the process of developing business continuity plans for each
service area. These plans will primarily be developed during the second half of
1999.
Cautionary Statement for Forward-Looking Information
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent the Company's judgement concerning the future and are subject to risks
and uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "believe," or "continue," or the negative
thereof or other variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the ability of the Company to integrate acquired
businesses with the Company's historical operations, the costs and impact of the
year 2000 issue, the actual costs of the combining of the acquired businesses,
actual operating performance, the ability to operate successfully in the lines
of business resulting from the ENVOY and PMSI transactions, the ability to
maintain large client contracts or to enter into new contracts and the level of
demand for services. See Exhibit 99.01 for additional factors that could cause
the Company's actual results to differ.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a result of the acquisition of PMSI, the Company has a forward sale agreement
with CIBC pursuant to which the Company transferred all of the IMS Health common
stock, approximately 1.2 million shares, in exchange for cash and a note payable
of $73.0 million. As a result of this forward sale agreement, the Company has
mitigated its risk of a decrease in the market value of the IMS Health common
stock by agreeing to a pre-determined value with CIBC.
The Company did not have any other material changes in market risk from December
31, 1998.
16
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information
Item 1. Legal Proceedings
The Company previously reported certain legal proceedings in its
Form 10-K for the fiscal year ended December 31, 1998. There were
no material developments in such matters since that report.
Item 2. Changes in Securities
On February 17, 1999, the Company completed the acquisition of Oak
Grove, a leading provider of current Good Manufacturing Practice
compliance services to the pharmaceutical, biotechnology and
medical device industries. The Company issued 87,948 shares of its
Common Stock, par value $0.01 per share, in connection with the
acquisition, which shares were received by the holders of all of
the outstanding share capital of Oak Grove in exchange for such
interests. The shares were issued in reliance on a claim of
exemption pursuant to section 4(2) of the Securities Act of 1933,
as amended, based on representations made by the recipients in the
share acquisition agreement.
On March 31, 1999, the Company completed the acquisition of Medlab
Pty Ltd. ("Medlab") and the assets of the Niehaus & Botha
partnership ("N&B"), which together comprise a South African-based
clinical laboratory. In connection with the acquisition, the
Company issued an aggregate of 271,146 shares of its Common Stock,
par value $0.01 per share, to the owners of all of the share
capital of Medlab and the N&B partnership interests in exchange for
all of the outstanding share capital of Medlab and the N&B assets,
respectively. The shares were issued in reliance on a claim of
exemption pursuant to section 4(2) of the Securities Act of 1933,
as amended, based on representations made by the recipients in the
agreement relating to the purchase of such shares and assets.
During the three months ended March 31, 1999, options to purchase
25,150 shares of Common Stock were exercised at an average exercise
price of $3.7166 per share in reliance on Rule 701 under the
Securities Act of 1933. Such options were issued by the Company
prior to becoming subject to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, pursuant
to its Non-qualified Employee Incentive Stock Option Plan.
Item 3. Defaults upon Senior Securities -- Not applicable
17
18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information -- Continued
Item 4. Submission of Matters to a Vote of Security Holders
On March 30, 1999, the Company held a special meeting of
shareholders during which the shareholders:
(1) Approved a proposal to issue shares of the Company's Common
Stock to the shareholders of ENVOY in exchange for their
shares of ENVOY common stock and ENVOY Series B convertible
preferred stock pursuant to the Amended and Restated Agreement
and Plan of Merger, dated as of December 15, 1998, by and
among the Company, QELS Corp. and ENVOY.
Broker
For Against Abstain Non-vote
--- ------- ------- --------
Approval of proposal to issue
shares of the Company's Common Stock 52,166,689 461,731 177,431 9,381,251
(2) Approved an amendment to the Company's amended and Restated
Articles of Incorporation to increase the number of authorized
shares of the Company's Common Stock from 200,000,000 to
500,000,000.
Broker
For Against Abstain Non-vote
--- ------- ------- --------
Approval of an amendment to the
Company's Amended and Restated
Articles of Incorporation 48,609,617 13,503,134 74,351 -
Item 5. Other Information -- Not applicable
18
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information -- Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
3.01 Amended and Restated Articles of Incorporation, as amended
4.01 Amended and Restated Articles of Incorporation, as amended (included
as Exhibit 3.01 hereto)
27.01 Financial Data Schedule for the
Three Months Ended March 31, 1999 (for SEC use only)
27.02 Restated Financial Data Schedule for the
Three Months Ended March 31, 1998 (for SEC use only)
99.01 Risk Factors
(b) During the three months ended March 31, 1999, the Company
filed five reports on Form 8-K.
The Company filed a Form 8-K, dated January 27, 1999, to
report restated consolidated financial statements and other
materials in connection with certain acquisitions accounted
for as poolings of interests which were consummated between
January 1, 1996 and September 30, 1998. This report also
included a copy of the Company's press release announcing its
financial results for the fiscal year ended December 31,
1998.
The Company filed a Form 8-K, also dated January 27, 1999, as
amended by Form 8-K/A on February 17, 1999, to report
historical financial statements of each of ENVOY Corporation
("ENVOY") and Pharmaceutical Marketing Services Inc. ("PMSI")
and pro forma financial information in accordance with Rule
3-05 and Article 11 of Regulation S-X in connection with the
Company's pending acquisitions of those entities.
The Company filed a Form 8-K, dated February 17, 1999,
including certain historical financial information for each
of ENVOY and PMSI for the purpose of updating its disclosure
provided in the Company's January 27, 1999 Form 8-K, as
amended on February 17, 1999, pursuant to Rule 3-05 of
Regulation S-X.
The Company filed a Form 8-K, dated March 3, 1999, attaching
as an exhibit a copy of the Agreement for the Provision of
Research Services and Purchase of Business Assets between
Hoechst Marion Roussel, Inc. and Quintiles, Inc. relating to
the Company's previously announced acquisition of substantial
assets of Hoechst Marion Roussel's Kansas City-based
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20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
PART II. Other Information -- Continued
Drug Innovation and Approval facility and the opening of a
Kansas City contract research facility. The March 3, 1999
Form 8-K also included the Company's restated Selected
Consolidated Financial Data table and described certain
information regarding a recently filed lawsuit which names a
subsidiary of the Company as a defendant.
The Company filed a Form 8-K, dated March 29, 1999, to report
the Company's acquisition of both PMSI and ENVOY.
No other reports on Form 8-K were filed during the three
months ended March 31, 1999.
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21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
------------------------------------
Registrant
Date May 14, 1999 /s/ Dennis B. Gillings
---------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date May 14, 1999 /s/ Rachel R. Selisker
---------------- -------------------------------------------
Rachel R. Selisker, Chief Financial Officer
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22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
3.01 Amended and Restated Articles of Incorporation, as amended
4.01 Amended and Restated Articles of Incorporation, as amended (included
as Exhibit 3.01 hereto)
27.01 Financial Data Schedule for the
Three Months Ended March 31, 1999 (for SEC use only)
27.02 Restated Financial Data Schedule for the
Three Months Ended March 31, 1998 (for SEC use only)
99.01 Risk Factors
22