<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly report pursuant to section 13 or 15(d) of the Securities and
- - ----- Exchange Act of 1934.
For the quarterly period ended March 31, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
- - ----- For the transition period from to .
------ ------
Commission File Number
0-27570
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1640186
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
115 North Third Street, Wilmington, North Carolina 28401
- - -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 251-0081
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of May 1, 1996
----------------------------- ------------------------------
Common Stock, par value $0.10 9,242,195 Shares
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
Page
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets as of March 31, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-10
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
Part I. Financial Information.
Item 1. Financial Statements.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
-----------------------
1996 1995
-----------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,012 $ 2,261
Marketable securities 27,010 242
Accounts receivable and unbilled services 17,735 15,837
Investigator advances 541 648
Prepaid expenses and other current assets 380 125
-----------------
Total current assets 50,678 19,113
-----------------
Furniture and equipment, net 5,374 4,538
Goodwill, net 2,904 2,949
Other assets 364 904
-----------------
$59,320 $27,504
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 4,036 $ 1,879
Accounts payable 1,699 1,991
Payables to investigators 5,080 3,588
Other accrued expenses 3,203 2,380
Unearned income 3,552 5,346
-----------------
Total current liabilities 17,570 15,184
-----------------
Long-term debt, less current maturities 76 2,899
-----------------
Shareholders' equity:
Preferred stock
Common stock 924 694
Additional paid-in capital 39,842 1,317
Unrealized gain on marketable securities 6
Foreign currency translation adjustment (11)
Retained earnings 919 7,477
-----------------
41,674 9,494
Unearned compensation (73)
-----------------
Total shareholders' equity 41,674 9,421
-----------------
$59,320 $27,504
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Consolidated Statements of Operations
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------
1996 1995
------------------------
(unaudited)
<S> <C> <C>
Professional fee income $ 19,040 $ 11,843
Less reimbursed costs 7,087 3,091
---------- ----------
Net Revenue 11,953 8,752
Operating Expenses:
Direct costs 6,384 4,528
Selling, general and administrative 3,828 2,643
Depreciation and amortization 467 285
---------- ----------
10,679 7,456
Income from operations 1,274 1,296
Other income (expense), net 284 (47)
---------- ----------
Income before income tax expense 1,558 1,249
Income tax expense 639
---------- ----------
Net Income $ 919 $ 1,249
========== ==========
Earnings per share $ 0.11
==========
Weighted average number of shares
outstanding 8,672,978
==========
Pro forma data:
Net income, as reported $ 1,249
Pro forma income tax expense 547
----------
Pro forma net income $ 702
==========
Pro forma earnings per share $ 0.10
==========
Pro forma weighted average number
of shares outstanding 7,278,941
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the
Three
Months Ended
March 31,
--------------
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities: $ 919 $1,249
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 467 285
Accretion of investment discounts (42)
Stock compensation amortization 24
Loss on sale of equipment 20
Gain on sale of investments (8)
Changes in assets and liabilities:
Receivables and unbilled services (1,898) (322)
Advance payments and payables to investigators 1,599 (156)
Prepaid expenses and other current assets (255) (93)
Goodwill and other assets 529 (19)
Accounts payable (292) 148
Other accrued expenses 823 381
Unearned income (1,794) 183
------- ------
Net cash provided by operating activities 68 1,680
------- ------
Cash flows from investing activities:
Purchase of equipment (1,271) (612)
Proceeds from sale of assets 3 3
Purchase of investments (26,978)
Sale of investments 244
------- ------
Net cash used in investing activities (28,002) (609)
------- ------
Cash flows from financing activities:
Proceeds from long-term debt 2,958
Principal payments on long-term debt (3,624) (88)
Cash dividends paid (5,859)
Net proceeds from issuance of common stock 37,210
------- ------
Net cash provided by (used in) financing activities 30,685 (88)
------- ------
Net increase in cash and cash equivalents 2,751 983
Beginning of period 2,261 1,860
------- ------
End of Period $ 5,012 $2,843
======= ======
Supplemental disclosure for cash flow information:
Cash payments for interest $ 84 $ 36
======= ======
Cash payments for taxes $ 558 $ 0
======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
Pharmaceutical Product Development, Inc. (the "Company") for interim
financial reporting are consistent with the accounting policies followed
for annual financial reporting. These unaudited consolidated financial
statements have been prepared in accordance with Rule 10-01 of Regulation
S-X, and in management's opinion, all adjustments of a normal recurring
nature necessary for a fair presentation have been included. The
accompanying financial statements do not purport to contain all the
necessary financial disclosures that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated
financial statements and notes thereto in the Company's Annual report for
the year ended December 31, 1995. The results of operations for the three
month period ended March 31, 1996 are not necessarily indicative of the
results to be expected for the full year.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain 1995 financial statement amounts have been reclassified to conform
with the 1996 presentation.
2. Basis of Presentation: The accompanying unaudited consolidated financial
statements include the accounts of Pharmaceutical Product Development,
Inc., and its wholly owned subsidiaries, Pharmaceutical Product
Development-Clinical Research Unit, Inc. and Gabbay Group Limited. All
significant intercompany items have been eliminated.
3. Earnings Per Share: Earnings per share are calculated by dividing net
income by the weighted average number of shares outstanding during the
period. Outstanding stock options have not been included in the
computation of net income per share since the effect is not material.
4. Pro Forma Net Income and Net Income Per Share: Prior to January 1996, the
Company had elected to be treated as a S corporation for income tax
purposes and accordingly did not incur any expense or liability for
corporate income taxes. Effective January 1, 1996, the Company revoked its
S corporation election and began reporting as a C corporation. For the
quarter ended March 31, 1995 the Statement of Operations includes a pro
forma income tax provision as well as a pro forma earnings per share
computation. Pro forma weighted average shares outstanding assumes the
issuance of sufficient shares at the net per share proceeds of the
Company's initial public offering in January 1996 ($16.18) to repay the
indebtedness ($5.5 million) incurred by the Company in making the final S
corporation distribution.
6
<PAGE> 7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Pharmaceutical Product Development, Inc. is a leading contract research
organization ("CRO") providing a broad range of integrated product development
services across the globe to complement the research and development activities
of many of the world's largest companies in the pharmaceutical and
biotechnology industries. The Company's professional services include Phase I
clinical testing, laboratory services, Phase II-IV clinical trial management,
clinical data management and biostatistical analysis, treatment Investigational
New Drug Applications, medical writing and regulatory services and health care
economics and outcomes research.
The Company has broadened its range of services in the United States and
facilitated its offering of certain services in Europe through acquisitions and
internal growth. In 1990, the Company opened its Phase I Clinical Research
Unit ("PPD-CRU"), located near Research Triangle Park, North Carolina. In May
1994, PPD-CRU acquired Wisconsin Analytical and Research Services, Ltd.
("WARS"), an analytical laboratory located in Madison, Wisconsin. In August
1995, the Company acquired Southampton, England-based Gabbay, which specializes
in clinical research services and training. Each of the acquisitions was
accounted for under the purchase method with the acquired company's results
being included in the Company's results from the effective date of acquisition.
The Company's clinical research and development service contracts generally
have terms ranging from several months to several years. A portion of the
contractual fee is generally payable at the time the contract is entered into,
with the balance payable in installments over the contract's term. Revenues from
the contracts are generally recognized on a percentage-of-completion basis as
work is performed, except for the contracts which the Company performs on a
cost-plus basis. As is customary in the CRO industry, the Company routinely
subcontracts with third party investigators in connection with clinical trials
and with other third party service providers for laboratory analysis and other
specialized services. These costs and other reimbursable costs are passed
through to clients and are included in gross revenue, but, in accordance with
industry practice, are deducted to arrive at net revenue. Reimbursed costs vary
from contract to contract. Consistent with industry practice, the Company views
growth in net revenue as its primary measure of revenue growth.
The Company's backlog consists of anticipated net revenue from letters of
intent and contracts that have not been completed. At March 31, 1996, backlog
was approximately $67.8 million, as compared to $38.7 million at March 31,
1995, a 75.3% increase. The Company believes that its backlog as of any date
is not
7
<PAGE> 8
necessarily a meaningful predictor of future results and no assurances
can be given that the Company will be able to fully realize all of its backlog
as net revenue.
RESULTS OF OPERATIONS
Quarter ended March 31, 1996 compared with the quarter ended March 31, 1995
Net revenue for the quarter ended March 31, 1996 was $12.0 million, an
increase of $3.2 million, or 36.6%, from $8.8 million for the comparable period
in 1995. The increase was primarily the result of the performance of services
pursuant to the large number of contracts which were entered into as a result
of the Company's enhanced business development efforts during 1994 and 1995.
Direct costs increased by $1.9 million, or 41.0%, to $6.4 million for the
quarter ended March 31, 1996 from the $4.5 million for the same period in 1995.
This represents a slight increase in direct costs as a percentage of net
revenue from 51.7% for the quarter ended March 31, 1995 to 53.4% for 1996.
Direct costs include compensation and related fringe benefits for
non-administrative employees and any other expenses directly related to
contracts which are not included as reimbursed costs. The slight increase in
direct costs relative to net revenue was due principally to the Company's
constant efforts to improve internal cost accounting systems. The management
accounting systems of recent acquisitions have been enhanced to more accurately
match direct costs with revenue. In addition, the Clinical Research Unit
incurred a project loss of approximately $120,000 during the quarter which
related to trial rework for a particular client.
Selling, general and administrative expenses were $3.8 million for the
quarter ended March 31, 1996, an increase of $1.2 million, or 44.8%, from $2.6
million in the quarter ended 1995. As a percentage of net revenue, selling,
general and administrative expenses increased to 32.0% from 30.2%, principally
due to increases in business development expenses, administrative staffing at
the executive and middle management levels and the number of employees in
finance, human resources and other administrative areas, reflecting the
continued growth of the Company.
Depreciation and amortization increased by 63.9%, rising to $467,000 for
the quarter ended March 31, 1996 from $285,000 for the same period in 1995.
The increase was principally related to purchases of furniture, fixtures and
equipment as a result of significant increases in the Company's operations and
amortization of goodwill related to acquisitions.
Other income (expense), net, improved by $331,000, rising to $284,000 in
net other income for the quarter ended March 31, 1996 from $47,000 in net other
expense for the quarter ended March 31, 1995. The improvement was primarily the
result of net interest income of $235,000 in the first quarter of 1996, compared
to net interest expense of $69,000 for the quarter ended March 31, 1995.
Interest income during the first quarter of 1996 is primarily the result of
investment of funds received in connection with the Company's initial public
offering in late January 1996.
QUARTERLY RESULTS
The Company's quarterly results have been, and are expected to continue to
be, subject to fluctuations. Quarterly results can fluctuate as a result of a
number of factors, including the commencement, completion or cancellation of
large contracts, progress of ongoing contracts, acquisitions, the timing of
start-up expenses for new offices and changes in the mix of services. Since a
large percentage of the Company's operating costs are
8
<PAGE> 9
relatively fixed, variations in the timing and progress of large
contracts can materially affect quarterly results. To the extent the Company's
international business increases, exchange rate fluctuations may also influence
these results. The Company believes that comparisons of its quarterly
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations and growth, including
acquisitions, with cash flow from operations and borrowings. Prior to January
24, 1996, the only issuances of equity securities over the last few years have
been in connection with the acquisition of WARS, the sale of stock to the
Company's Chairman of the Board and stock awards to the Company's President.
Equity issued in the WARS transaction accounted for approximately 20% of the
total purchase price. In January 1996, the Company completed an initial public
offering of its common stock. Proceeds of the offering, after expenses, were
approximately $37.2 million and a portion thereof was used to repay a $5.5
million loan.
Total capital expenditures were approximately $1.3 million and $0.6 million
for the quarters ended March 31, 1996 and 1995, respectively. Facilities
expansion, additional furniture, computer equipment and a phone system upgrade
accounted for a significant portion of the purchases in 1996.
Cash and accounts receivable and unbilled services, net of unearned
income, increased during the quarter ended March 31, 1996 primarily as a result
of the Company's initial public offering. The number of days revenue
outstanding in accounts receivable and unbilled services net of unearned income
was 56 days at March 31, 1995 and 67 days at March 31, 1996. The number of
days revenue outstanding at any particular date is subject to fluctuation.
Most of the Company's contracts for its services call for bills to be rendered
based upon the achievement of certain project goals, or milestones. These
milestones, while related to work performed, may call for installment payments
that are not reflective of work performed for purposes of revenue recognition
by the Company. As a result, billing by the Company (and therefore collection
of receivables) and recognition of revenue do not necessarily coincide.
In February 1996, the Company renegotiated a new credit facility with
Wachovia Bank of North Carolina, N.A. The new facility consists of a $10
million Line of Credit with an additional discretionary line of credit for $20
million. Terms on the $10 million line are for one year, rates at LIBOR plus
120 basis points, or the Bank's Prime rate, with selection at the Company's
option, and interest payable quarterly. Indebtedness under the Line is
unsecured and subject to certain covenants relating to financial ratios and
tangible net worth.
The Company expects to continue expanding its operations through internal
growth and strategic acquisitions. The Company expects such activities will be
funded from existing cash and cash equivalents, cash flow from operations, the
net proceeds from the offering and borrowings under its credit facility. The
Company believes that such sources of cash will be sufficient to fund the
Company's current operations for the foreseeable future. The Company is
currently evaluating a number of acquisition and other growth
9
<PAGE> 10
opportunities which may require additional external financing, and the
Company may from time to time seek to obtain funds from public or private
issuances of equity or debt securities.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse effect on its results of operations or financial condition.
10
<PAGE> 11
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1996.
11
<PAGE> 12
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.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
Date: May 14, 1996 /s/ Fred N. Eshelman
-------------- -----------------------
Chief Executive Officer
Date: May 14, 1996 /s/ Rudy C. Howard
------------- -----------------------
Chief Financial Officer
12
<PAGE> 1
EXHIBIT 11
Pharmaceutical Product Development, Inc.
Statement Regarding Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1996 March 31, 1995
-----------------------------------------
(in thousands except per share data)
<S> <C> <C>
NET INCOME $ 919
=========
EARNINGS PER SHARE:
Weighted average shares outstanding 8,672,978
=========
NET INCOME PER SHARE 0.11
=========
PRO FORMA NET INCOME $ 702
==========
PRO FORMA EARNINGS PER SHARE:
Actual weighted average shares outstanding 6,938,981
Pro forma weighted average shares assuming the occurrence of the
events pursuant to the initial public offering and the issuance of
sufficient shares at net proceeds of $16.18 per share to
repay the $5.5 million debt incurred by the Company in
making the final S corporation distribution 339,960
TOTAL 7,278,941
==========
PRO FORMA NET INCOME PER SHARE $ 0.10
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMAY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF PHARMACEUTICAL PRODUCT DEVELOPMENT FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,012
<SECURITIES> 27,010
<RECEIVABLES> 18,276
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,678
<PP&E> 5,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,320
<CURRENT-LIABILITIES> 17,570
<BONDS> 76
0
0
<COMMON> 924
<OTHER-SE> 40,750
<TOTAL-LIABILITY-AND-EQUITY> 59,320
<SALES> 0
<TOTAL-REVENUES> 11,953
<CGS> 6,384
<TOTAL-COSTS> 6,384
<OTHER-EXPENSES> 4,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,558
<INCOME-TAX> 639
<INCOME-CONTINUING> 919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 919
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
