1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 15, 1999
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
North Carolina 340-23520 56-1714315
(State or other (Commission File No.) I.R.S. Employer
jurisdiction Identification Number
of incorporation)
4709 Creekstone Drive, Riverbirch Building, Suite 200,
Durham, North Carolina 27703-8411
(Address of principal executive offices)
(919) 998-2000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
2
Item 5. Other Events.
In connection with its March 30, 1999 acquisition of ENVOY Corporation
and its subsidiaries, March 31, 1999 acquisition of Medlab (Pty) Limited and the
assets of the Niehaus & Botha partnership, June 3, 1999 acquisition of SMG
Marketing Services, Inc. and May 19, 1999 acquisition of Minerva Medical Limited
and its subsidiaries, which acquisitions were accounted for as poolings of
interests, Quintiles Transnational Corp. (the "Company") has restated certain of
its historical consolidated financial data and provides the supplemental
consolidated financial statements and other materials described below. Upon the
filing of the Company's Form 10-Q for the period ended June 30, 1999, the
supplemental consolidated financial statements provided herein shall become the
historical consolidated financial statements of the Company.
Item Description Page
---------------- ----
(1) Selected Consolidated Financial Data 1
(2) Annual Supplemental Financial Data of the Company
a. Management's Discussion and Analysis of Financial Condition and 2
Results of Operations
b. Supplemental Consolidated Financial Statements of the Company
i. Report of Independent Public Accountants 12
ii. Report of Independent Auditors 13
iii. Supplemental Consolidated Statements of Operations for each 14
of the three years in the period ended December 31, 1998
iv. Supplemental Consolidated Balance Sheets as of December 31, 15
1998, and 1997
v. Supplemental Consolidated Statements of Shareholders' Equity 17
for each of the three years in the period ended
December 31, 1998
vi. Supplemental Consolidated Statements of Cash Flows for 18
each of the three years in the period ended December 31, 1998
vii. Notes to Supplemental Consolidated Financial Statements 20
(3) Condensed Supplemental Financial Data of the Company - March 31, 1999
(Unaudited)
a. Condensed Supplemental Financial Statements of the Company -
March 31, 1999 (Unaudited)
i. Condensed Supplemental Consolidated Statements of Operations 37
for the three months ended March 31, 1998 and 1997 (Unaudited)
ii. Condensed Supplemental Consolidated Balance Sheet as of 38
March 31, 1998 (Unaudited)
iii. Condensed Supplemental Consolidated Statements of Cash Flows 39
for the three months ended March 31, 1998 and 1997 (Unaudited)
iv. Notes to Unaudited Condensed Supplemental Consolidated 40
Financial Statements
b. Management's Discussion and Analysis of Financial Condition and 45
Results of Operations
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3
Information set forth in this report, 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 judgment 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 Company's dependence on certain
industries and clients, management of its growth, risks associated with
acquisitions, risks relating to contract sales services, competition within the
industry, the loss or delay of large contracts, dependence on personnel and
government regulation and other considerations described in connection with
specific forward looking statements, as well as other risk factors described in
the Company's filings with the Securities and Exchange Commission.
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SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The selected supplemental Consolidated Statement of Income Data set forth below
for each of the years in the three-year period ending December 31, 1998 and the
supplemental Consolidated Balance Sheet Data set forth below as of December 31,
1998 and 1997 are derived from the audited supplemental consolidated financial
statements of the Company and notes thereto, as restated for certain pooling
transactions, included in this Current Report on Form 8-K dated July 15, 1999.
The selected supplemental Consolidated Statement of Income Data set forth below
for the years ended December 1995 and 1994, and the supplemental Consolidated
Balance Sheet Data set forth below as of December 31, 1996, 1995 and 1994 are
derived from the consolidated financial statements of the Company as
subsequently restated for certain pooling transactions. The data provided as of
March 31, 1999 and 1998 and for the three months ended March 31, 1999 and 1998
are derived from unaudited consolidated financial statements included in the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999, as
subsequently restated herein for certain pooling transactions, but in the
opinion of management, contain all adjustments, consisting only of normal
recurring accruals, which are necessary for a fair statement of results of such
periods. The supplemental consolidated financial statements of the Company have
been restated to reflect material acquisitions by the Company in transactions
accounted for as poolings of interests. However, the supplemental consolidated
financial statements have not been restated to reflect certain other
acquisitions accounted for as pooling of interests where the Company determined
that the consolidated financial data would not have been materially different if
the pooled companies had been included. For such immaterial pooling of interests
transactions, which include three transactions in 1998, one transaction in 1997
and two transactions in 1996, the Company's financial statements for the year of
each transaction have been restated to include the pooled companies from January
1 of that year, but the financial statements for years prior to the year of each
transaction have not been restated because the effect of such restatement would
be immaterial. The selected supplemental consolidated financial data presented
below should be read in conjunction with the Company's audited and unaudited
supplemental consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
Year Ended December 31, Three Months Ended March 31,
-------------------------------------------------------------- ----------------------------
1998 1997 1996 (1,3) 1995 (1) 1994 1999 1998
---------- ---------- --------- -------- -------- ---------- ----------
(In thousands, except per share data)
Net revenue $1,403,719 $1,023,162 $ 717,823 $421,984 $274,524 $ 413,314 $ 315,070
Income from operations 151,310 89,215 32,420 24,994 20,337 50,073 33,460
Income before income taxes 146,974 86,575 6,285 22,972 19,289 28,110 32,639
Net income (loss) available for
common shareholders 88,569 48,866 (27,377) 11,247 13,302 8,614 21,214
Basic net income (loss) per share 0.85 0.49 (0.30) 0.13 0.17 0.08 0.20
Diluted net income (loss) per share $ 0.80 $ 0.46 $ (0.30) $ 0.13 $ 0.17 $ 0.08 $ 0.19
Weighted average shares
outstanding (2):
Basic 104,799 99,908 91,693 83,465 77,570 109,341 107,077
Diluted 110,879 107,141 91,693 85,826 78,594 112,043 110,533
As of December 31, As of March 31,
-------------------------------------------------------------- ------------------------
1998 1997 1996 (1) 1995 (1) 1994 (1) 1999 1998
---------- ---------- --------- -------- -------- ---------- ----------
(In thousands, except employees)
Cash and cash equivalents $ 156,977 $ 93,195 $ 112,866 $ 85,904 $ 57,026 $ 198,409 $ 64,253
Working capital 239,439 184,593 151,277 84,234 57,857 279,185 196,309
Total assets 1,210,923 999,811 722,978 396,000 277,599 1,545,750 1,079,026
Long-term debt including current
portion 191,924 187,762 197,340 67,450 25,138 273,761 215,435
Shareholders' equity $ 646,132 $ 517,283 $ 278,574 $183,132 $110,583 $ 851,600 $ 547,194
Employees 16,732 12,717 8,998 5,553 3,942 17,857 13,515
1 Prior to the Company's November 29, 1996 share exchange with Innovex
Limited ("Innovex"), Innovex had a fiscal year end of March 31 and the
Company had (and continues to have) a fiscal year end of December 31. As a
result, the pooled data presented above for 1994 and 1995 include Innovex's
March 31 fiscal year data in combination with the Company's December 31
fiscal year data. In connection with the share exchange, Innovex changed
its fiscal year end to December 31. Accordingly, the pooled data presented
above for 1996 include both Innovex's and the Company's data on a December
31 year end basis. Because of the difference between Innovex's fiscal year
end in 1995 compared with 1996, Innovex's quarter ended March 31,1996 data
are included in the Company's pooled data for both 1995 and 1996.
2 Restated to reflect the two-for-one stock splits of the Company's Common
Stock effected as a 100% stock dividend in November 1995 and December 1997.
3 Excluding amortization of certain acquired intangible assets of $16.4
million and non-recurring costs, the 1996 basic and diluted net income per
share (unaudited) were $0.28 and $0.25, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Quintiles Transnational Corp. ("Quintiles" or "the Company") is a market leader
in providing a full range of integrated product development and
commercialization solutions to the global pharmaceutical, biotechnology and
medical device industries. The Company is also a leader in providing electronic
data interchange ("EDI") and healthcare informatics services to the healthcare
market and provides healthcare policy consulting to governments and other
organizations worldwide. Based on industry analyst reports, the Company is the
largest company in the pharmaceutical outsourcing services industry as ranked by
1998 net revenue; the net revenue of the second largest company was over $650
million less than the Company's 1998 net revenue.
During 1998, the Company completed a number of strategic acquisitions.
Specifically:
On February 2, 1998, the Company acquired Pharma Networks N.V. ("Pharma"), a
leading contract sales organization in Belgium. The Company acquired Pharma in
exchange for 132,000 shares of the Company's Common Stock. The acquisition of
Pharma was accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include the historical financial data of
Pharma.
On February 4, 1998, the Company acquired Technology Assessment Group ("TAG"), a
California-based international health outcomes assessment firm that specializes
in patient registries and in evaluating the economic, quality-of-life and
clinical effects of drug therapies and disease management programs. The Company
acquired TAG in exchange for 460,366 shares of the Company's Common Stock. The
acquisition of TAG was accounted for as a purchase.
On February 26, 1998, the Company acquired T2A S.A. ("T2A"), a leading French
contract sales organization. The Company acquired T2A in exchange for 311,899
shares of the Company's Common Stock. The acquisition of T2A was accounted for
as a pooling of interests, and as such, all historical financial data have been
restated to include T2A.
On February 27, 1998, the Company acquired More Biomedical Contract Research
Organization Ltd. ("More Biomedical"), a contract research organization based in
Taiwan. The Company acquired More Biomedical in exchange for 16,600 shares of
the Company's Common Stock. The acquisition was accounted for as a pooling of
interests.
On February 27, 1998, ENVOY Corporation ("ENVOY") which was acquired by the
Company in March 1999, acquired XpiData, Inc., Professional Office Services,
Inc. and Automated Revenue Management, Inc. (collectively "ExpressBill
Companies") pursuant to separate agreements and plans of merger for an aggregate
of approximately 3.5 million shares of ENVOY common stock (approximately 4.1
million shares of the Company's Common Stock). ExpressBill Companies
transactions were accounted for as poolings of interest and as such, the
historical financial data includes the results of the ExpressBill Companies.
On May 31, 1998, the Company acquired Crossbox Limited t/a Cardiac Alert
("Cardiac Alert"), a U.K.-based company which provides a centralized
electrocardiogram monitoring service for international clinical trials. The
Company acquired Cardiac Alert in exchange for 70,743 shares of the Company's
Common Stock. The acquisition of Cardiac Alert was accounted for as a pooling of
interests, and as such, all historical financial data have been restated to
include Cardiac Alert.
On May 31, 1998, the Company acquired ClinData International Pty Limited
("ClinData"), a leading biostatistics and data management company in South
Africa. The Company acquired ClinData in exchange for 123,879 shares of the
Company's Common Stock. The acquisition of ClinData was accounted for as a
pooling of interests.
On August 24, 1998, the Company acquired The Royce Consultancy, Limited
("Royce"), a leading pharmaceutical sales representative recruitment and
contract sales organization in the U.K. The Company acquired Royce in exchange
for 664,194 shares of the Company's Common Stock. The acquisition of Royce was
accounted for as a pooling of interests and as such, all historical financial
data have been restated to include Royce.
On September 9, 1998, the Company acquired Data Analysis Systems, Inc. ("DAS"),
a New Jersey-based leader in sales force planning and territory organization
systems for the pharmaceutical industry. The Company acquired DAS in exchange
for 358,897 shares of the Company's Common Stock. The acquisition of DAS was
accounted for as a pooling of interests and as such, all historical financial
data have been restated to include DAS.
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On October 8, 1998, the Company acquired Simirex Inc. and Simirex International
Ltd. ("Simirex"), a New Jersey-based provider of clinical packaging services for
the U.S. pharmaceutical industry. The Company acquired Simirex in exchange for
383,273 shares of the Company's Common Stock. The acquisition of Simirex was
accounted for as a pooling of interests.
On October 12, 1998, the Company acquired Groupe H2V SA ("Serval"), a
Paris-based French contract sales and marketing company. The Company acquired
Serval in exchange for 77,876 shares of the Company's Common Stock. The
acquisition of Serval was accounted for as a purchase.
On October 12, 1998, the Company acquired Q.E.D. International, Inc. ("QED"), a
New York-based provider of integrated product marketing and communication
services for pharmaceutical companies in the U.S. market. The Company acquired
QED in exchange for 523,520 shares of the Company's Common Stock. The
acquisition of QED was accounted for as a pooling of interests, and as such, all
historical financial data have been restated to include QED.
The Company has made several more strategic acquisitions in the first half of
1999 which include the following pooling of interests transactions:
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 was
accounted for as a pooling of interests, and as such, all historical financial
data have been restated to include ENVOY.
On March 31, 1999, the Company acquired MedLab Pty Ltd. and the assets of the
Niehaus & Botha (collectively "N&B"), a South African-based clinical laboratory.
The Company acquired N&B in exchange for 271,146 shares of the Company's Common
Stock. The acquisition of N&B was accounted for as a pooling of interests, and
as such, all historical financial data have been restated to include N&B.
On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a
Scotland-based clinical research organization. The Company acquired Minerva in
exchange for 1,143,625 shares of the Company's Common Stock. The acquisition of
Minerva was accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include Minerva.
On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a
Chicago-based healthcare market information company. The Company acquired SMG in
exchange for 1,170,291 shares of the Company's Common Stock. The acquisition of
SMG was accounted for as a pooling of interests, and as such, all historical
financial data have been restated to include SMG.
The Company's 1998 financial statements have been restated to include More
Biomedical, ClinData, and Simirex from January 1, 1998, but the financial
statements for 1997 and prior years have not been restated because the effect of
such restatement would be immaterial.
Contract Revenue
The Company considers net revenue, which excludes reimbursed costs, its primary
measure of revenue growth. Substantially all net revenue for the product
development and commercialization service groups is earned by performing
services under contracts with various pharmaceutical, biotechnology, medical
device and healthcare companies. Most of the net revenue for the QUINTERNET(TM)
informatics service group is earned from providing EDI and transaction
processing services to the healthcare market which are generally paid for by the
healthcare providers or third party payors. Many of the Company's contracts are
fixed price, with some variable components, and range in duration from a few
months to several years. The Company is also party to fee-for-service and
unit-of-service contracts. The Company recognizes net revenue based upon (1)
labor costs expended as a percentage of total labor costs expected to be
expended (percentage of completion) for fixed price contracts, (2) contractual
per diem or hourly rate basis as work is performed for fee-for-service contracts
or (3) completion of units of service or transactions processed for
unit-of-service contracts.
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The Company's contracts generally provide for price negotiation upon scope of
work changes. The Company recognizes revenue related to these scope changes when
the underlying services are performed and realization of revenue is assured.
Most contracts are terminable upon 15 - 90 days' notice by the customer. In the
event of termination, contracts typically require payment for services rendered
through the date of termination, as well as subsequent services rendered to
close out the contract. Any anticipated losses resulting from contract
performance are charged to earnings in the period identified.
Each contract specifies billing and payment procedures. Generally, the
procedures require a portion of the contract fee to be paid at the time the
project is initiated with subsequent contract billings and payments due
periodically over the length of the project's term in accordance with
contractual provisions. Revenue recognized in excess of billings is classified
as unbilled services, while billings in excess of revenue are classified as
unearned income.
The Company reports backlog based on anticipated net revenue from uncompleted
projects which have been authorized by the customer through a written contract
or otherwise. Backlog does not include anticipated net revenue from the
Company's transaction processing services since the contracts do not quantify
the volume of transactions to be processed. Using this method of reporting
backlog, at December 31, 1998, 1997 and 1996 the backlog was approximately $1.9
billion, $1.1 billion and $744 million, respectively. The Company believes that
backlog may not be a consistent indicator of future results because backlog can
be affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years, loss or significant
delay of contracts, or a change in the scope of a project during the course of a
study.
Results of Operations
Year Ended December 31, 1998 Compared with
Year Ended December 31, 1997
Net revenue for the year ended December 31, 1998 was $1.4 billion, an increase
of $380.6 million or 37.2% over fiscal 1997 net revenue of $1.0 billion. Growth
occurred across each of the Company's geographic regions and each of its major
service groups. Factors contributing to the growth included an increase of
contract service offerings, the provision of increased services rendered under
existing contracts, an increase in the volume of transactions processed and the
initiation of services under contracts awarded subsequent to January 1, 1998.
Net revenue for the product development group increased 36.8% to $708.5 million
for the year ended December 31, 1998 as compared to $518.0 million for the year
ended December 31, 1997. Net revenue for the commercialization group increased
39.4% to $496.2 million for the year ended December 31, 1998 as compared to
$356.1 million for the year ended December 31, 1997. Net revenue for the
QUINTERNET(TM) informatics group increased 33.5% to $199.0 million for the year
ended December 31, 1998 as compared to $149.1 million for the year ended
December 31, 1997 primarily as a result of the increase in the volume of
transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related EDI and transaction
processing expenses and other expenses directly related to contracts, were
$725.3 million or 51.7% of 1998 net revenue versus $532.5 million or 52.0% of
1997 net revenue.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $434.4 million or
30.9% of 1998 net revenue versus $321.7 million or 31.4% of 1997 net revenue.
The $112.7 million increase in general and administrative expenses was primarily
due to an increase in personnel, facilities and locations and outside services
resulting from the Company's growth.
Depreciation and amortization expense was $92.7 million or 6.6% of 1998 net
revenue versus $73.1 million or 7.1% of 1997 net revenue. Included is
amortization of certain acquired intangible assets of $20.3 million and $20.4
million in 1998 and 1997, respectively. Excluding these expenses, depreciation
and amortization expense was $72.5 million or 5.2% of 1998 net revenue versus
$52.7 million or 5.1% of 1997 net revenue. The $19.8 million increase is
primarily due to the increase in the capitalized asset base of the Company. In
1998, the Company recognized approximately $2.8 million of depreciation expense
associated with the first full year of operation for the facility in Bathgate,
Scotland and related assets.
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Income from operations was $151.3 million or 10.8% of 1998 net revenue versus
$89.2 million or 8.7% of 1997 net revenue. Excluding the amortization of certain
acquired intangible assets as discussed above and the $6.6 million of 1997
non-recurring costs relating to ENVOY's write-offs of acquired in-process
technology discussed below, income from operations was $171.6 million or 12.2%
of 1998 net revenue versus $116.3 million or 11.4% of 1997 net revenue. Income
from operations for the product development group increased to $77.6 million or
11.0% of 1998 net revenue from $52.2 million or 10.1% of 1997 net revenue.
Income from operations for the commercialization group increased to $47.3
million or 9.5% of 1998 net revenue from $37.7 million or 10.6% of 1997 net
revenue. Excluding the amortization of certain acquired intangible assets of
$20.3 million and $20.4 million in 1998 and 1997, respectively and the 1997
non-recurring costs of $6.6 million, the income from operations for the
QUINTERNET(TM) informatics group increased to $46.7 million or 23.4% of 1998 net
revenue from $26.4 million or 17.7% of 1997 net revenue. This increase primarily
results from the efficiencies realized due to the increase in the volume of
transactions processed.
Other expense, which consists primarily of transaction costs and interest,
increased to $4.3 million in 1998 from $2.6 million in 1997. Transaction costs
included in other expense were $3.5 million in 1998 versus $2.2 million in 1997.
The effective tax rate for 1998 was 39.7% versus a 43.6% rate in 1997. Excluding
amortization of certain acquired intangible assets as discussed above, the
effective tax rate for 1998 would have been 34.9% versus a 35.4% rate for 1997.
The effective tax rate reduction resulted from the reversal of prior year
valuation allowances relating to certain net operating loss carryforwards that
the Company now believes are more likely than not to be utilized and profits
generated in countries with favorable tax rates. Since the Company conducts
operations on a global basis, its effective tax rate may vary. See "--Taxes."
Year Ended December 31, 1997 Compared with
Year Ended December 31, 1996
Net revenue for the year ended December 31, 1997 was $1.0 billion, an increase
of $305.3 million or 42.5% over fiscal 1996 net revenue of $717.8 million.
Growth occurred across each of the Company's geographic regions and each of its
major service groups. Factors contributing to the growth included an increase of
contract service offerings, the provision of increased services rendered under
existing contracts, an increase in the volume of transactions processed and the
initiation of services under contracts awarded subsequent to January 1, 1997.
Net revenue for the product development group increased 24.3% to $518.0 million
for the year ended December 31, 1997 as compared to $416.8 million for the year
ended December 31, 1996. Net revenue for the commercialization group increased
78.7% to $356.1 million for the year ended December 31, 1997 as compared to
$199.2 million for the year ended December 31, 1996. The commercialization group
experienced particularly strong growth in the Americas region. Net revenue for
the QUINTERNET(TM) informatics group increased 46.5% to $149.1 million for the
year ended December 31, 1997 as compared to $101.8 million for the year ended
December 31, 1996 primarily due to an increase in the volume of transactions
processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related EDI and transaction
processing expenses and other expenses directly related to contracts, were
$532.5 million or 52.0% of 1997 net revenue versus $369.4 million or 51.5% of
1996 net revenue.
General and administrative expenses, which include compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, were $321.7 million or
31.4% of 1997 net revenue versus $239.9 million or 33.4% of 1996 net revenue.
The $81.8 million increase in general and administrative expenses was primarily
due to an increase in personnel, facilities and locations and outside services
resulting from the Company's growth.
Depreciation and amortization expense was $73.1 million or 7.1% of 1997 net
revenue versus $52.0 million or 7.2% of 1996 net revenue. Included is
amortization of certain acquired intangible assets of $20.4 million and $16.4
million in 1997 and 1996, respectively. Excluding these expenses, depreciation
and amortization expense was $52.7 million or 5.1% of 1997 net revenue versus
$35.6 million or 5.0% of 1996 net revenue.
ENVOY recorded write-offs of acquired in-process technology of $6.6 million and
$8.7 million in 1997 and 1996, respectively. These write-offs related to
acquisitions completed by ENVOY in 1997 and 1996. These amounts represent an
allocation of the purchase price of these acquisitions to research and
development projects that had not reached technological feasibility and for
which there was no alternative future use.
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Income from operations was $89.2 million or 8.7% of 1997 net revenue versus
$32.4 million or 4.5% of 1996 net revenue. Excluding non-recurring costs of
$15.4 million incurred in 1996, the 1996 income from operations was $47.9
million or 6.6% of net revenue. Excluding the amortization of certain acquired
intangible assets as discussed above and the non-recurring costs, income from
operations was $116.3 million or 11.4% of 1997 net revenue versus $73.0 million
or 10.2% of 1996 net revenue. Excluding 1996 non-recurring costs, the income
from operations for the product development group increased to $52.2 million or
10.1% of 1997 net revenue from $41.5 million or 9.9% of 1996 net revenue.
Excluding non-recurring costs in 1996, income from operations for the
commercialization group increased to $37.7 million or 10.6% of 1997 net revenue
from $18.2 million or 9.1% of 1996 net revenue. Excluding the amortization of
certain acquired intangible assets of $20.4 million and $16.4 million in 1997
and 1996, respectively and the non-recurring costs in 1997 and 1996, the income
from operations for the QUINTERNET(TM) informatics group increased to $26.4
million or 17.7% of 1997 net revenue from $13.3 million or 13.0% of 1996 net
revenue. This increase primarily results from the efficiencies realized due to
the increase in the volume of transactions processed.
Other expense decreased to $2.6 million in 1997 from $26.1 million in 1996.
Excluding acquisition costs and non-recurring transaction costs, other expense
was $410,000 in 1997 and $4.3 million in 1996. The $3.9 million change was
primarily due to decreases in net interest expense.
The effective tax rate for 1997 was 43.6% versus a 269.8% rate in 1996.
Excluding amortization of certain acquired intangible assets as discussed above
and non-recurring transaction and restructuring costs which were not deductible
for tax purposes, the effective tax rate for 1997 would have been 35.4% versus a
34.0% rate for 1996. Since the Company conducts operations on a global basis,
its effective tax rate may vary. See "--Taxes."
Liquidity and Capital Resources
Cash flows generated from operations were $170.0 million in 1998 versus $108.0
million and $53.3 million in 1997 and 1996, respectively. Cash flows used in
investing activities in 1998 were $98.8 million, versus $207.5 million and
$244.8 million in 1997 and 1996, respectively. Of these investing activities,
capital asset purchases required $102.3 million in 1998 versus $90.0 million and
$47.0 million in 1997 and 1996, respectively. Capital asset expenditures in 1997
and 1996 included (pound)15.8 million (approximately $26.5 million) and
(pound)2.7 million (approximately $5.0 million), respectively, related to the
Company's purchase of land and construction of a facility in Bathgate, Scotland.
The remaining capital expenditures were predominantly incurred in connection
with the expansion of existing operations, the enhancement of information
technology capabilities and the opening of new offices.
Total working capital increased $54.8 million to $239.4 million at December 31,
1998 from $184.6 million at December 31, 1997. Including long-term investments
of $65.5 million and $69.1 million at December 31, 1998 and 1997, respectively,
in total working capital, the increase was $51.2 million. Total accounts
receivable and unbilled services increased 38.2% to $363.2 million at December
31, 1998 from $262.8 million at December 31, 1997, as a result of the growth in
net revenue. Accounts receivable and unbilled services, net of unearned income,
increased 25.6% to $209.6 million at December 31, 1998 from $166.9 million at
December 31, 1997. The number of days revenue outstanding in accounts receivable
and unbilled services, net of unearned income, were 43 and 46 days at December
31, 1998 and December 31, 1997, respectively.
During 1998, the Company acquired a clinical trial production and warehouse
facility in Livingston, Scotland for a purchase commitment valued at (pound)1.75
million (approximately $2.9 million), with payment due in May, 2001.
During 1995, the Company acquired a drug development facility in Edinburgh,
Scotland. Related to this acquisition, the Company entered into a purchase
commitment valued at (pound)12.5 million (approximately $20.9 million) with
payment due in December 1999. The Company has hedged a portion of this
commitment by purchasing forward contracts. The Company's forward contracts
mature on December 29, 1999, and as of December 31, 1998, the Company had
committed to purchasing approximately (pound)2.4 million (approximately $3.5
million) under such contracts. The Company is obligated to purchase up to an
additional (pound)2.9 million through December 28, 1999 in varying amounts as
the daily dollar-to-pound exchange rate ranges between $1.5499 and $1.6800.
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. The right to receive contingent
value payments terminated in accordance with the merger agreement. Accordingly,
no contingent value payments were payable to any former PMSI shareholder.
6
10
The Company has available to it a (pound)15.0 million (approximately $25.1
million) unsecured line of credit with a U.K. bank and a (pound)5.0 million
(approximately $8.4 million) unsecured line of credit with a second U.K. bank.
At December 31, 1998, the Company had (pound)19.8 million (approximately $33.1
million) available under these credit agreements. In accordance with their
terms, both of these facilities expired in May 1999.
During 1998, the Company entered into a $150 million senior unsecured credit
facility ("$150 million facility") with a U.S. bank. At December 31, 1998, the
Company had $150 million available under this facility. Based upon its current
financing plan, the Company believes the $150 million facility would be
available to retire long-term credit arrangements and obligations, if necessary.
In May 1999, the Company entered into a (pound)10.0 million (approximately $16.7
million) unsecured line of credit with a U.K. bank. The Company also entered
into a (pound)1.5 million (approximately $2.5 million) general bank facility
with the same U.K. bank.
All foreign currency denominated amounts due, subsequent to December 31, 1998,
have been translated using the Thursday, December 24, 1998 foreign exchange
rates as published in the December 28, 1998 edition of the Wall Street Journal.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents, together with future cash flows from operations and
borrowings under its line of credit agreements will be sufficient to meet its
foreseeable cash needs in connection with its operations. As part of its
business strategy, the Company reviews many acquisition candidates in the
ordinary course of business, and in addition to acquisitions already made, the
Company is continually evaluating new acquisition and expansion possibilities.
The Company may from time to time seek to obtain debt or equity financing in its
ordinary course of business or to facilitate possible acquisitions or expansion.
Taxes
Since the Company conducts operations on a global basis, the Company's effective
tax rate has depended and will continue to depend on the amount of profits in
locations with varying tax rates. The Company's results of operations will be
impacted by changes in the tax rates of the various jurisdictions and by changes
in any applicable tax treaties. In particular, as the portion of the Company's
non-U.S. business varies, the Company's effective tax rate may vary
significantly from period to period. The Company's effective tax rate may also
depend upon the extent to which the Company is allowed (and is able to use under
applicable limitations) U. S. foreign tax credits in respect of taxes paid on
its foreign operations.
Inflation
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
Impact of Year 2000 Issue
State of Readiness
The Company has established a Year 2000 Program to address the Year 2000 issue,
which results from computer processors and software failing to process date
values correctly, potentially causing system failures or data corruption. The
Year 2000 issue could cause disruptions of the Company's operations, including,
among other things, a temporary inability to process information 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.
7
11
The Company's Year 2000 Program is directed by the Year 2000 Executive Steering
Team, which is comprised of the Company's Chief Information Officer and
representatives from regional business units, together with legal, quality
assurance and information technology personnel. The Company has established a
Year 2000 Program Management Office, staffed by consultants 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 has
addressed and substantially completed assessment, remediation, testing and
deployment of its systems relating to its healthcare consulting services and its
commercialization services. 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
has successfully remediated, replaced and migrated a substantial majority of
these systems, and anticipates that substantial completion of these systems will
occur by the end of the third quarter of 1999. The Company has evaluated the
state of readiness of its recent acquisitions, including ENVOY, PMSI and SMG,
which form the core of the Company's QUINTERNET(TM) informatics services, and
has integrated these acquisitions into its Year 2000 Program. The Company's
QUINTERNET(TM) informatics services utilize real-time and batch systems linked
to external organizations and PC based audit and syndicated data systems.
Significant progress has been made in remediating and testing these systems. The
Company is substantially complete with respect to the systems formerly owned by
PMSI, and it anticipates that remediation and testing of former ENVOY and SMG
systems will be substantially complete by the end of the third quarter of 1999.
Testing with external organizations which work with our QUINTERNET(TM)
informatics service group will occur throughout 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 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.
8
12
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 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.
Conversion to the Euro Currency
On January 1, 1999, a new currency, the euro, became the legal currency for 11
of the 15 member countries of the European Economic Community. Between January
1, 1999 and January 1, 2002, governments, companies and individuals may conduct
business in the member countries in both the euro and existing national
currencies. On January 1, 2002, the euro will become the sole currency in the
member countries. The Company conducts business in the member countries. The
Company is reviewing the issues involved with the introduction of the euro. The
more important issues the Company is reviewing include: (1) whether the Company
may have to change the prices of its services in the different countries and (2)
whether the Company will have to change the terms of any financial instruments
in connection with its hedging activities.
Based on current information and its initial evaluation, the Company believes
that the use of the euro will not have a significant impact on the Company's
business or operations. Accordingly, the Company does not expect the conversion
to the euro to have a material effect on the Company's financial condition or
results of operations.
9
13
Recent Events
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 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 United States ("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 was accounted for as a purchase.
On March 29, 1999, the Company acquired PMSI and its core company, Scott-Levin,
a leader in pharmaceutical market information and research services located 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 continent 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. The right
to receive contingent value payments terminated in accordance with the merger
agreement. Accordingly, no contingent value payments were payable to any former
PMSI shareholder. The acquisition of PMSI was accounted for as a purchase.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"). Statement No. 133
requires that upon adoption, all derivative instruments be recognized in the
balance sheet at fair value, and that changes in such fair values be recognized
in earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged items; effects of certain changes in fair value
are recorded in other comprehensive income pending recognition in earnings. The
Company will adopt Statement No. 133 when required to do so on January 1, 2001.
Because of its limited use of derivatives, the Company does not expect the
application of Statement No. 133 to have a significant impact on its financial
position or results of operations.
Market Risk
Market risk is the potential loss arising from adverse changes in the market
rates and prices, such as foreign currency rates, interest rates, and other
relevant market rate or price changes. In the ordinary course of business, the
Company is exposed to various market risks, including changes in foreign
currency exchange rates, interest rates and equity price changes and the Company
regularly evaluates its exposure to such changes. The Company's overall risk
management strategy seeks to balance the magnitude of the exposure and the cost
and availability of appropriate financial instruments. From time to time, the
Company has utilized forward exchange contracts to manage its foreign currency
exchange rate risk. The Company does not hold or issue derivative instruments
for trading purposes. The following analyses present the sensitivity of the
Company's financial instruments to hypothetical changes in interest and foreign
currency exchange rates that are reasonably possible over a one-year period.
Foreign Currency Exchange Rates
Approximately 44.3%, 44.6% and 50.1% of the Company's net revenue for the years
ended December 31, 1998, 1997, and 1996, respectively, were derived from the
Company's operations outside the United States. The Company does not have
significant operations in countries in which the economy is considered to be
highly-inflationary. The Company's financial statements are denominated in U.S.
dollars, and accordingly, changes in the exchange rate between foreign
currencies and the U.S. dollar will affect the translation of such subsidiaries'
financial results into U.S. dollars for purposes of reporting the Company's
consolidated financial results. Accumulated currency translation adjustments
recorded as a separate component (reduction) of shareholders' equity were ($4.6)
million at December 31, 1998 as compared to ($7.2) million at December 31, 1997.
10
14
The Company may be subject to foreign currency transaction risk when the
Company's service contracts are denominated in a currency other than the
currency in which the Company earns fees or incurs expenses related to such
contracts. At December 31, 1998, the Company's most significant foreign currency
exchange rate exposures were in the British pound, German mark and French franc.
The Company limits its foreign currency transaction risk through exchange rate
fluctuation provisions stated in its contracts with customers, or the Company
may hedge its transaction risk with foreign currency exchange contracts or
options. The Company recognizes changes in value in income only when foreign
currency exchange contracts or options are settled or exercised, respectively.
There were several foreign exchange contracts relating to service contracts open
at December 31, 1998, all of which are immaterial to the Company.
As of December 31, 1998, the Company has a long-term obligation denominated in a
foreign currency (approximately (pound)1.8 million) and a short-term obligation
denominated in a foreign currency (approximately (pound)12.5 million). Assuming
a hypothetical change of 10% in year-end exchange rates (a weakening of the U.S.
dollar), the fair value of these instruments would increase by approximately
$2.4 million.
Interest Rates
At December 31, 1998, the Company had outstanding $143.75 million of 4.25%
Convertible Subordinated Notes (" Notes") due May 31, 2000. The fair value of
long-term fixed interest rate debt is subject to interest rate risk. Generally,
the fair market value of fixed interest rate debt will increase as interest
rates fall and decrease as interest rates rise. The carrying value of the Notes
at December 31, 1998 approximates the fair value. A 10% increase in prevailing
interest rates at December 31, 1998 would not result in a material decrease in
the fair value of the Notes due to the short maturity. Currently, the Company
does not hold any derivative instruments to manage interest rate risk.
At December 31, 1998, the Company's investment portfolio consists primarily of
U.S. Government Securities and money funds. The portfolio is primarily
classified as available-for-sale and therefore these investments are recorded at
fair value in the financial statements. These securities are exposed to market
price risk which also takes into account interest rate risk. As of December 31,
1998, the fair value of the investment portfolio was $97.7 million, based on
quoted market prices. The potential loss in fair value resulting from a
hypothetical decrease of 10% in quoted market price is approximately $9.8
million.
11
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quintiles Transnational Corp.:
We have audited the accompanying supplemental consolidated balance sheet of
Quintiles Transnational Corp. (a North Carolina corporation) and subsidiaries as
of December 31, 1998, and the related supplemental consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. The
supplemental consolidated statements give retroactive effect to the merger of
Quintiles Transnational Corp. and the companies identified in Note 3, which have
been accounted for using the pooling of interests method as described in the
notes to the supplemental consolidated financial statements. These supplemental
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audit. We did not audit the consolidated financial
statements of ENVOY Corporation, included in the supplemental consolidated
financial statements of Quintiles Transnational Corp., which statements reflect
total assets and total net revenues of 15 percent and 13 percent, respectively,
of the related supplemental consolidated totals. These statements were audited
by other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for ENVOY
Corporation, is based solely upon the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion based upon our audit and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quintiles
Transnational Corp. and subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended, after giving
retroactive effect to the mergers with the companies identified in Note 3 to the
supplemental consolidated financial statements, all in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Raleigh, North Carolina,
June 3, 1999.
12
16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Quintiles Transnational Corp.
We have audited the accompanying supplemental consolidated balance sheet of
Quintiles Transnational Corp. (formed as a result of the consolidation of
Quintiles Transnational Corp. and the companies identified in Note 3 of the
supplemental consolidated financial statements) as of December 31, 1997, and the
related supplemental consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1997 and 1996. The
supplemental consolidated financial statements give retroactive effect to the
merger of Quintiles Transnational Corp. and the companies identified in Note 3,
which have been accounted for using the pooling of interests method as described
in the notes to the supplemental consolidated financial statements. These
supplemental financial statements are the responsibility of the management of
Quintiles Transnational Corp. Our responsibility is to express an opinion on
these supplemental financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quintiles Transnational Corp. at December 31, 1997, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1997 and
1996, after giving retroactive effect to the merger of the companies identified
in Note 3 to the supplemental consolidated financial statements, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
January 26, 1998,
except for Note 3, as to which the date is
June 3, 1999
13
17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- ---------
Net revenue ......................................... $ 1,403,719 $ 1,023,162 $ 717,823
Costs and expenses:
Direct .......................................... 725,279 532,539 369,400
General and administrative ...................... 434,394 321,686 239,878
Depreciation and amortization ................... 92,736 73,122 51,994
Non-recurring costs:
Write-off of acquired in-process technology .. -- 6,600 8,700
Restructuring ................................ -- -- 13,102
Special pension contribution ................. -- -- 2,329
----------- ----------- ---------
1,252,409 933,947 685,403
----------- ----------- ---------
Income from operations .............................. 151,310 89,215 32,420
Other income (expense):
Interest income ................................... 11,762 8,906 8,763
Interest expense .................................. (12,440) (9,461) (13,171)
Non-recurring transaction costs ................... -- -- (17,118)
Other ............................................. (3,658) (2,085) (4,609)
----------- ----------- ---------
(4,336) (2,640) (26,135)
----------- ----------- ---------
Income before income taxes .......................... 146,974 86,575 6,285
Income taxes ........................................ 58,405 37,709 16,956
----------- ----------- ---------
Net income (loss) ................................... 88,569 48,866 (10,671)
Non-equity dividend ................................. -- -- (16,706)
----------- ----------- ---------
Net income (loss) available for common shareholders.. $ 88,569 $ 48,866 $ (27,377)
=========== =========== =========
Basic net income (loss) per share ................... $ 0.85 $ 0.49 (0.30)
Diluted net income (loss) per share ................. $ 0.80 $ 0.46 (0.30)
Shares used in computing net income (loss) per share:
Basic ............................................ 104,799 99,908 91,693
Diluted .......................................... 110,879 107,141 91,693
The accompanying notes are an integral part of these consolidated statements.
14
18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31,
-----------------------------
1998 1997
----------- ---------
Assets
Current assets:
Cash and cash equivalents ................ $ 156,977 $ 93,195
Accounts receivable and unbilled services 363,163 262,825
Investments .............................. 32,241 44,372
Prepaid expenses ......................... 26,326 22,565
Other current assets ..................... 24,112 30,902
----------- ---------
Total current assets ............. 602,819 453,859
Property and equipment:
Land, buildings and leasehold improvements 97,163 86,811
Equipment and software ................... 242,255 155,882
Furniture and fixtures ................... 44,115 33,795
Motor vehicles ........................... 46,875 40,188
----------- ---------
430,408 316,676
Less accumulated depreciation ............ (156,763) (105,815)
----------- ---------
273,645 210,861
Intangibles and other assets:
Intangibles .............................. 155,618 166,780
Investments .............................. 65,456 69,089
Deferred income taxes .................... 71,401 68,651
Deposits and other assets ................ 41,984 30,571
----------- ---------
334,459 335,091
----------- ---------
Total assets ..................... $ 1,210,923 $ 999,811
=========== =========
The accompanying notes are an integral part of these consolidated statements.
15
19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands)
DECEMBER 31,
-----------------------------
1998 1997
----------- ---------
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit .................................................. $ 921 $ 11,800
Accounts payable ................................................. 63,475 45,129
Accrued expenses ................................................. 98,073 78,769
Unearned income .................................................. 153,535 95,934
Income taxes payable ............................................. 9,926 2,456
Current portion of obligations held under capital
leases ........................................................ 12,692 15,282
Current portion of long-term debt and obligation ................. 21,126 1,028
Other current liabilities ........................................ 3,632 18,868
----------- ---------
Total current liabilities ................................ 363,380 269,266
Long-term liabilities:
Obligations held under capital leases, less current
portion ....................................................... 12,646 8,796
Long-term debt and obligation, less current portion .............. 145,460 162,656
Deferred income taxes ............................................ 30,603 28,092
Other liabilities ................................................ 12,702 13,718
----------- ---------
201,411 213,262
----------- ---------
Total liabilities ........................................ 564,791 482,528
Commitments and contingencies
Shareholders' Equity:
Preferred stock, 3,264,800 and 4,349,451 shares issued and
outstanding at December 31, 1998 and 1997, respectively ....... 33 43
Common Stock and additional paid-in capital, 105,775,628 and
101,892,097 shares issued and outstanding at December 31, 1998
and 1997, respectively ........................................ 559,496 513,142
Retained earnings ................................................ 95,618 12,002
Accumulated other comprehensive income ........................... (5,198) (7,302)
Other equity ..................................................... (3,817) (602)
----------- ---------
Total shareholders' equity ............................... 646,132 517,283
----------- ---------
Total liabilities and shareholders' equity ............... $ 1,210,923 $ 999,811
=========== =========
The accompanying notes are an integral part of these consolidated statements.
16
20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated Employee Stock
Other Com- Additional Ownership Plan
Comprehensive Retained prehensive Preferred Common Paid-In Loan Guarantee
Income Earnings Income Stock Stock Capital & Other Total
--------- --------- --------- --------- ------ --------- --------- ---------
Balance, December 31, 1995, as
previously reported............. $ -- $ 32,618 $ 1,700 $ -- $ 342 $ 132,778 $ (1,495) $ 165,943
Adjustments for poolings of interest -- (1,429) -- -- 203 18,415 -- 17,189
--------- --------- --------- --------- ------ --------- --------- ---------
Balance, December 31, 1995 .......... -- 31,189 1,700 -- 545 151,193 (1,495) 183,132
Issuance of common stock ............ -- -- -- -- 56 87,271 -- 87,327
Principal payments on ESOP loan ..... -- -- -- -- -- -- 420 420
Stock issued for acquisitions ....... -- 608 -- 43 9 47,297 -- 47,957
Issuance of common stock for other
than cash ...................... -- -- -- -- 1 135 -- 136
Conversion of debt by pooled entity . -- -- -- -- 2 1,784 -- 1,786
Effect due to change in fiscal year
of pooled entity ............... -- 324 -- -- -- -- -- 324
Recapitalization of pooled entity ... -- (29,028) -- -- -- (202) -- (29,230)
Tax benefit from the exercise of
non-qualified stock options .... -- -- -- -- -- 2,920 -- 2,920
Dividends paid by pooled entity ..... -- (1,901) -- -- -- -- -- (1,901)
Non-equity dividend ................. -- (16,706) -- -- -- 14,921 -- (1,785)
Other equity transactions ........... -- (645) -- -- -- 25 (62) (682)
Comprehensive income:
Net loss .......................... (10,671) (10,671) -- -- -- -- -- (10,671)
Unrealized gain on marketable,
securities, net of tax ........ 45 -- 45 -- -- -- -- 45
Foreign currency adjustments ...... (1,204) -- (1,204) -- -- -- -- (1,204)
---------
Comprehensive loss .................. (11,830)
========= --------- --------- --------- ------ --------- --------- ---------
Balance, December 31, 1996 .......... (26,830) 541 43 613 305,344 (1,137) 278,574
Issuance of common stock ............ -- -- -- -- 27 114,657 -- 114,684
Principal payments on ESOP loan ..... -- -- -- -- -- -- 536 536
Stock issued for acquisitions ....... -- (445) -- -- -- 244 -- (201)
Issuance of common stock for other
than cash ...................... -- -- -- -- 1 19 -- 20
Conversion of debt by pooled entity . -- -- -- -- 9 8,205 -- 8,214
Effect due to change in fiscal year
of pooled entity ............... -- (3,775) 117 -- -- -- -- (3,658)
Tax effect of pooling of interests .. -- -- -- -- -- 62,700 -- 62,700
Tax benefit from the exercise of
non-qualified stock options .... -- -- -- -- -- 21,367 -- 21,367
Dividend paid by pooled entity ...... -- (5,814) -- -- -- (72) -- (5,886)
Two-for-one stock split ............. -- -- -- -- 369 (369) -- --
Other equity transactions ........... -- -- -- -- -- 28 (1) 27
Comprehensive income:
Net income ....................... 48,866 48,866 -- -- -- -- -- 48,866
Unrealized loss on marketable
securities, net of tax ....... (104) -- (104) -- -- -- -- (104)
Foreign currency adjustments ..... (7,856) -- (7,856) -- -- -- -- (7,856)
---------
Comprehensive income ................ 40,906
========= --------- --------- --------- ------ --------- --------- ---------
Balance, December 31, 1997 .......... 12,002 (7,302) 43 1,019 512,123 (602) 517,283
Issuance of common stock ............ -- -- -- -- 17 24,263 -- 24,280
Principal payments on ESOP loan ..... -- -- -- -- -- -- 215 215
Loan to ESOP ........................ -- -- -- -- -- -- (3,429) (3,429)
Stock issued for acquisitions ....... -- (272) -- -- 11 4,474 -- 4,213
Tax benefit from the exercise of
non-qualified stock options .... -- -- -- -- -- 15,603 -- 15,603
Conversion of preferred stock by
pooled entity .................. -- -- -- (10) 10 -- -- --
Dividend paid by pooled entity ...... -- (3,181) -- -- -- -- -- (3,181)
Other equity transactions ........... -- (1,500) -- -- -- 1,976 (1) 475
Comprehensive income:
Net income ....................... 88,569 88,569 -- -- -- -- -- 88,569
Unrealized loss on marketable
securities, net of tax ......... (572) -- (572) -- -- -- -- (572)
Foreign currency adjustments .... 2,676 -- 2,676 -- -- -- -- 2,676
---------
Comprehensive income ................ $ 90,673
========= --------- --------- --------- ------ --------- --------- ---------
Balance, December 31, 1998 .......... $ 95,618 $ (5,198) $ 33 $1,057 $ 558,439 $ (3,817) $ 646,132
========= ========= ========= ====== ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
17
21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
Operating activities:
Net income (loss) .................................... $ 88,569 $ 48,866 $ (10,671)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ...................... 92,736 73,122 52,611
Non-recurring transaction costs .................... -- -- 17,118
Net loss (gain) on sale of property and equipment .. 534 670 (20)
Write-off of certain intangible assets by pooled
entity ........................................ -- 6,600 10,281
Provision for (benefit from) deferred income taxes . (1,846) 9,967 1,289
Change in operating assets and liabilities:
Accounts receivable and unbilled services ........ (91,084) (41,655) (82,021)
Prepaid expenses and other assets ................ (7,003) (14,807) (9,713)
Accounts payable and accrued expenses ............ 38,368 13,894 31,012
Unearned income .................................. 51,952 3,092 48,756
Income taxes payable and other current liabilities (2,325) 8,728 4,073
Change in fiscal year of pooled entity ............. -- (581) (9,378)
Other .............................................. 81 62 4
--------- --------- ---------
Net cash provided by operating activities ............ 169,982 107,958 53,341
Investing activities:
Proceeds from disposition of property and equipment 6,297 4,642 2,489
Purchase of investments held-to-maturity ........... -- -- (95,939)
Maturities of investments held-to-maturity ......... 10,593 35,579 43,345
Purchase of investments available-for-sale ......... (125,413) (137,597) (19,020)
Proceeds from sale of investments available-for-sale 130,422 51,278 8,960
Purchase of other investments ...................... -- (12,011) --
Acquisition of property and equipment .............. (102,331) (89,999) (46,960)
Acquisition of businesses, net of cash acquired .... (15,010) (51,741) (128,852)
Payment of non-recurring transaction costs ......... -- (5,648) (11,440)
Change in fiscal year of pooled entity ............. -- (17) 2,606
Loan to ESOP, net .................................. (3,429) -- --
Other .............................................. 85 (1,998) --
--------- --------- ---------
Net cash used in investing activities ................ $ (98,786) $(207,512) $(244,811)
18
22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
Financing activities:
Increase (decrease) in lines of credit, net .............. $ (9,912) $ 194 $ 2,907
Proceeds from issuance of debt ........................... -- 566 185,108
Repayment of debt ........................................ (677) (7,302) (104,367)
Principal payments on capital lease obligations .......... (19,025) (17,082) (9,627)
Issuance of common stock ................................. 24,280 110,758 132,257
Issuance of debt for capitalization of pooled entity ..... -- -- 45,197
Recapitalization of pooled entity ........................ -- -- (29,230)
Payment of deferred financing costs ..................... -- -- (1,200)
Non-equity dividend ...................................... -- -- (1,756)
Dividend paid by pooled entity ........................... (3,499) (5,397) (2,293)
Change in fiscal year of pooled entity ................... -- 58 1,399
Other .................................................... 827 (56) (295)
--------- --------- ---------
Net cash provided by (used in) financing activities ........ (8,006) 81,739 218,100
Effect of foreign currency exchange rate changes on cash ... 592 (1,856) 332
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ........... 63,782 (19,671) 26,962
Cash and cash equivalents at beginning of year ............. 93,195 112,866 85,904
--------- --------- ---------
Cash and cash equivalents at end of year ................... $ 156,977 $ 93,195 $ 112,866
========= ========= =========
Supplemental Cash Flow Information
Interest paid ............................................ $ 11,758 $ 9,184 $ 11,955
Income taxes paid ........................................ 28,192 22,800 13,078
Non-cash Investing and Financing Activities
Capitalized leases ....................................... 19,531 23,027 13,210
Equity impact of mergers and acquisitions ................ 5,046 1,134 (24,903)
Equity impact from exercise of non-qualified stock options 5,498 24,049 2,920
Tax effect of pooled transactions ........................ -- 62,700 --
Conversion of debt to equity ............................. $ -- $ 8,214 $ 1,786
The accompanying notes are an integral part of these consolidated statements.
19
23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company
The Company is a leader in providing a full range of integrated product
development and commercialization solutions to the global pharmaceutical,
biotechnology and medical device industries. The Company is also a leader in
providing electronic data interchange and healthcare informatics services to the
healthcare market and provides healthcare policy consulting to governments and
other organizations worldwide.
Principles of Consolidation
The accompanying supplemental consolidated financial statements include the
accounts and operations of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Revenues, costs and expenses are recorded at average rates of exchange
during the year. Translation adjustments resulting from this process are charged
or credited to equity. Gains and losses on foreign currency transactions are
included in other income (expense).
Revenue Recognition
Many of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. The
Company is also party to fee-for-service and unit-of-service contracts. The
Company recognizes net revenue based upon (1) labor costs expended as a
percentage of total labor costs expected to be expended (percentage of
completion) for fixed price contracts, (2) contractual per diem or hourly rate
basis as work is performed under fee-for-service contracts or (3) completion of
units of service or transactions processed for unit-of-service contracts.
The Company's contracts provide for price renegotiation upon scope of work
changes. The Company recognizes revenue related to these scope changes when the
underlying services are performed and realization is assured. Most contracts are
terminable upon 15 - 90 days' notice by the customer. In the event of
termination, contracts typically require payment for services rendered through
the date of termination, as well as for subsequent services rendered to close
out the contract. Any anticipated losses resulting from contract performance are
charged to earnings in the period identified.
Concentration of Credit Risk
Substantially all net revenue is earned by performing services under
contracts with various pharmaceutical, biotechnology, medical device and
healthcare companies. The concentration of credit risk is equal to the
outstanding accounts receivable and unbilled services balances, less the
unearned income related thereto, and such risk is subject to the financial and
industry conditions of the Company's customers. The Company does not require
collateral or other securities to support customer receivables. Credit losses
have been immaterial and consistently within management's expectations. No one
customer accounted for greater than 10% of consolidated net revenue.
Unbilled Services and Unearned Income
In general, prerequisites for billings and payments are established by
contractual provisions including predetermined payment schedules, submission of
appropriate billing detail or the achievement of contract milestones, depending
on the type of contract. Unbilled services arise when services have been
rendered but customers have not been billed. Similarly, unearned income
represents prebillings for services that have not yet been rendered.
20
24
Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company does not
report in the accompanying balance sheets cash held for customers for
investigator payments in the amount of $7.3 million and $9.5 million at December
31, 1998 and 1997, respectively, that pursuant to agreements with these
customers, remains the property of the customers.
The Company's investments in debt and marketable equity securities are
classified as either held-to-maturity or available-for-sale. Investments
classified as held-to-maturity are recorded at amortized cost. Investments
classified as available-for-sale are measured at market value and net unrealized
gains and losses are recorded as a component of shareholders' equity until
realized. In addition, the Company has recorded $19.2 million and $13.1 million
in deposits and other assets at December 31, 1998 and 1997, respectively, that
represents investments in equity securities of and advances to companies for
which there are not readily available market values; such investments are
accounted for using the cost method. Any gains or losses on sales of investments
are computed by specific identification.
Property and Equipment
Property and equipment are carried at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated useful
life or the lease term as follows:
Buildings and leasehold improvements 3 - 50 years
Equipment and software 3 - 10 years
Furniture and fixtures 5 - 10 years
Motor vehicles 3 - 5 years
Intangible Assets
Intangibles consist principally of the excess cost over the fair value of
net assets acquired ("goodwill"). Goodwill and other intangible assets are being
amortized on a straight-line basis over periods from two to 40 years.
Accumulated amortization totaled $90.0 million and $61.6 million at December 31,
1998 and 1997, respectively.
The carrying values of intangible assets are reviewed if the facts and
circumstances suggest impairment. If this review indicates that carrying values
will not be recoverable, as determined based on undiscounted cash flows over the
remaining amortization period, the Company would reduce carrying values by the
estimated shortfall of discounted cash flows.
Net Income Per Share
In February 1997, the FASB issued Statement No. 128, "Earnings per Share"
which established new standards for computing and presenting net income per
share information. As required, the Company adopted the provisions of Statement
No. 128 in its 1997 financial statements and has restated all prior year net
income per share information. Basic net income per share was determined by
dividing net income available for common shareholders by the weighted average
number of common shares outstanding during each year. Diluted net income per
share reflects the potential dilution that could occur assuming conversion or
exercise of all convertible securities and issued and unexercised stock options.
A reconciliation of the net income available for common shareholders and number
of shares used in computing basic and diluted net income per share is in Note 4.
Income Taxes
Income tax expense includes U.S. and international income taxes. Certain
items of income and expense are not reported in tax returns and financial
statements in the same year. The tax effects of these differences are reported
as deferred income taxes. Tax credits are accounted for as a reduction of tax
expense in the year in which the credits reduce taxes payable.
Research and Development Costs
Research and development costs relating principally to new software
applications and computer technology are charged to expense as incurred. These
expenses totaled $6.3 million, $5.1 million and $4.1 million in 1998, 1997 and
1996, respectively.
21
25
Employee Stock Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Foreign Currency Hedging
The Company uses foreign exchange contracts and options to hedge the risk
of changes in foreign currency exchange rates associated with contracts in which
the expenses for providing services are incurred in one currency and paid for by
the customer in another currency. The Company recognizes changes in value in
income only when contracts are settled or options are exercised. There were
several foreign exchange contracts relating to service contracts open at
December 31, 1998, all of which are immaterial to the Company.
Recently Adopted Accounting Standards
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement No.
130"). Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Statement No. 130 requires foreign
currency translation adjustments and unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
Prior to the adoption of Statement No. 130, the Company reported such
adjustments and unrealized gains or losses separately in shareholders' equity.
Amounts in prior year financial statements have been reclassified to conform to
Statement No. 130.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company adopted
the provisions of SOP No. 98-1 in fiscal 1998. The adoption of SOP No. 98-1 did
not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Standard
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 requires that upon
adoption, all derivative instruments be recognized in the balance sheet at fair
value, and that changes in such fair values be recognized in earnings unless
specific hedging criteria are met. Changes in the values of derivatives that
meet these hedging criteria will ultimately offset related earnings effects of
the hedged items; effects of certain changes in fair value are recorded in other
comprehensive income pending recognition in earnings. The Company will adopt
Statement No. 133 when required to do so on January 1, 2001. Because of its
limited use of derivatives, the Company does not expect the application of
Statement No. 133 to have a significant impact on its financial position or
results of operations.
2. SHAREHOLDERS' EQUITY
The Company is authorized to issue 25 million shares of preferred stock,
$.01 per share par value. At December 31, 1998, 200 million common shares of
$.01 par value were authorized.
In October 1997, the Board of Directors authorized a two-for-one split of
the Company's Common Stock in the form of a 100% stock dividend. A total of
36,920,627 shares of Common Stock were issued in connection with the split. The
stated par value of each share was not changed from $.01. A total of $369,000
was reclassified from additional paid-in capital to Common Stock. All references
in the financial statements to number of shares, per share amounts, stock option
data and market prices of Common Stock have been restated to reflect the stock
split.
In March 1997, the Company completed a stock offering of 11,040,000 shares
of its Common Stock. Of the shares sold, 2,830,000 shares were sold by the
Company and 8,210,000 shares by certain selling shareholders. The offering
provided the Company with approximately $84.3 million, net of expenses.
22
26
3. MERGERS AND ACQUISITIONS
On May 31, 1998, the Company acquired Cardiac Alert in exchange for 70,743
shares of the Company's Common Stock. On October 12, 1998, the Company acquired
QED in exchange for 523,520 shares of the Company's Common Stock. On March 30,
1999, 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. On March
31, 1999, the Company acquired N&B in exchange for 271,146 shares of the
Company's Common Stock. On May 19, 1999, the Company acquired Minerva in
exchange for 1,143,625 shares of the Company's Common Stock. On June 3, 1999,
the Company acquired SMG in exchange for 1,170,291 shares of the Company's
Common Stock. These transactions were accounted for by the pooling of interests
method. Thus the accompanying supplemental consolidated financial statements
have been restated to include historical financial data for each such
acquisition.
On February 27, 1998, ENVOY acquired the Express Bill Companies pursuant to
separate agreements and plans of merger for an aggregate of 3.5 million shares
of ENVOY common stock (approximately 4.1 million shares of the Company's
Common Stock). These transactions were accounted for as poolings of interests
and as such, the historical financial data for ENVOY includes the results of the
Express Bill Companies.
The following are reconciliations of net revenue and net income (loss)
available for common shareholders previously reported by the Company for the
years ended December 31, 1998, 1997 and 1996, with the combined amounts
currently presented in the financial statements for those years:
YEAR ENDED DECEMBER 31, 1998
----------------------------
(in thousands)
Consolidated,
As Previously As
Reported ENVOY N&B Minerva SMG Restated
------------- ---------- ---------- ---------- ---------- -------------
Net revenue $1,188,012 $ 184,773 $ 10,929 $ 5,745 $ 14,260 $1,403,719
Net income (loss) available for
common shareholders $ 83,679 $ 4,245 $ 107 $ (2,325) $ 2,863 $ 88,569
YEAR ENDED DECEMBER 31, 1997
----------------------------
(in thousands)
As Consolidated,
Previously Cardiac As
Reported Alert QED ENVOY N&B Minerva SMG Restated
---------- ------- ------ --------- -------- ------ ------- ----------
Net revenue $852,900 $1,435 $5,096 $ 137,605 $ 10,298 $4,328 $11,500 $1,023,162
Net income (loss) $ 55,683 $ 140 $ 452 $ (9,197) $ (527) $ 459 $ 1,856 $ 48,866
available for common
shareholders
YEAR ENDED DECEMBER 31, 1996
----------------------------
(in thousands)
As Consolidated,
Previously Cardiac As
Reported Alert QED ENVOY N&B Minerva SMG Restated
---------- ------- ------ --------- -------- ------ ------- ----------
Net revenue $601,126 $ 341 $3,602 $ 90,572 $ 9,713 $1,254 $11,215 $ 717,823
Net income (loss) $ 7,879 $(245) $ 401 $(37,217) $ (504) $ 78 $ 2,231 $ (27,377)
available for common
shareholders
23
27
On February 2, 1998, the Company acquired Pharma in exchange for 132,000
shares of the Company's Common Stock. On February 26, 1998, the Company acquired
T2A in exchange for 311,899 shares of the Company's Common Stock. On August 24,
1998, the Company acquired Royce in exchange for 664,194 shares of the Company's
Common Stock. On September 9, 1998, the Company acquired DAS in exchange for
358,897 shares of the Company's Common Stock. These transactions were accounted
for by the pooling of interests method and were previously included in the
Company's historical consolidated financial statements.
On May 6, 1998, ENVOY acquired all of the issued and outstanding capital
stock of Synergy Health Care, Inc. for approximately $10.2 million in cash.
ENVOY recorded approximately $6.9 million related to the excess cost over the
fair value of net assets acquired. This acquisition was accounted for as a
purchase and accordingly, the financial statements include the results of the
business from the date of acquisition.
On October 1, 1998, ENVOY acquired substantially all of the assets of
Control-O-Fax Corporation and its wholly-owned subsidiary Control-O-Fax Systems,
Inc. for approximately $8.3 million in cash. ENVOY recorded approximately $3.1
million related to the excess cost over the fair value of the net assets
acquired. This acquisition was accounted for as a purchase.
On June 2, 1997, the Company acquired Butler Communications, Inc. in
exchange for 428,610 shares of the Company's Common Stock. On June 11, 1997, the
Company acquired 100% of the stock of Medical Action Communications Limited for
1,131,394 shares of the Company's Common Stock. On July 2, 1997, the Company
acquired CerebroVascular Advances, Inc. ("CVA") through an exchange of 100% of
CVA's stock for 467,936 shares of the Company's Common Stock. On August 29,
1997, the Company acquired Intelligent Imaging, Inc. ("Intelligent Imaging") in
exchange for 171,880 shares of the Company's Common Stock. On August 29, 1997,
the Company acquired Clindepharm International (Pty) Limited in exchange for
477,966 shares of the Company's Common Stock. These transactions were accounted
for by the pooling of interests method and were previously included in the
Company's historical financial statements.
On August 7, 1997, ENVOY acquired all of the issued and outstanding capital
stock of Healthcare Data Interchange Corporation ("HDIC"), the EDI subsidiary of
Aetna U.S. Healthcare Inc., for approximately $36.4 million in cash. ENVOY
recorded approximately $38.9 million related to the excess cost over the fair
value of net assets acquired. As part of the HDIC acquisition, ENVOY also
recorded a one-time write-off of acquired in-process technology of approximately
$6.0 million. The acquisition was accounted for as a purchase and accordingly,
the financial statements include the results of operations of the business from
the date of acquisition.
On March 6, 1996, ENVOY's shareholders approved the acquisition of National
Electronic Information Corporation ("NEIC"). As part of the $88.4 million
purchase price, ENVOY issued approximately 4.1 million shares of ENVOY stock
(approximately 4.7 million shares of the Company's Stock). ENVOY recorded
approximately $59.6 million related to the excess cost over the fair value of
net assets acquired. The NEIC acquisition was financed through equity and debt
financing. ENVOY issued approximately 3.7 million shares of ENVOY Preferred
Stock (approximately 4.3 million shares of the Company's Preferred Stock) and
333,333 shares of ENVOY common stock (approximately 388,600 shares of the
Company's Common Stock). In addition, ENVOY entered into a credit agreement,
whereby ENVOY obtained $50 million in bank financing. In connection with the
NEIC acquisition, ENVOY recorded a one-time write-off of acquired in-process
technology of approximately $8.0 million. The acquisition was accounted for as a
purchase and accordingly, the financial statements include the results of
operations of the business from the date of acquisition.
On May 13, 1996, the Company acquired the operating assets of Lewin-VHI,
Inc., a healthcare consulting company, for approximately $30 million in cash.
The Company recorded approximately $20 million related to the excess cost over
the fair value of net assets acquired. The acquisition was accounted for as a
purchase and accordingly, the financial statements include the results of
operations of the business from the date of acquisition.
On November 29, 1996, the Company acquired 100% of the outstanding stock of
Innovex Limited ("Innovex"), an international contract pharmaceutical
organization based in Marlow, U.K., for 18,428,478 shares of the Company's
Common Stock and the exchange of options to purchase 1,572,452 shares of the
Company's Common Stock. On November 22, 1996, the Company acquired BRI
International, Inc. ("BRI"), a global contract research organization, through an
exchange of 100% of BRI's stock for 3,229,724 shares of the Company's Common
Stock. Related to the Innovex and BRI transactions, the Company recognized
approximately $17.1 million in non-recurring transaction costs and approximately
$10.7 million in non-recurring restructuring costs. These transactions were
accounted for by the pooling of interests method and were previously included in
the Company's historical financial statements.
In addition to the above mergers and acquisitions, the Company has completed
other mergers and acquisitions all of which are immaterial to the financial
statements. For such immaterial pooling of interests transactions, the Company's
financial statements for the year of the transaction have been restated to
include the pooled companies from January 1 of that year, but the financial
statements for years prior to the year of the transaction have not been restated
because the effect of such restatement would be immaterial. For the Company's
1998 purchase transactions, the Company has not presented pro forma disclosures
because the results of operations for these transactions are not material to
the Company.
24
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4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Net income (loss) available for common shareholders:
Net income (loss) $ 88,569 $ 48,866 $(10,671)
Non-equity dividend -- -- (16,706)
-------- -------- --------
Net income (loss) available for common shareholders $ 88,569 $ 48,866 $(27,377)
======== ======== ========
Weighted average shares:
Basic weighted average shares 104,799 99,908 91,693
Effect of dilutive securities:
Stock options 2,815 2,884 --
Preferred Stock 3,265 4,349 --
-------- -------- --------
Diluted adjusted weighted average shares
and assumed conversions 110,879 107,141 91,693
======== ======== ========
Basic net income (loss) per share $ 0.85 $ 0.49 $ (0.30)
======== ======== ========
Diluted net income (loss) per share $ 0.80 $ 0.46 $ (0.30)
======== ======== ========
Options to purchase 1.5 million shares of common stock with exercise prices
ranging between $46.75 and $56.25 per share were outstanding during 1998 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
("Notes") into approximately 3.5 million shares of common stock was not included
in the computation of diluted net income per share because the effect would be
antidilutive.
For additional disclosures regarding the outstanding stock options and the
Notes, see "Employee Benefit Plans" and "Credit Arrangements and Obligations."
5. CREDIT ARRANGEMENTS AND OBLIGATIONS
On May 31, 1998, the Company acquired a clinical trial supply production and
warehouse facility in Livingston, Scotland for a purchase commitment valued at
(pound)1.75 million (approximately $2.9 million), with payment due in May, 2001.
On May 23, 1996, the Company completed a private placement of $143.75
million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. Net
proceeds to the Company amounted to approximately $139.7 million. The Notes are
convertible into 3,474,322 shares of Common Stock, at the option of the holder,
at a conversion price of $41.37 per share, subject to adjustment under certain
circumstances, at any time after August 21, 1996. The Notes are redeemable, at
the option of the Company, beginning May 31, 1999. Interest is payable on the
notes semi-annually on May 31 and November 30 each year.
The Company has a $150 million senior unsecured credit facility with a U.S.
bank. At the option of the Company, interest is charged at either the bank's
prime rate (7.75% at December 31, 1998) or LIBOR rate (5.06563% at December 31,
1998) plus an applicable rate (.2% at December 31, 1998). No balance was
outstanding as of December 31, 1998.
At December 31, 1998, the Company had a (pound)15.0 million (approximately
$25.1 million) line of credit which was guaranteed by certain of the Company's
U.K. subsidiaries. Interest is charged at the bank's base rate (7.25% at
December 31, 1998), plus 1%, with a minimum of 5.5%. The line of credit had an
outstanding balance of (pound)0 and (pound)1.5 million (approximately $2.5
million) at December 31, 1998 and 1997, respectively.
At December 31, 1998, the Company had a (pound)5.0 million (approximately
$8.4 million) unsecured line of credit with a second U.K. bank. The line of
credit was charged interest at the bank's published base rate (6.25% at December
31, 1998) plus 1.5%. The line of credit had an outstanding balance of (pound).2
million (approximately $.4 million) and (pound)4.7 million (approximately $7.8
million) at December 31, 1998 and 1997, respectively. In accordance with their
terms, both of these facilities expired in May 1999.
In conjunction with the ENVOY transaction, ENVOY's $50.0 million revolving
credit facility with a U.S. bank was terminated. ENVOY did not have any amounts
outstanding on this facility at December 31, 1998 and 1997.
25
29
In March 1995, Quintiles Scotland Limited, a wholly-owned subsidiary of the
Company, acquired assets of a drug development facility in Edinburgh, Scotland
from Syntex Pharmaceuticals Limited, a member of the Roche group based in Basel,
Switzerland for a purchase commitment valued at (pound)12.5 million
(approximately $20.9 million), with payment due in December 1999. In connection
with this commitment, the Company has committed to purchasing at December 31,
1998 approximately (pound)2.4 million (approximately $3.5 million) under foreign
exchange contracts. The Company is obligated to purchase up to an additional
(pound)2.9 million through December 28, 1999 in varying amounts as the daily
dollar-to-pound exchange rate ranges between $1.5499 and $1.6800.
Long-term debt and obligation consist of the following (in thousands):
DECEMBER 31,
------------------------
1998 1997
-------- --------
4.25% Convertible Subordinated Notes due 2000 $143,747 $143,750
Other notes payable ......................... 678 1,484
Long-term obligations ....................... 23,830 20,985
-------- --------
168,255 166,219
Less: current portion .................. 21,126 1,028
unamortized issuance costs ....... 1,669 2,535
-------- --------
$145,460 $162,656
======== ========
Maturities of long-term debt and obligation at December 31, 1998 are as
follows (in thousands):
1999 $ 21,126
2000 143,924
2001 3,089
2002 108
2003 8
--------
$168,255
========
The fair value of the Company's long-term debt approximates carrying value.
26
30
6. INVESTMENTS
The following is a summary as of December 31, 1998 of held-to-maturity
securities and available-for-sale securities by contractual maturity where
applicable (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE
---------------------------- ------ ------- ------ ------
U.S. Government Securities --
Maturing in one year or less $2,990 $ 15 $ -- $3,005
Other 2,333 217 -- 2,550
------ ------- ------ ------
$5,323 $ 232 $ -- $5,555
====== ======= ====== ======
GROSS GROSS
AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES: COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- --------
U.S. Government Securities --
Maturing between one and three years $ 6,506 $ 2 $ (9) $ 6,499
Maturing between three and five years 43,584 9 (298) 43,295
Maturing between five and seven years 13,000 13 (39) 12,974
State and Municipal Securities --
Maturing in one year or less 2,000 -- -- 2,000
Maturing between one and three years 1,568 27 -- 1,595
Equity Securities 556 -- (63) 493
Money Funds 25,512 -- (594) 24,918
Other 605 -- (5) 600
-------- -------- -------- --------
$ 93,331 $ 51 $ (1,008) $ 92,374
======== ======== ======== ========
The following is a summary as of December 31, 1997 of held-to-maturity and
available-for-sale securities by contractual maturity where applicable (in
thousands):
GROSS GROSS
HELD-TO-MATURITY AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES: COST GAINS LOSSES VALUE
---------------- --------- ---------- ---------- ------
U.S. Government Securities --
Maturing in one year or less $ 5,892 $ 15 $ -- $ 5,907
Maturing between one and three years 2,814 16 -- 2,830
State and Municipal Securities --
Maturing in one year or less 2,688 9 -- 2,697
Maturing between one and three years 2,329 17 -- 2,346
Other 2,312 97 -- 2,409
------- ------- ------- -------
$16,035 $ 154 $ -- $16,189
======= ======= ======= =======
GROSS GROSS
AVAILABLE-FOR-SALE AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES: COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- --------
U.S. Government Securities --
Maturing in one year or less $ 2,499 $ -- $ -- $ 2,499
Maturing between one and three years 52,061 -- (57) 52,004
Maturing between three and five years 7,000 5 -- 7,005
State and Municipal Securities --
Maturing in one year or less 3,060 -- -- 3,060
Maturing between three and five years 2,595 30 -- 2,625
Money Funds 30,301 -- (68) 30,233
-------- -------- -------- --------
$ 97,516 $ 35 $ (125) $ 97,426
======== ======== ======== ========
27
31
The gross realized gains and losses on sales of available-for-sale
securities were $81,000 and $210,000, respectively, in 1998. The net adjustment
to unrealized holding gains (losses) on available-for-sale securities included
as a separate component of shareholders' equity was ($572,000), ($104,000) and
$45,000 in 1998, 1997 and 1996, respectively.
7. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
Accounts receivable and unbilled services consist of the following (in
thousands):
DECEMBER 31,
---------------------------
1998 1997
--------- ---------
Trade:
Billed $ 205,139 $ 159,808
Unbilled services 150,431 96,860
--------- ---------
355,570 256,668
Other 14,133 11,848
Allowance for doubtful accounts (6,540) (5,691)
--------- ---------
$ 363,163 $ 262,825
========= =========
Substantially all of the Company's accounts receivable and unbilled
services are due from companies in the pharmaceutical, biotechnology, medical
device, and healthcare industries and are a result of contract research, sales,
marketing, healthcare consulting, health information management and EDI services
provided by the Company on a global basis. The percentage of accounts receivable
and unbilled services by region is as follows:
DECEMBER 31,
----------------
REGION 1998 1997
------ ---- ----
Americas:
United States 58% 54%
Other 1 1
--- ---
Americas 59 55
Europe and Africa:
United Kingdom 27 31
Other 12 13
--- ---
Europe and Africa 39 44
Asia - Pacific 2 1
--- ---
100% 100%
=== ===
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
----------------------
1998 1997
------- -------
Compensation and payroll taxes .... $51,142 $34,236
Transaction and restructuring costs 943 2,751
Other ............................. 45,988 41,782
------- -------
$98,073 $78,769
======= =======
28
32
9. LEASES
The Company leases certain office space and equipment under operating
leases. The leases expire at various dates through 2049 with options to cancel
certain leases at five-year increments. Some leases contain renewal options.
Annual rental expenses under these agreements were approximately $40.8 million,
$28.4 million and $25.2 million for the years ended December 31, 1998, 1997 and
1996, respectively. The Company leases certain assets, primarily vehicles, under
capital leases. Capital lease amortization is included with depreciation and
amortization expenses and accumulated depreciation in the accompanying financial
statements.
The following is a summary of future minimum payments under capitalized
leases and under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1998 (in thousands):
CAPITAL OPERATING
LEASES LEASES
-------- --------
1999 $ 13,994 $ 43,582
2000 12,907 36,553
2001 284 27,637
2002 174 22,598
2003 6 17,520
Thereafter 1 59,105
-------- --------
Total minimum lease payments 27,366 $206,995
========
Amounts representing interest 2,028
--------
Present value of net minimum payments 25,338
Current portion 12,692
--------
Long-term capital lease obligations $ 12,646
========
10. INCOME TAXES
The components of income tax expense are as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- ------- --------
Current:
Federal $ 41,761 $16,158 $ 5,500
State 7,473 5,084 2,851
Foreign 12,736 7,003 6,717
-------- ------- --------
61,970 28,245 15,068
Deferred expense (benefit):
Federal (1,186) 6,968 (50)
Foreign (2,379) 2,496 1,938
-------- ------- --------
(3,565) 9,464 1,888
-------- ------- --------
$ 58,405 $37,709 $ 16,956
======== ======= ========
The Company has allocated directly to additional paid-in capital
approximately $15.6 million in 1998, $21.4 million in 1997 and $2.9 million in
1996 related to the tax benefit from non-qualified stock options exercised.
29
33
The differences between the Company's consolidated tax expense and the
expense computed at the 35% U.S. statutory tax rate were as follows (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
Federal taxes at statutory rate $ 51,441 $ 30,301 $ 2,211
State and local income taxes, net of federal benefit 4,849 2,375 1,304
Non-deductible transaction costs 315 -- 7,740
Non-deductible goodwill amortization 7,242 7,055 5,447
Foreign earnings taxed at different rates (519) 726 537
Utilization of net operation loss carryforwards (2,194) (398) 163
Non-taxable income (590) (1,521) --
Other (2,139) (829) (446)
-------- -------- --------
$ 58,405 $ 37,709 $ 16,956
======== ======== ========
Income before income taxes from foreign operations was approximately $30.8
million, $4.7 million and $24.4 million for the years 1998, 1997 and 1996,
respectively. Income from foreign operations was approximately $63 million,
$35.8 million and $25.6 million for the years 1998, 1997 and 1996, respectively.
The difference between income from operations and income before income taxes is
due primarily to intercompany charges which eliminate in consolidation.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $76.8 million at December 31, 1998. Those earnings are considered
to be indefinitely reinvested, and accordingly, no U.S. federal and state income
taxes have been provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various countries.
The tax effects of temporary differences that give rise to significant
portions of deferred tax (assets) liabilities are presented below (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
--------- ---------
Deferred tax liabilities:
Depreciation and amortization $ 31,255 $ 29,896
Prepaid expenses 3,389 1,335
Other 4,336 3,283
--------- ---------
Total deferred tax liabilities 38,980 34,514
Deferred tax assets:
Net operating loss carryforwards (24,817) (17,930)
Accrued expenses and unearned income (15,437) (8,787)
Goodwill net of amortization (96,460) (103,527)
Other (7,160) (7,378)
--------- ---------
Total deferred tax assets (143,874) (137,622)
Valuation allowance for deferred tax assets 53,600 55,904
--------- ---------
Net deferred tax assets (90,274) (81,718)
--------- ---------
Net deferred tax (assets) liabilities $ (51,294) $ (47,204)
========= =========
The decrease in the Company's valuation allowance for deferred tax assets
to $53.6 million at December 31, 1998 from $55.9 million at December 31, 1997 is
primarily due to the reduction of prior year valuation allowances relating to
net operating loss carryforwards that the Company now believes are more likely
than not to be utilized. In connection with the Innovex acquisition, the Company
established an initial deferred tax asset of $108 million to reflect the tax
benefits arising from the deductibility of goodwill recorded for tax purposes.
The Innovex business combination was accounted for as a pooling of interests for
financial reporting purposes, and no goodwill was recorded. In addition, the
Company recorded a $45.3 million valuation allowance related to this taxable
goodwill to reflect uncertainties that might affect the realization of this
deferred tax asset. These uncertainties include the projection of future taxable
and foreign source income, the interplay of U.S. tax statutes and the Company's
ability to minimize foreign tax credit limitations. Based on its analysis, the
Company believes it is more likely than not that a portion of the deferred tax
asset related to this taxable goodwill will not be recognized. The resulting net
asset of $62.7 million was recorded as an increase to additional paid-in
capital.
30
34
The Company's deferred income tax expense (benefit) results from the
following (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
-------- -------- -------
Excess (deficiency) of tax over financial reporting:
Depreciation and amortization $ 10,208 $ 13,883 $ 9,753
Net operating loss carryforwards (6,816) (6,057) (1,907)
Valuation allowance reduction (2,194) (636) --
Accrued expenses and unearned income (6,611) (874) (4,368)
Other items, net 1,848 3,148 (1,590)
-------- -------- -------
$ (3,565) $ 9,464 $ 1,888
======== ======== =======
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for
100% of capital expenditures on certain assets under the Inland Revenue Service
guidelines. For 1998, 1997 and 1996, these allowances were $23 million, $28
million and $11 million, respectively, which helped to generate net operating
loss carryforwards of $7 million to be used to offset taxable income in that
country. Assuming the U.K. subsidiaries continue to invest in qualified capital
expenditures at an adequate level, the portion of the deferred tax liability
relating to the U.K. subsidiaries may be deferred indefinitely. The Company
recognizes a deferred tax benefit for foreign generated operating losses at the
time of the loss, as the Company believes it is more likely than not that the
benefit will be realized. The Company has net operating loss carryforwards of
approximately $55 million in various entities within the United Kingdom which
have no expiration date and has over $10 million of net operating loss
carryforwards from various foreign jurisdictions which have different expiration
periods. In addition, the Company has approximately $18.6 million of U.S. state
operating loss carryforwards which expire through 2012 and has approximately $3
million of U.S. federal operating loss carryforwards which begin to expire in
2005.
11. EMPLOYEE BENEFIT PLANS
The Company has numerous employee benefit plans that cover substantially all
eligible employees in the countries in which the plans are offered.
Contributions are primarily discretionary, except in some countries where
contributions are contractually required. Plans include Approved Profit Sharing
Schemes in the U.K. and Ireland that are funded with Company stock, a defined
contribution plan funded by Company stock in Australia, Belgium and Canada,
defined contribution plans in Belgium, Holland, Sweden, and Great Britain, a
profit sharing scheme in France, and defined benefit plans in Germany and the
U.K. The defined benefit plan in Germany is an unfunded plan, which is provided
for in the balance sheet. In addition, the Company sponsors a supplemental
non-qualified deferred compensation plan, covering certain management employees.
The Company sponsors a leveraged Employee Stock Ownership Plan (the "ESOP")
for all eligible employees. In 1992, the Company loaned the ESOP approximately
$2.0 million to purchase 413,222 shares of Company common stock. As of December
31, 1997, the loan was repaid. In connection with its acquisition of BRI, the
Company merged the existing BRI ESOP, also a leveraged plan, into the Company's
ESOP effective September 1, 1997. During 1998, the ESOP borrowed approximately
$4.0 million from the Company to purchase 100,000 shares of Company Common
Stock. The ESOP's trustee holds such shares in suspense and releases them for
allocation to participants as the loan is repaid. The Company's contributions to
the ESOP are used to repay the loan principal and interest.
Compensation expense for the Company's contributions to the ESOP totaled
$1,743,000, $568,000, and $585,000 in 1998, 1997, and 1996, respectively. As of
December 31, 1998 and 1997, 1,520,950 and 1,773,000 shares, respectively, were
allocated to participants. Shares unallocated and held in suspense as of
December 31, 1998, totaled 172,740 and had a fair value of $9.2 million.
The Company has an employee savings and investment plan (401(k) Plan)
available to all eligible employees meeting certain specified criteria. The
Company matches employee deferrals at varying percentages, set at the discretion
of the Board of Directors. For the years ended December 31, 1998, 1997 and 1996,
the Company expensed $3.4 million, $2.1 million, and $1.1 million.,
respectively, as matching contributions.
The Company has an Employee Stock Purchase Plan (the "Purchase Plan"), which
is intended to provide eligible employees an opportunity to acquire the
Company's Common Stock. Participating employees have the option to purchase
shares at 85% of the lower of the closing price per share of common stock on the
first or last day of the calendar quarter. The Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. During 1998, 1997 and 1996, 141,727 shares,
84,522 shares and 9,576 shares, respectively, were purchased under the Purchase
Plan. At December 31, 1998, 285,163 shares were available for issuance under the
Purchase Plan.
31
35
The Company has stock option plans to provide incentives to eligible
employees, officers and directors in the form of incentive stock options,
non-qualified stock options, stock appreciation rights and restricted stock. The
Board of Directors determines the option price (not to be less than fair market
value for incentive options) at the date of grant. Options, particularly those
assumed or exchanged as a result of acquisitions, have various vesting schedules
and expiration periods. The majority of options granted under the Executive
Compensation Plan typically vest 25% per year over four years expiring ten years
from the date of grant.
Stock option activity during the periods indicated is as follows:
Weighted-Average
Number Exercise Price
---------- ----------------
Outstanding at December 31, 1995 6,113,116 $ 6.79
Granted 4,875,318 32.29
Exercised (1,524,894) 2.51
Canceled (728,752) 23.83
----------
Outstanding at December 31, 1996 8,734,788 12.62
Granted 3,206,831 31.69
Exercised (2,075,369) 6.76
Canceled (530,734) 20.77
----------
Outstanding at December 31, 1997 9,335,516 20.02
Granted 3,148,054 43.26
Exercised (1,535,542) 12.38
Canceled (728,087) 25.40
----------
Outstanding at December 31, 1998 10,219,941 $ 27.99
Pro forma information regarding net income and net income per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
Statement No. 123. The per share weighted-average fair value of stock options
granted during 1998, 1997 and 1996 was $16.07, $12.64 and $5.83 per share,
respectively, on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
Employee Stock Options Employee Stock Purchase Plan
---------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Expected dividend yield 0% 0% 0% 0% 0% --
Risk-free interest rate 4.8% 5.9% 6.0% 4.9% 5.1% --
Expected volatility 42.0% 41.0% 40.0% 40.0% 34.4% --
Expected life (in years from vest) 1.35 1.20 1.10 0.25 0.25 --
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
transferable. All available option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
32
36
11. EMPLOYEE BENEFIT PLANS -- Continued
The Company's pro forma information follows (in thousands, except for net
income per share information):
Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
Pro forma net income (loss) available for
common shareholders $ 70,252 $ 36,773 $(35,834)
Pro forma basic net income (loss) per share 0.67 0.37 (0.39)
Pro forma diluted net income (loss) per share $ 0.63 $ 0.34 $ ( 0.39)
Selected information regarding stock options as of December 31, 1998
follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- ------------------------------------
Number of Exercise Price Weighted-Average Weighted-Average Number of Weighted-Average
Options Range Exercise Price Remaining Life Options Exercise Price
--------- --------------- ---------------- ---------------- --------- ----------------
2,371,966 $ 0.20 - $ 8.58 $ 6.66 5.6 585,256 $ 4.77
2,118,068 $ 8.75 - $26.37 19.00 7.3 308,640 16.56
2,130,132 $26.59 - $36.25 33.00 7.8 715,467 32.36
1,988,200 $36.32 - $43.06 38.19 8.6 1,005,622 38.23
1,611,575 $43.13 - $56.25 51.68 9.7 14,888 47.39
--------- ---------
10,219,941 $28.03 7.7 2,629,873 $ 26.69
========== =========
12. OPERATIONS BY GEOGRAPHIC LOCATION
The table below presents the Company's operations by geographical location.
The Company attributes revenues to geographical locations based upon (1)
customer service activities, (2) operational management, (3) business
development activities and (4) customer contract coordination. The Company's
operations within each geographical region are further broken down to show each
country which accounts for 10% or more of the totals. (in thousands)
1998 1997 1996
---------- ---------- --------
Net revenue:
Americas:
United States $ 781,700 $ 566,525 $357,893
Other 15,078 7,325 2,908
---------- ---------- --------
Americas 796,778 573,850 360,801
Europe and Africa:
United Kingdom 346,090 256,371 202,253
Other 232,047 170,248 142,058
---------- ---------- --------
Europe and Africa 578,137 426,619 344,311
Asia-Pacific: 28,804 22,693 12,711
---------- ---------- --------
$1,403,719 $1,023,162 $717,823
========== ========== ========
Long-lived assets:
Americas:
United States $ 96,913 $ 74,580 $ 52,725
Other 1,544 1,130 460
---------- ---------- --------
Americas 98,457 75,710 53,185
Europe and Africa:
United Kingdom 149,101 117,407 80,125
Other 20,713 15,330 11,353
---------- ---------- --------
Europe and Africa 169,814 132,737 91,478
Asia-Pacific: 5,374 2,414 1,947
---------- ---------- --------
$ 273,645 $ 210,861 $146,610
========== ========== ========
33
37
13. 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 primarily ENVOY. The Company does not include
non-recurring costs ($20.3 million, $27.0 million and $40.5 million in 1998,
1997 and 1996, respectively), interest income (expense) and income tax expense
(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. (in thousands)
1998 1997 1996
---------- ---------- --------
Net revenue:
Product development $ 708,508 $ 517,993 $416,815
Commercialization 496,178 356,064 199,221
QUINTERNET(TM) informatics 199,033 149,105 101,787
---------- ---------- --------
$1,403,719 $1,023,162 $717,823
========== ========== ========
Income from operations:
Product development $ 77,605 $ 52,167 $ 41,468
Commercialization 47,298 37,685 18,208
QUINTERNET(TM) informatics 46,666 26,403 13,282
---------- ---------- --------
$ 171,569 $ 116,255 $ 72,958
========== ========== ========
Total assets:
Product development $ 754,129 $ 614,234 $411,283
Commercialization 267,091 213,519 150,106
QUINTERNET(TM) informatics 189,703 172,058 161,589
---------- ---------- --------
$1,210,923 $ 999,811 $722,978
========== ========== ========
Expenditures to acquire long-lived assets:
Product development $ 77,587 $ 68,877 $ 31,909
Commercialization 18,349 11,510 9,477
QUINTERNET(TM) informatics 6,395 9,612 5,574
---------- ---------- --------
$ 102,331 $ 89,999 $ 46,960
========== ========== ========
Depreciation and amortization expense:
Product development $ 33,341 $ 20,463 $ 14,901
Commercialization 22,681 17,864 11,168
QUINTERNET(TM) informatics 36,714 34,795 25,925
---------- ---------- --------
$ 92,736 $ 73,122 $ 51,994
========== ========== ========
34
38
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net revenue $315,070 $340,435 $362,035 $386,179
Income from operations 33,460 34,891 39,355 43,604
Net income available for
common shareholders 21,214 20,418 21,985 24,952
Basic net income per share 0.20 0.20 0.21 0.24
Diluted net income per share $ 0.19 $ 0.18 $ 0.20 $ 0.22
Range of stock prices $34.000-52.428 $42.250-53.500 $33.375-52.000 $41.000-56.875
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net revenue $227,208 $243,079 $259,342 $293,533
Income from operations 19,306 23,141 19,121 27,647
Net income available for
common shareholders 10,040 12,965 10,231 15,630
Basic net income per share 0.10 0.13 0.10 0.15
Diluted net income per share $ 0.10 $ 0.12 $ 0.09 $ 0.14
Range of stock prices $26.625-39.000 $21.500-35.000 $35.032-43.688 $31.000-43.500
15. SUBSEQUENT EVENTS
On January 1, 1999, the Company acquired substantial assets of HMR's 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 12, 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 humiliation, victimization,
emotional turmoil and distress. The compliant 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 against these claims.
On February 17, 1999, the Company acquired 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 is expected to be accounted for as a purchase.
35
39
On March 29, 1999, the Company acquired 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 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. The right
to receive contingent value payments terminated in accordance with the merger
agreement. Accordingly, no contingent value payments were payable to any former
PMSI shareholder. The acquisition of PMSI will be accounted for as a purchase.
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 asserts claims under 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, among other things, 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. ENVOY
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.
36
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Quintiles Transnational Corp. and Subsidiaries
Condensed Supplemental Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31
1999 1998
---- ----
(in thousands)
Net revenue $ 413,314 $ 315,070
Costs and expenses:
Direct 212,758 162,553
General and administrative 125,147 96,989
Depreciation and amortization 25,336 22,068
--------- ---------
363,241 281,610
--------- ---------
Income from operations 50,073 33,460
Transaction costs (22,363) (532)
Other income (expense) 400 (289)
--------- ---------
Total other expense, net (21,963) (821)
--------- ---------
Income before income taxes 28,110 32,639
Income taxes 19,496 11,425
--------- ---------
Net income $ 8,614 $ 21,214
========= =========
Basic net income per share $ 0.08 $ 0.20
========= =========
Diluted net income per share $ 0.08 $ 0.19
========= =========
The accompanying notes are an integral part of these consolidated condensed
statements.
37
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Quintiles Transnational Corp. and Subsidiaries
Condensed Supplemental Consolidated Balance Sheets
March 31 December 31
1999 1998
-------------- --------------
(unaudited) (Note 1)
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 198,409 $ 156,977
Accounts receivable and unbilled services 395,928 363,163
Investments 114,973 32,241
Prepaid expenses 38,795 26,326
Other current assets 22,141 24,112
----------- -----------
Total current assets 770,246 602,819
Property and equipment 474,849 430,408
Less accumulated depreciation (166,072) (156,763)
----------- -----------
308,777 273,645
Intangibles and other assets:
Goodwill, net 234,104 124,963
Other intangibles, net 40,227 30,655
Investments 79,267 65,456
Deferred income taxes 71,090 71,401
Deposits and other assets 42,039 41,984
----------- -----------
466,727 334,459
----------- -----------
Total assets $ 1,545,750 $ 1,210,923
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 5,488 $ 921
Accounts payable and accrued expenses 201,720 161,548
Credit arrangements, current 106,118 33,818
Unearned income 155,355 153,535
Income taxes and other current liabilities 22,380 13,558
----------- -----------
Total current liabilities 491,061 363,380
Long-term liabilities:
Credit arrangements, less current portion 164,803 134,276
Long-term obligations 2,840 23,830
Deferred income taxes and other liabilities 35,446 43,305
----------- -----------
203,089 201,411
----------- -----------
Total liabilities 694,150 564,791
Shareholders' equity:
Preferred stock, none and 3,264,800 shares issued
and outstanding at March 31, 1999 and
December 31, 1998, respectively -- 33
Common stock and additional paid-in capital,
114,256,517 and 105,775,628 shares issued
and outstanding at March 31, 1999 and
December 31, 1998, respectively 767,344 559,496
Retained earnings 102,564 95,618
Accumulated other comprehensive income (14,542) (5,198)
Other equity (3,766) (3,817)
----------- -----------
Total shareholders' equity 851,600 646,132
----------- -----------
Total liabilities and shareholders' equity $ 1,545,750 $ 1,210,923
=========== ===========
The accompanying notes are an integral part of these consolidated condensed
statements.
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Quintiles Transnational Corp. and Subsidiaries
Condensed Supplemental Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31
1999 1998
--------- --------
(In thousands)
Operating activities
Net income $ 8,614 $ 21,214
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 25,336 22,068
Non-recurring transaction costs 22,363 --
Provision for deferred income tax expense 2,402 5,825
Change in operating assets and liabilities (33,888) (48,752)
Other 443 335
Change in fiscal year by pooled entity 556 --
--------- --------
Net cash provided by operating activities 25,826 690
Investing activities
Proceeds from disposition of property and equipment 1,024 795
Acquisition of property and equipment (57,577) (19,546)
Cash acquired in stock transactions, Note 2 87,386 1,360
Payment of non-recurring transaction costs (2,878) --
Payment of dividends by pooled entities (1,411) (600)
Purchases of marketable securities, net (12,753) (22,695)
Other (234) --
--------- --------
Net cash provided by (used in) investing activities 13,557 (40,686)
Financing activities
Increase in lines of credit, net 4,384 10,926
Principal payments on credit arrangements (3,427) (5,775)
Issuance of common stock, net 3,416 6,573
Other (28) --
--------- --------
Net cash provided by financing activities 4,345 11,724
Effect of foreign currency exchange rate changes on cash (2,296) (670)
--------- --------
Increase (decrease) in cash and cash equivalents 41,432 (28,942)
Cash and cash equivalents at beginning of period 156,977 93,195
--------- --------
Cash and cash equivalents at end of period $ 198,409 $ 64,253
========= ========
The accompanying notes are an integral part of these consolidated condensed
statements.
39
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Quintiles Transnational Corp. and Subsidiaries
Notes to Condensed Supplemental Consolidated Financial Statements
(unaudited)
March 31, 1999
1. Basis of Presentation
The accompanying unaudited condensed supplemental 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 Supplemental Consolidated Financial Statements and
Notes thereto included in the Current Report on Form 8-K, dated July 15, 1999 of
Quintiles Transnational Corp. (the "Company").
The balance sheet at December 31, 1998 has been derived from the audited
supplemental consolidated financial statements of the Company. 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. The
Company has evaluated the pro forma disclosure requirements for the Oak Grove
transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
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.
40
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Quintiles Transnational Corp. and Subsidiaries
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 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. The right to receive contingent value payments
terminated in accordance with the merger agreement. Accordingly, no contingent
value payments were payable to any former PMSI shareholder. 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 and is being amortized over 30 years. The acquisition of
PMSI has been accounted for as a purchase. For the periods presented, the
Company has evaluated the pro forma disclosure requirements for the PMSI
transaction and has determined that this transaction is immaterial and
therefore, no pro forma disclosures are required.
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.
On May 19, 1999, the Company acquired Minerva Medical plc ("Minerva"), a
Scotland-based clinical research organization, in exchange for 1,143,625 shares
of the Company's Common Stock. The acquisition of Minerva has been accounted for
as a pooling of interests, and as such, all historical data have been restated
to include the historical data of Minerva.
On June 3, 1999, the Company acquired SMG Marketing Group Inc. ("SMG"), a
Chicago-based healthcare market information company in exchange for 1,170,291
shares of the Company's Common Stock. The acquisition of SMG has been accounted
for as a pooling of interests, and as such, all historical data have been
restated to include the historical data of SMG.
41
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Quintiles Transnational Corp. and Subsidiaries
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 Minerva SMG Consolidated
------- ------- --- ------------
For the three months ended
March 31, 1999:
Net revenue $408,098 $1,283 $3,933 $413,314
Net income (loss) 7,703 (329) 1,240 8,614
Basic net income per share 0.07 0.08
Diluted net income per share $ 0.07 0.08
For the three months ended
March 31, 1998:
Net revenue $309,068 $2,024 $3,978 $315,070
Net income (loss) 18,872 932 1,410 21,214
Basic net income per share 0.19 0.20
Diluted net income per share $ 0.17 0.19
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.
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
-------- --------
Net income $ 8,614 $ 21,214
======== ========
Weighted average shares:
Basic weighted average shares 109,341 103,813
Effect of dilutive securities
Stock options 2,702 3,456
Preferred stock -- 3,264
-------- --------
Diluted weighted average shares 112,043 110,533
======== ========
Basic net income per share $ 0.08 $ 0.20
Diluted net income per share $ 0.08 $ 0.19
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.
42
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Quintiles Transnational Corp. and Subsidiaries
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
------- --------
Net income $ 8,614 $ 21,214
Other comprehensive income:
Unrealized loss on marketable securities, net of tax (232) (81)
Foreign currency adjustment (9,112) 947
------- --------
Comprehensive (loss) income $ (730) $ 22,080
======= ========
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.
43
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Quintiles Transnational Corp. and Subsidiaries
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
asserts claims under 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, among other things, 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.
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.
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Quintiles Transnational Corp. and Subsidiaries
Three Months Ended March 31,
1999 1998
---- ----
(in thousands)
Net revenue:
Product development $ 225,496 $ 157,472
Commercialization 129,416 111,096
QUINTERNET(TM) informatics 58,402 46,502
---------- ----------
$ 413,314 $ 315,070
========== ==========
Income from operations:
Product development $ 27,631 $ 18,856
Commercialization 12,242 10,263
QUINTERNET(TM) informatics 13,921 9,406
---------- ----------
$ 53,794 $ 38,525
========== ==========
As of
March 31, 1999 December 31, 1998
-------------- -----------------
Total assets:
Product development $ 701,557 $ 754,129
Commercialization 242,150 267,091
QUINTERNET(TM) informatics 602,043 189,703
---------- ----------
$1,545,750 $1,210,923
========== ==========
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The Company's consolidated supplemental financial data have been restated to
include ENVOY, N & B, Minerva and SMG.
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
Net revenue for the first quarter of 1999 was $413.3 million, an increase of
$98.2 million or 31.2% over the first quarter of 1998 net revenue of $315.1
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 43.2% to $225.5
million for the first quarter of 1999 as compared to $157.5 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
25.6% to $58.4 million for the first quarter of 1999 as compared to $46.5
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.
45
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Quintiles Transnational Corp. and Subsidiaries
Direct costs, which include compensation and related fringe benefits for
billable employees and other expenses directly related to contracts, were $212.8
million or 51.5% of net revenue for the first quarter of 1999 versus $162.6
million or 51.6% 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 $125.1 million or
30.3% of net revenue for the first quarter of 1999 versus $97.0 million or 30.8%
of net revenue for the first quarter of 1998. The $28.2 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 $25.3 million or 6.1% of net revenue for the
first quarter of 1999 versus $22.1 million or 7.0% 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
$21.6 million or 5.2% of net revenue for the first quarter of 1999 versus $17.0
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 $50.1 million or 12.1% of net revenue for the first
quarter of 1999 versus $33.5 million or 10.6% of net revenue for the first
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $53.8 million or 13.0% net revenue
for the first quarter of 1999 versus $38.5 million or 12.2% of net revenue for
the first quarter of 1998. Income from operations for the product development
group increased to $27.6 million or 12.3% of net revenue for the first quarter
of 1999 from $18.9 million or 12.0% 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 $13.9 million or 23.8% of net revenue for the
first quarter of 1999 from $9.4 million or 20.2% 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 69.4% versus a 35.0%
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 36.0% as compared to a 29.9% 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.
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Quintiles Transnational Corp. and Subsidiaries
Liquidity and Capital Resources
Cash inflows from operations were $25.8 million for the three months ended March
31, 1999 versus $690,000 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 $57.6 million for the
three months ended March 31, 1999 compared to an outlay of $19.5 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 $279.2 million versus $239.4
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $240.6 million at
March 31, 1999 as compared to $209.6 million at the end of 1998. As of March 31,
1999, accounts receivable were $240.2 million versus $212.7 million at December
31, 1998. Unbilled services were $155.7 million at March 31, 1999 versus $150.4
million at December 31, 1998, offset by unearned income balances of $155.4
million and $153.5 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 43 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. The right to receive contingent
value payments terminated in accordance with the merger agreement. Accordingly,
no contingent value payments were payable to any former PMSI shareholder on June
14, 1999.
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. In accordance with their terms, both of these
facilities expired in May, 1999.
In May, 1999, the Company entered into a (pound)10.0 million (approximately
$16.2 million) unsecured line of credit with a U.K. bank. The Company also
entered into a (pound)1.5 million (approximately $2.4 million) general banking
facility with the same U.K. bank.
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.
47
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Quintiles Transnational Corp. and Subsidiaries
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 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.
48
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Quintiles Transnational Corp. and Subsidiaries
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 has
addressed and substantially completed assessment, remediation, testing and
deployment of its systems relating to its healthcare consulting services and its
commercialization services. 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
has successfully remediated, replaced and migrated a substantial majority of
these systems, and anticipates that substantial completion of these systems will
occur by the end of the third quarter of 1999. The Company has evaluated the
state of readiness of its recent acquisitions, including ENVOY, PMSI and SMG,
which form the core of the Company's QUINTERNET(TM) informatics services, and
has integrated these acquisitions into its Year 2000 Program. The Company's
QUINTERNET(TM) informatics services utilize real-time and batch systems linked
to external organizations and PC based audit and syndicated data systems.
Significant progress has been made in remediating and testing these systems. The
Company is substantially complete with respect to the systems formerly owned by
PMSI, and it anticipates that remediation and testing of former ENVOY and SMG
systems will be substantially complete by the end of the third quarter of 1999.
Testing with external organizations which work with our QUINTERNET(TM)
informatics service group will occur throughout 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.
49
53
Quintiles Transnational Corp. and Subsidiaries
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 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.
50
54
Quintiles Transnational Corp. and Subsidiaries
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 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.
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.
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55
Item 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.01 Consent of Arthur Andersen LLP
23.02 Consent of Ernst & Young LLP
23.03 Consent of Ernst & Young LLP
27.01 Restated Financial Data Schedule (SEC Use Only)
27.02 Restated Financial Data Schedule (SEC Use Only)
27.03 Restated Financial Data Schedule (SEC Use Only)
27.04 Restated Financial Data Schedule (SEC Use Only)
27.05 Restated Financial Data Schedule (SEC Use Only)
27.06 Restated Financial Data Schedule (SEC Use Only)
27.07 Restated Financial Data Schedule (SEC Use Only)
27.08 Restated Financial Data Schedule (SEC Use Only)
27.09 Restated Financial Data Schedule (SEC Use Only)
27.10 Restated Financial Data Schedule (SEC Use Only)
99.01 Report of Ernst & Young LLP
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
------------------------------------------
Dated: July 15,1999 Rachel R. Selisker
Chief Financial Officer and Executive Vice
President Finance
57
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.01 Consent of Arthur Andersen LLP
23.02 Consent of Ernst & Young LLP
23.03 Consent of Ernst & Young LLP
27.01 Restated Financial Data Schedule (SEC Use Only)
27.02 Restated Financial Data Schedule (SEC Use Only)
27.03 Restated Financial Data Schedule (SEC Use Only)
27.04 Restated Financial Data Schedule (SEC Use Only)
27.05 Restated Financial Data Schedule (SEC Use Only)
27.06 Restated Financial Data Schedule (SEC Use Only)
27.07 Restated Financial Data Schedule (SEC Use Only)
27.08 Restated Financial Data Schedule (SEC Use Only)
27.09 Restated Financial Data Schedule (SEC Use Only)
27.10 Restated Financial Data Schedule (SEC Use Only)
99.01 Report of Ernst & Young LLP