1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
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Commission file number 340-23520
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QUINTILES TRANSNATIONAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1714315
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4709 Creekstone Dr., Suite 200
Durham, NC 27703-8411
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(Address of principal executive offices) (Zip Code)
(919) 998-2000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
The number of shares of Common Stock, $.01 par value, outstanding as of July 31,
1999 was 114,758,559.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Index
Page
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets -
June 30, 1999 and December 31, 1998 3
Condensed consolidated statements of
operations - Three months ended June 30,
1999 and 1998; six months ended June 30,
1999 and 1998 4
Condensed consolidated statements of
cash flows - Six months ended
June 30, 1999 and 1998 5
Notes to condensed consolidated financial
statements - June 30, 1999 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities - Not Applicable --
Item 4. Submission of Matters to a Vote of Security
Holders 21
Item 5. Other Information - Not Applicable --
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31
1999 1998
----------- -----------
(unaudited) (Note 1)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 140,735 $ 156,977
Accounts receivable and unbilled services 415,578 363,163
Investments in debt securities 128,075 32,241
Prepaid expenses 43,541 26,326
Other current assets 21,957 24,112
----------- -----------
Total current assets 749,886 602,819
Property and equipment 510,391 430,408
Less accumulated depreciation (184,119) (156,763)
----------- -----------
326,272 273,645
Intangibles and other assets:
Goodwill, net 240,544 124,963
Other intangibles, net 28,116 30,655
Investments in debt securities 85,157 65,456
Investments in marketable equity securities 14,765 --
Deferred income taxes 71,192 71,401
Deposits and other assets 46,595 41,984
----------- -----------
486,369 334,459
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Total assets $ 1,562,527 $ 1,210,923
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 6,268 $ 921
Accounts payable and accrued expenses 190,895 161,548
Credit arrangements, current 104,988 33,818
Unearned income 135,469 153,535
Income taxes and other current liabilities 24,550 13,558
----------- -----------
Total current liabilities 462,170 363,380
Long-term liabilities:
Credit arrangements, less current portion 157,941 134,276
Long-term obligations 2,777 23,830
Deferred income taxes and other liabilities 44,061 43,305
----------- -----------
204,779 201,411
----------- -----------
Total liabilities 666,949 564,791
Shareholders' equity:
Preferred stock, none and 3,264,800 shares
issued and outstanding at June 30, 1999
and December 31, 1998, respectively -- 33
Common stock and additional paid-in capital,
114,692,192 and 105,775,628 shares issued and
outstanding at June 30, 1999 and December
31, 1998, respectively 776,695 559,496
Retained earnings 138,631 95,618
Accumulated other comprehensive income (16,024) (5,198)
Other equity (3,724) (3,817)
----------- -----------
Total shareholders' equity 895,578 646,132
----------- -----------
Total liabilities and shareholders' equity $ 1,562,527 $ 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 CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
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(in thousands)
Net revenue $ 456,413 $ 340,435 $ 869,727 $ 655,505
Costs and expenses:
Direct 232,166 175,938 444,924 338,491
General and administrative 141,345 106,703 266,492 203,692
Depreciation and amortization 24,015 22,903 49,351 44,971
--------- --------- --------- ---------
397,526 305,544 760,767 587,154
--------- --------- --------- ---------
Income from operations 58,887 34,891 108,960 68,351
Transaction costs (3,464) (469) (25,827) (1,001)
Other income (expense) 1,245 (266) 1,645 (555)
--------- --------- --------- ---------
Total other expense, net (2,219) (735) (24,182) (1,556)
--------- --------- --------- ---------
Income before income taxes 56,668 34,156 84,778 66,795
Income taxes 21,488 13,738 40,984 25,163
--------- --------- --------- ---------
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
========= ========= ========= =========
Basic net income per share $ 0.31 $ 0.20 $ 0.39 $ 0.40
========= ========= ========= =========
Diluted net income per share $ 0.30 $ 0.18 $ 0.38 $ 0.38
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30
1999 1998
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(In thousands)
OPERATING ACTIVITIES
Net income $ 43,794 $ 41,632
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 49,351 44,971
Non-recurring transaction costs 25,827 --
Provision for (benefit from) deferred income tax expense 1,417 (2,686)
Change in operating assets and liabilities (73,018) (40,649)
Other 582 560
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Net cash provided by operating activities 47,953 43,828
INVESTING ACTIVITIES
Proceeds from disposition of property and equipment 4,132 1,474
Acquisition of property and equipment (94,527) (47,995)
Cash acquired in stock transactions, Note 2 83,986 (6,901)
Payment of non-recurring transaction costs (22,755) --
Payment of dividends by pooled entities (761) (2,078)
Purchases of debt securities, net (32,753) (13,734)
Purchases of equity securities, net (10,640) --
Other (234) --
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Net cash used in investing activities (73,552) (69,234)
FINANCING ACTIVITIES
Increase in lines of credit, net 5,188 (3,657)
Principal payments on credit arrangements (4,336) (9,340)
Issuance of common stock, net 11,709 11,309
Other (29) --
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Net cash provided by (used in) financing activities 12,532 (1,688)
Effect of foreign currency exchange rate changes on cash (3,175) (1,048)
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Decrease in cash and cash equivalents (16,242) (28,142)
Cash and cash equivalents at beginning of period 156,977 93,195
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Cash and cash equivalents at end of period $ 140,735 $ 65,053
========= =========
The accompanying notes are an integral part of these consolidated condensed
statements.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
June 30, 1999
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1999. For further information, refer to the
Consolidated Financial Statements and Notes thereto included in the 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
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.
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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 acquired, which amount 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 Corporation ("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 leading 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.
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(1) Minerva SMG Consolidated
---------- ------- ------- ------------
For the three months ended
June 30, 1999:
Net revenue $453,252 $ 655 $ 2,506 $456,413
Net income (loss) 34,154 619 407 35,180
Basic net income per share 0.30 0.31
Diluted net income per share $ 0.29 $ 0.30
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Company ENVOY N & B Minerva SMG Consolidated
---------- --------- -------- -------- -------- -----------
For the three months ended
June 30, 1998:
Net revenue $ 289,991 $ 42,949 $ 2,981 $ 1,248 $ 3,266 $ 340,435
Net income (loss) 20,371 612 164 (1,133) 404 20,418
Basic net income per share 0.26 0.19
Diluted net income per share $ 0.26 $ 0.18
For the six months ended
June 30, 1999:
Net revenue $ 804,158 $ 54,468 $ 2,724 $ 1,938 $ 6,439 $ 869,727
Net income (loss)(2) 44,638 (3,316) 535 290 1,647 43,794
Basic net income per share(2) 0.45 0.39
Diluted net income per share(2) $ 0.47 $ 0.38
For the six months ended
June 30, 1998:
Net revenue $ 553,865 $ 85,473 $ 5,651 $ 3,272 $ 7,244 $ 655,505
Net income (loss) 39,273 687 59 (201) 1,814 41,632
Basic net income per share 0.51 0.40
Diluted net income per share $ 0.50 $ 0.38
(1) Includes transaction costs and results of operations for Minerva and SMG
since their respective dates of acquisitions.
(2) Includes transaction costs and amortization of certain acquired intangible
assets.
3. Significant Customers
One customer accounted for 13.9% and 12.1% of consolidated net revenue for the
three and six months ended June 30, 1999, respectively. 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 and six months ended June 30, 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 June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
======== ======== ======== ========
Weighted average shares:
Basic weighted average shares 114,451 104,656 112,004 104,239
Effect of dilutive securities
Stock options 2,982 3,940 3,080 3,299
Preferred stock -- 3,264 -- 3,264
-------- -------- -------- --------
Diluted weighted average shares 117,433 111,860 115,084 110,802
======== ======== ======== ========
Basic net income per share $ 0.31 $ 0.20 $ 0.39 $ 0.40
Diluted net income per share $ 0.30 $ 0.18 $ 0.38 $ 0.38
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Options to purchase approximately 2.4 million and 2.2 million shares of common
stock with exercise prices ranging between $40.688 and $56.25 per share were
outstanding during the three and six months ended June 30, 1999, respectively,
but were not included in the computation of diluted net income per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
The conversion of the Company's 4.25% Convertible Subordinated Notes into
approximately 3.5 million shares of common stock was not included in the
computation of diluted net income per share because the effect would be
antidilutive.
5. Comprehensive Income
The following table represents the Company's comprehensive income for the three
and six months ended June 30, 1999 and 1998 (in thousands):
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 35,180 $ 20,418 $ 43,794 $ 41,632
Other comprehensive income:
Unrealized gain on marketable securities, net of tax 3,809 113 3,577 32
Foreign currency adjustment (5,162) (2,590) (14,274) (1,643)
-------- -------- -------- --------
Comprehensive income $ 33,827 $ 17,941 $ 33,097 $ 40,021
======== ======== ======== ========
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
7. Commitments and Contingencies
In February 1999, Kenneth Hodges ("Plaintiff") filed a civil lawsuit naming as
defendants Richard L. Borison, Bruce I. Diamond, 14 pharmaceutical companies and
Quintiles Laboratories Limited, a subsidiary of the Company. The complaint
alleges that certain drug trials conducted by Drs. Borison and Diamond in which
Plaintiff alleges he participated between 1988 and 1996 were not properly
conducted or supervised, that Plaintiff had violent adverse reactions to many of
the drugs and that his schizophrenia was aggravated by the drug trials.
Consequently, Plaintiff alleges that he was subject to severe mortification,
injured feelings, shame, public humiliations, victimization, emotional turmoil
and distress. The complaint alleges claims for battery, fraudulent inducement to
participate in the drug experiments, medical malpractice, negligence in
conducting the experiments, and intentional infliction of emotional distress.
Plaintiff seeks to recover his actual damages in unspecified amounts, medical
expenses, litigation costs, and punitive damages. Nowhere in the complaint are
found any specific allegations against Quintiles Laboratories Limited nor any
specific factual connection between the Company and the Plaintiff's claims. The
Company believes the claims alleged against it are vague and meritless, and the
recovery sought is baseless. The Company intends to vigorously defend itself
against these claims.
Three class action complaints were filed in 1998, and later consolidated into a
single action against ENVOY and certain of its executive officers. The complaint
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.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
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 primarily ENVOY, which was acquired in the
first quarter of 1999. The Company does not include non-recurring costs ($5.1
million for the three months ended June 30, 1998, and $3.7 million and $10.1
million for the six months ended June 30, 1999 and 1998, respectively), interest
income (expense) and income tax (benefit) in segment profitability. Overhead
costs are allocated based upon management's best estimate of efforts expended in
managing the segments. There are not any significant intersegment revenues.
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands)
Net revenue:
Product development $242,981 $170,493 $468,477 $327,965
Commercialization 146,686 123,727 276,102 234,823
QUINTERNET(TM) informatics 66,746 46,215 125,148 92,717
-------- -------- -------- --------
$456,413 $340,435 $869,727 $655,505
======== ======== ======== ========
Income from operations:
Product development $ 30,426 $ 16,919 $ 58,057 $ 35,775
Commercialization 13,582 12,795 25,824 23,058
QUINTERNET(TM) informatics 14,879 10,242 28,800 19,648
-------- -------- -------- --------
$ 58,887 $ 39,956 $112,681 $ 78,481
======== ======== ======== ========
As of June 30, 1999 As of December 31, 1998
------------------- -----------------------
Total assets:
Product development $ 786,816 $ 754,129
Commercialization 249,389 267,091
QUINTERNET(TM) informatics 526,322 189,703
---------- ----------
$1,562,527 $1,210,923
========== ==========
9. Subsequent Events
On July 2, 1999, the Company acquired Medcom, Inc., a New Jersey-based provider
of physician meetings and educational events to help pharmaceutical companies
raise awareness of their products among healthcare professionals, for
approximately $2.5 million in cash. In addition, the Company agreed to pay the
former Medcom, Inc. owners earnout payments based on a multiple of 1999 profits
for Medcom as defined in the Medcom purchase agreement. The acquisition of
Medcom, Inc. will be accounted for as a purchase.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
On July 15, 1999, the Company acquired MediTrain, a Netherlands-based multimedia
pharmaceutical sales representative training company, in exchange for 19,772
shares of the Company's Common Stock. The acquisition of MediTrain will be
accounted for as a purchase.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The Company's consolidated financial data have been restated to include ENVOY,
N & B, Minerva and SMG.
Three Months Ended June 30, 1999 and 1998
Net revenue for the second quarter of 1999 was $456.4 million, an increase of
$116.0 million or 34.1% over the second quarter of 1998 net revenue of $340.4
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, the
initiation of services under contracts awarded subsequent to the second quarter
of 1998 and the Company's 1999 acquisitions accounted for under purchase
accounting which contributed approximately $9.9 million of net revenue for the
second quarter of 1999. Net revenue for the product development group increased
42.5% to $243.0 million for the second quarter of 1999 as compared to $170.5
million for the second quarter of 1998. Net revenue for the commercialization
group increased 18.6% to $146.7 million for the second quarter of 1999 as
compared to $123.7 million for the second quarter of 1998. Net revenue for the
QUINTERNET(TM) informatics group increased 44.4% to $66.7 million for the second
quarter of 1999 as compared to $46.2 million for the second quarter of 1998. The
net revenue for the second quarter of 1999 for the QUINTERNET(TM) informatics
group included approximately $8.4 million of net revenue contributed by a 1999
acquisition accounted for as a purchase. In addition, the QUINTERNET(TM)
informatics group continued to experience 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 electronic data
interchange ("EDI") and transaction processing expenses and other expenses
directly related to contracts, were $232.2 million or 50.9% of net revenue for
the second quarter of 1999 versus $175.9 million or 51.7% of net revenue for the
second 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 $141.3 million or
31.0% of net revenue for the second quarter of 1999 versus $106.7 million or
31.3% of net revenue for the second quarter of 1998. The $34.6 million increase
in general and administrative expenses was primarily due to an increase in
personnel, facilities and locations and outside services resulting from the
Company's growth. Also included in the increase is approximately $1.1 million of
incremental costs related to the Company's Year 2000 Program.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Depreciation and amortization were $24.0 million or 5.3% of net revenue for the
second quarter of 1999 versus $22.9 million or 6.7% of net revenue for the
second quarter of 1998. Included is amortization of certain acquired intangible
assets of $5.1 million for the three months ended June 30, 1998. These
intangible assets were fully amortized as of March 31, 1999. Excluding these
expenses, depreciation and amortization were $17.8 million or 5.2% of net
revenue for the second quarter of 1998. Excluding the amortization of certain
acquired intangible assets, amortization expense increased $1.9 million due to
the goodwill amortization resulting from the Company's 1999 acquisitions
accounted for under purchase accounting. The remaining $4.6 million increase is
primarily due to the increase in the capitalized asset base of the Company.
Income from operations was $58.9 million or 12.9% of net revenue for the second
quarter of 1999 versus $34.9 million or 10.2% of net revenue for the second
quarter of 1998. Excluding amortization of certain acquired intangible assets as
discussed above, income from operations was $40.0 million or 11.7% of net
revenue for the second quarter of 1998. Income from operations for the product
development group increased to $30.4 million or 12.5% of net revenue for the
second quarter of 1999 from $16.9 million or 9.9% of net revenue for the second
quarter of 1998. Income from operations for the commercialization group
decreased as a percentage of net revenue to $13.6 million or 9.3% of net revenue
for the second quarter of 1999 from $12.8 million or 10.3% of net revenue for
the second quarter of 1998. Excluding the amortization of certain acquired
intangible assets as discussed above, income from operations for the
QUINTERNET(TM) informatics group increased slightly to $14.9 million or 22.3% of
net revenue for the second quarter of 1999 from $10.2 million or 22.2% of net
revenue for the second quarter of 1998.
Other expense increased to $2.2 million for the second quarter of 1999 from
$735,000 for the second quarter of 1998. Excluding transaction costs, other
income was $1.2 million for the second quarter of 1999 versus other expense of
$266,000 for the second quarter of 1998. The $1.4 million change primarily
results from an increase in net interest income.
The effective tax rate for the second quarter of 1999 was 37.9% versus a 40.2%
effective tax rate for the second 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 second quarter of 1999 was 35.7% versus a 34.6% effective tax rate for the
second 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
Six Months Ended June 30, 1999 and 1998
Net revenue for the six months ended June 30, 1999 was $869.7 million, an
increase of $214.2 million or 32.7% over the six months ended June 30, 1998 net
revenue of $655.5 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, the initiation of services under contracts awarded subsequent to June
30, 1998 and the Company's 1999 acquisitions accounted for under purchase
accounting which contributed approximately $10.3 million of net revenue for the
six months ended June 30, 1999. Net revenue for the product development group
increased 42.8% to $468.5 million for the six months ended June 30, 1999 as
compared to $328.0 million for the six months ended June 30, 1998. Net revenue
for the commercialization group increased 17.6% to $276.1 million for the six
months ended June 30, 1999 as compared to $234.8 million for the six months
ended June 30, 1998. Net revenue for the QUINTERNET(TM) informatics group
increased 35.0% to $125.1 million for the six months ended June 30, 1999 as
compared to $92.7 million for the six months ended June 30, 1998. The net
revenue for the six months ended June 30, 1999 for the QUINTERNET(TM)
informatics group includes approximately $8.4 million of net revenue contributed
by a 1999 acquisition accounted for as a purchase. In addition, the
QUINTERNET(TM) informatics group experienced an increase in the volume of
transactions processed.
Direct costs, which include compensation and related fringe benefits for
billable employees, cost of communications and related EDI and transaction
processing expenses and other expenses directly related to contracts, were
$444.9 million or 51.2% of net revenue for the six months ended June 30, 1999
versus $338.5 million or 51.6% of net revenue for the six months ended June 30,
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 $266.5 million or
30.6% of net revenue for the six months ended June 30, 1999 versus $203.7
million or 31.1% of net revenue for the six months ended June 30, 1998. The
$62.8 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. Also included in the increase is
approximately $3.9 million of incremental costs related to the Company's Year
2000 Program.
Depreciation and amortization were $49.4 million or 5.7% of net revenue for the
six months ended June 30, 1999 versus $45.0 million or 6.9% of net revenue for
the six months ended June 30, 1998. Included is amortization of certain acquired
intangible assets of $3.7 million and $10.1 million for the six months ended
June 30, 1999 and 1998, respectively. These intangible assets were fully
amortized as of March 31, 1999. Excluding these expenses, depreciation and
amortization were $45.6 million or 5.2% of net revenue for the six months ended
June 30, 1999 versus $34.8 million or 5.3% of net revenue for the six months
ended June 30, 1998. Excluding the amortization of certain acquired intangible
assets, amortization expense increased approximately $1.3 million due to the
goodwill amortization resulting from the Company's 1999 acquisitions accounted
for under purchase accounting. The remaining $9.5 million increase is primarily
due to the increase in the capitalized asset base of the Company.
14
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Income from operations was $109.0 million or 12.5% of net revenue for the six
months ended June 30, 1999 versus $68.4 million or 10.4% of net revenue for the
six months ended June 30, 1998. Excluding amortization of certain acquired
intangible assets as discussed above, income from operations was $112.7 million
or 13.0% of net revenue for the six months ended June 30, 1999 versus $78.5
million or 12.0% of net revenue for the six months ended June 30, 1998. Income
from operations for the product development group increased to $58.1 million or
12.4% of net revenue for the six months ended June 30, 1999 from $35.8 million
or 10.9% of net revenue for the six months ended June 30, 1998. Income from
operations for the commercialization group decreased slightly as a percentage of
net revenue to $25.8 million or 9.4% of net revenue for the six months ended
June 30, 1999 from $23.1 million or 9.8% of net revenue for the six months ended
June 30, 1998. Excluding the amortization of certain acquired intangible assets
as discussed above, income from operations for the QUINTERNET(TM) informatics
group increased to $28.8 million or 23.0% of net revenue for the six months
ended June 30, 1999 from $19.6 million or 21.2% of net revenue for the six
months ended June 30, 1998. This increase primarily results from the
efficiencies realized due to the increase in the volume of transactions
processed.
Other expense increased to $24.2 million for the six months ended June 30, 1999
from $1.6 million for the six months ended June 30, 1998. Excluding transaction
costs, other income was $1.6 million for the six months ended June 30, 1999
versus other expense of $555,000 for the six months ended June 30, 1998. The
$2.2 million change primarily results from an increase in net interest income.
The effective tax rate for the six months ended June 30, 1999 was 48.3% versus a
37.7% effective tax rate for the six months ended June 30, 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 six months ended June 30, 1999 was 35.8% as compared
to a 32.3% effective tax rate for the six months ended June 30, 1998. The
effective tax rate increase resulted primarily from profits generated in
locations with higher tax rates. Since the Company conducts operations on a
global basis, its effective tax rate may vary.
Liquidity and Capital Resources
Cash inflows from operations were $48.0 million for the six months ended June
30, 1999 versus $43.8 million for the comparable period of 1998. Investing
activities, for the six months ended June 30, 1999, consisted primarily of
capital asset purchases, investment security purchases and maturities and
payment of non-recurring transaction costs. Capital asset purchases required an
outlay of cash of $94.5 million for the six months ended June 30, 1999 compared
to an outlay of $48.0 million for the same period in 1998. Capital asset
expenditures for the six months ended June 30, 1999 included approximately $35
million in connection with the acquisition of the HMR Drug Innovation and
Approval Facility. 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.
15
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
As of June 30, 1999, total working capital was $287.7 million versus $239.4
million as of December 31, 1998. Net receivables from clients (accounts
receivable and unbilled services, net of unearned income) were $280.1 million at
June 30, 1999 as compared to $209.6 million at the end of 1998. As of June 30,
1999, accounts receivable were $262.0 million versus $212.7 million at December
31, 1998. Unbilled services were $153.6 million at June 30, 1999 versus $150.4
million at December 31, 1998, offset by unearned income balances of $135.5
million and $153.5 million, respectively. The number of days revenue outstanding
in accounts receivable and unbilled services, net of unearned income, was 49
days at June 30, 1999, as compared to 43 days at December 31, 1998. This
increase is due to the decrease in unearned income.
During the first six months of 1999, the Company had a (pound sterling) 15.0
million (approximately $24.3 million) unsecured line of credit with a U.K. bank
and a (pound sterling) 5.0 million (approximately $8.1 million) unsecured line
of credit with a second U.K. bank. In accordance with their terms, both of these
facilities expired in May 1999.
In May 1999, the Company entered into a (pound sterling) 10.0 million
(approximately $15.9 million) unsecured line of credit with a U.K. bank. The
Company also entered into a (pound sterling) 1.5 million (approximately $2.4
million) general banking facility with the same U.K. bank. At June 30, 1999, the
Company had (pound sterling) 7.5 million (approximately $12.0 million) available
under these arrangements.
The Company has a $150 million senior unsecured credit facility ("$150.0 million
facility") with a U.S. bank. At June 30, 1999, the Company had the full $150
million available under this credit facility. Based upon its current financing
plan, the Company believes the $150.0 million facility would be available to
retire long-term credit arrangements and obligations, if necessary.
Based on its current operating plan, the Company believes that its available
cash and cash equivalents and investments in marketable securities, together
with future cash flows from operations and borrowings under its line of credit
agreements will be sufficient to meet its foreseeable cash needs in connection
with its operations. As part of its business strategy, the Company reviews many
acquisition candidates in the ordinary course of business, and in addition to
acquisitions already made, the Company is continually evaluating new acquisition
and expansion possibilities. The Company may from time to time seek to obtain
debt or equity financing in its ordinary course of business or to facilitate
possible acquisitions or expansion.
16
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Impact of Year 2000 Issue
State of Readiness
The Company continues to implement its Year 2000 Program described in its
previous filings. Reference is made to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 for information relating to the Company's
staffing, framework and scope of its Year 2000 Program.
Current Status
The Company has addressed and substantially completed assessment, remediation,
testing and deployment of its systems relating to its commercialization service
group. The Company has successfully remediated, replaced and migrated a
substantial majority of systems in the Company's product development service
group, 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 is
substantially complete with respect to the systems formerly owned by PMSI and
SMG, and it anticipates that remediation, internal testing and deployment of
former ENVOY systems will be substantially complete by the end of the third
quarter 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.
Although the Company cannot control whether and how third parties will address
the Year 2000 issue, the Company is conducting a limited evaluation of critical
services on which it is substantially dependent. For example, the Company
believes that among its most significant third party service providers are
physician investigators who participate as independent contractors 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.
17
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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 $12.3 million through June
30, 1999, of which approximately $7.5 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, costs relating to the Year 2000 compliance
status of acquired companies and similar uncertainties.
Contingencies
The Company is developing business continuity plans for each service area. These
plans are specifically created based on the unique characteristics of the
affected service group or business unit. The Company will continue to develop
and refine these plans through the fourth quarter of 1999.
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.
18
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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.
Cautionary Statement for Forward-Looking Information
Information set forth in this Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, which statements
represent the Company's judgement concerning the future and are subject to risks
and uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "believe," or "continue," or the negative
thereof or other variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the ability of the Company to integrate acquired
businesses with the Company's historical operations, the costs and impact of the
year 2000 issue, the actual costs of the combining of the acquired businesses,
actual operating performance, the ability to operate successfully in the lines
of business resulting from the ENVOY and PMSI transactions, the Company's
ability to introduce new service offerings and achieve commercial success for
those offerings, the ability to maintain large client contracts or to enter into
new contracts and the level of demand for services. See Exhibit 99.01 for
additional factors that could cause the Company's actual results to differ.
19
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a result of the acquisition of PMSI, the Company has a forward sale agreement
with CIBC pursuant to which the Company transferred all of the IMS Health common
stock, approximately 1.2 million shares, in exchange for cash and a note payable
of $73.0 million. As a result of this forward sale agreement, the Company has
mitigated its risk of a decrease in the market value of the IMS Health common
stock by agreeing to a pre-determined value with CIBC.
The Company did not have any other material changes in market risk from December
31, 1998.
PART II. Other Information
Item 1. Legal Proceedings
The Company previously reported certain legal proceedings in its
Form 10-K for the fiscal year ended December 31, 1998. There were
no material developments in such matters since that report.
Item 2. Changes in Securities
On May 19, 1999, the Company completed the acquisition of Minerva,
a Scotland-based clinical research organization. The Company issued
1,143,625 shares of its Common Stock, par value $0.01 per share, in
connection with the acquisition, which shares were received by the
holders of all of the outstanding share capital of Minerva in
exchange for such interests. The shares were issued in reliance on
a claim of exemption pursuant to section 4(2) of the Securities Act
of 1933, as amended, based on representations made by the
recipients in the share acquisition agreement.
On June 3, 1999, the Company completed the acquisition of SMG, a
Chicago-based healthcare market information company. The Company
issued 1,170,291 shares of its Common Stock, par value $0.01 per
share, in connection with the acquisition, which shares were
received by holders of all of the outstanding share capital of SMG
in exchange for such interests. The shares were issued in reliance
on a claim of exemption pursuant to Rule 506 of Regulation D and
section 4(2) of the Securities Act of 1933, as amended, based on
representations made by the recipients in the agreement relating to
the purchase of such shares and assets.
Item 3. Defaults upon Senior Securities -- Not applicable
20
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
On June 14, 1999, the Company held its Annual Meeting of
Shareholders during which the shareholders:
(1) Elected five nominees to serve as Class II directors with
terms continuing until the Annual Meeting of Shareholders in
2002. The votes were cast as follows:
Broker
For Withheld Non-Vote
---------- -------- --------
Vaughn D. Bryson 85,851,163 195,547 --
Rachel R. Selisker 85,864,687 182,023 --
Eric J. Topol, M.D. 85,860,263 186,447 --
Jim D. Kever 85,851,764 194,946 --
William E. Ford 85,838,410 208,300 --
(2) Elected one nominee to serve as Class III director with a term
continuing until the Annual Meeting of Shareholders in 2000.
The votes were cast as follows:
Broker
For Withheld Non-Vote
---------- -------- --------
Fred C. Goad, Jr. 85,739,694 307,016 --
(3) Approved amendments to the Company's Equity Compensation Plan.
The votes were cast as follows:
Broker
For Against Abstain Non-Vote
---------- ---------- ------- --------
Approval of amendments to Company's
Equity Compensation Plan 49,152,405 36,747,307 146,998 --
(4) Ratified the appointment of Arthur Andersen LLP as independent
public accountants for the Company and its subsidiaries for
the fiscal year ending December 31, 1999. The votes were cast
as follows:
Broker
For Against Abstain Non-Vote
---------- ---------- ------- --------
Ratification of Arthur Andersen LLP 85,976,083 34,155 36,472 --
Item 5. Other Information -- Not applicable
21
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
10.01 Amended and Restated Equity Compensation Plan
27.01 Financial Data Schedule for the
Six Months Ended June 30, 1999
99.01 Risk Factors
(b) During the three months ended June 30, 1999, the Company
filed two reports on Form 8-K.
The Company filed a Form 8-K, dated April 22, 1999, including
its press release announcing the Company's fiscal first
quarter 1999 earnings information.
The Company filed a Form 8-K, dated April 30, 1999, to
publish unaudited financial results covering 30 days of
combined operations of the Company and ENVOY following the
merger.
No other reports on Form 8-K were filed during the three
months ended June 30, 1999.
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Quintiles Transnational Corp.
-----------------------------
Registrant
Date August 13, 1999 /s/ Dennis B. Gillings
----------------- -------------------------------------------
Dennis B. Gillings, Chief Executive Officer
Date August 13, 1999 /s/ Rachel R. Selisker
----------------- -------------------------------------------
Rachel R. Selisker, Chief Financial Officer
23
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QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Description
------- -----------
10.01 Amended and Restated Equity Compensation Plan
27.01 Financial Data Schedule for the
Six Months Ended June 30, 1999
99.01 Risk Factors
24