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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2000.
OR
[ ] 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 Number)
3151 South Seventeenth Street
Wilmington, North Carolina
(Address of principal executive offices)
28412
(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: 25,047,753 shares of common
stock, par value $0.10 per share, as of July 31, 2000.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations for the Three and Six Months Ended
June 30, 2000 and 1999....................................................................... 3
Consolidated Condensed Balance Sheets as of June 30, 2000
and December 31, 1999........................................................................ 4
Consolidated Condensed Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999....................................................................... 5
Notes to Consolidated Condensed Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 15
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 16
Item 6. Exhibits and Reports on Form 8-K............................................................ 16
Signatures.......................................................................................... 17
</TABLE>
2
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Month Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Life sciences revenues, net of subcontractor costs of
$26,541, $37,696, $52,686 and $60,848, respectively $ 81,820 $ 75,569 $ 160,185 $ 144,342
Discovery sciences revenues, net of subcontractor costs of
$49, $18, $55 and $34, respectively 2,229 685 5,625 1,522
----------- ---------- ------------ -----------
Net revenue 84,049 76,254 165,810 145,864
----------- ---------- ------------ -----------
Direct costs - Life sciences 41,992 37,141 82,365 70,519
Direct costs - Discovery sciences 1,751 1,650 3,449 3,133
Selling, general and administrative expenses 26,805 24,066 53,205 46,103
Depreciation and amortization 4,226 3,592 8,224 7,057
Merger costs - - - 218
----------- ---------- ------------ ------------
74,774 66,449 147,243 127,030
----------- ---------- ------------ ------------
Operating income 9,275 9,805 18,567 18,834
Interest income, net 962 739 2,203 1,457
Other income, net 671 276 825 751
----------- ---------- ------------ ------------
Income from continuing operations before provision
for income taxes 10,908 10,820 21,595 21,042
Provision for income taxes 3,981 4,198 8,028 8,164
---------- ---------- ------------ -------------
Income from continuing operations 6,927 6,622 13,567 12,878
Loss from operations of discontinued environmental
sciences segment, net of income tax benefit of $79 - - - (125)
---------- ---------- ------------ -------------
Net income $ 6,927 $ 6,622 $ 13,567 $ 12,753
=========== ========== ============ =============
Income from continuing operations per share:
Basic $ 0.28 $ 0.27 $ 0.55 $ 0.53
=========== ========== ============ =============
Diluted $ 0.28 $ 0.27 $ 0.54 $ 0.52
=========== ========== ============ =============
Loss from discontinued operations per share:
Basic $ - $ - $ - $ (0.01)
=========== ========== ============ =============
Diluted $ - $ - $ - $ (0.01)
=========== ========== ============ =============
Net income per share:
Basic $ 0.28 $ 0.27 $ 0.55 $ 0.52
=========== ========== ============ =============
Diluted $ 0.28 $ 0.27 $ 0.54 $ 0.51
=========== ========== ============ =============
Weighted average number of common shares outstanding:
Basic 24,879 24,567 24,810 24,501
Dilutive effect of stock options 148 330 156 407
----------- ---------- ------------ -----------
Diluted 25,027 24,897 24,966 24,908
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Assets
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 62,791 $ 61,251
Accounts receivable and unbilled services, net 113,698 114,753
Investigator advances 2,975 2,069
Prepaid expenses and other current assets 13,620 16,802
Deferred tax asset 4,012 4,012
----------- -----------
Total current assets 197,096 198,887
Property, plant and equipment, net 57,769 52,282
Goodwill, net 9,616 9,437
Note receivable 19,000 19,500
Other assets, net 15,026 8,597
----------- -----------
Total assets $ 298,507 288,703
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 5,901 $ 10,103
Payables to investigators 4,342 5,916
Other accrued expenses 29,557 27,471
Unearned income 46,657 50,213
Current maturities of long-term debt 473 211
----------- -----------
Total current liabilities 86,930 93,914
Long-term debt, less current maturities 844 359
Deferred rent and other 2,252 1,966
----------- -----------
Total liabilities 90,026 96,239
----------- -----------
Shareholders' equity
Common stock 2,492 2,463
Paid-in capital 137,425 134,029
Retained earnings 72,264 58,697
Accumulated other comprehensive loss (3,700) (2,725)
----------- -----------
Total shareholders' equity 208,481 192,464
----------- -----------
Total liabilities and shareholders' equity $ 298,507 $ 288,703
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,567 $ 12,753
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,224 7,254
Change in operating assets and liabilities (2,933) (186)
----------- ---------
Net cash provided by operating activities 18,858 19,821
----------- ---------
Cash flows from investing activities:
Cash received from repayment of note receivable 500 500
Cost method investments (5,000) (3,500)
Purchases of property and equipment (11,836) (13,241)
Proceeds from sale of property and equipment 74 14
Net cash (paid for) received from acquisitions (1,500) 738
Net cash received in sale of business - 3,421
----------- ---------
Net cash used in investing activities (17,762) (12,068)
----------- ---------
Cash flows from financing activities:
Proceeds from long-term debt - 982
Repayment of long-term debt (94) (6,231)
Repayment of capital leases obligation (257) -
Proceeds from exercise of stock options
and employee stock purchase plan 2,678 5,085
----------- ---------
Net cash provided by (used in) financing activities 2,327 (164)
----------- ---------
Effect of exchange rate changes on cash (1,883) (2,338)
----------- ---------
Net increase in cash and cash equivalents 1,540 5,251
Cash and cash equivalents, beginning of the period 61,251 34,083
----------- ---------
Cash and cash equivalents, end of the period $ 62,791 $ 39,334
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. ACCOUNTING POLICIES
The significant accounting policies followed by Pharmaceutical Product
Development, Inc. and its subsidiaries (collectively the "Company") for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. These unaudited consolidated condensed 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
consolidated condensed 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 on Form 10-K for the
year ended December 31, 1999. The results of operations for the three-month and
six-month periods ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year or any other period. The amounts on the
December 31, 1999 consolidated condensed balance sheet have been derived from
the audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
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.
Reclassifications
Some 1999 financial statement amounts have been reclassified to conform
to the 2000 presentation.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosures of revenue in
financial statements filed with the SEC. SAB 101, as amended by SAB 101A and SAB
101B, outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition policies. SAB
101 is required to be adopted in the Company's fourth quarter of fiscal year
2000. The adoption of SAB101 is not expected to have a significant impact on the
Company's revenue recognition policies.
2. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated condensed financial statements
include the accounts and operations of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
3. ACQUISITIONS
Pooling
In March 1999, the Company acquired ATP, Inc. a health information
services company. ATP provides customized inbound and outbound
telecommunications programs targeting consumers and health care providers. The
Company acquired all of the outstanding stock of ATP in exchange for issuance of
approximately 876,000 shares of the Company's common stock. Outstanding ATP
options were exchanged for options to acquire approximately 216,000 shares of
the Company's common stock. This acquisition was accounted for using the pooling
of interests method. Results of operations for ATP are included in the
consolidated results of operations of the Company beginning January 1, 1999.
6
<PAGE>
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
3. ACQUISITIONS (continued)
Purchase
In February 2000, the Company acquired the assets of the Pharmazyme
division of Immune Complex Corporation for $1,500,000 in cash. In connection
with this acquisition, the Company recorded approximately $929,000 in goodwill.
Pharmazyme develops, produces and markets drug metabolism reagent products and
services.
4. EARNINGS PER SHARE
The computation of basic net income per share information is computed
using the weighted average number of shares of common stock outstanding during
the period. Diluted net income per common share is computed using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period.
5. DISCONTINUED OPERATIONS
Effective January 31, 1999, the Company sold its environmental sciences
segment to Environ Holdings, Inc., a new company formed by the management of the
environmental sciences segment, for total consideration of approximately
$26,244,000. The Company received cash of $1,244,000, a four-year note for
$7,000,000 and a 12-year note for $18,000,000. The sale resulted in no gain or
loss because the sales price was equal to the book value of the net assets sold
at the date of the sale. In the first quarter of 1999, the Company received full
pre-payment of the four-year note of $7,000,000. To date, the Company has
received interest payments, when due, on the 12 year note.
6. COMPREHENSIVE INCOME
The Company's total comprehensive income for the three-month periods
ended June 30, 2000 and 1999 was $5,524,000 and $5,854,000, respectively, and
for the six-month periods ended June 30, 2000 and 1999 was $12,592,000 and
$10,415,000, respectively.
Information concerning the components of the Company's other
comprehensive income (loss) for the three-month and six-month periods ended June
30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------- -----------------------
<S> <C> <C> <C> <C>
Cumulative translation adjustment $ (1,385) $ (768) $(1,883) $(2,338)
Unrealized gain (loss) on investments $ (18) $ 0 $ 908 $ 0
</TABLE>
7. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES:
Accounts receivable and unbilled services consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Billed $70,917 $70,005
Unbilled 43,706 45,814
Reserve for doubtful accounts (925) (1,066)
------------ ------------
$113,698 $114,753
============ ============
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is provided to increase understanding of,
and should be read in conjunction with, the consolidated financial statements
and accompanying notes. In this discussion, the words "PPD", "Company", "we",
"our", and "us" refer to Pharmaceutical Product Development, Inc., together with
its subsidiaries where appropriate.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain statements that reflect PPD's current
expectations regarding future results of operations, economic performance,
financial condition and achievements of the Company. Forward-Looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performances, expectations, predictions, assumptions and other
statements that are other than statements of historical facts. We have tried,
wherever possible, to identify these forward-looking statements by using words
such as "anticipate", "believe", "estimate", "expect" and similar expressions.
These statements reflect management's current plans and expectations and are
based on information currently available to us. These statements rely on a
number of assumptions and estimates which could be inaccurate and which are
subject to risks and uncertainties. PPD undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
PPD wishes to caution the reader that actual results could differ materially
from those currently anticipated due to a number of factors, including those set
forth herein and in the Company's other SEC filings. The following are some of
the factors that could affect our financial performance or could cause actual
results to differ materially from estimates contained in or underlying our
Company's forward-looking statements: risks relating to government regulation;
dependence on certain industries; the fixed price nature of contracts; the
commencement, completion or cancellation of large contracts; progress of ongoing
contracts; potential liability associated with the Company's lines of business;
risks associated with acquisitions; continued success in sales growth;
dependence on personnel; management of growth; and competition.
COMPANY OVERVIEW
PPD is a leading contract research organization providing a broad range of
research and development and consulting services on a worldwide basis. We
believe we are one of the largest contract research organizations, based on 1999
annual net revenues, and are one of only a few companies that is capable of
providing comprehensive global product development services. We operate in two
different segments for financial reporting purposes: life sciences and discovery
sciences. In the life sciences group, we provide worldwide clinical research and
development of pharmaceutical products and medical devices, biostatistical
analysis and analytical laboratory services. The discovery sciences services
include target identification and validation, compound creation, screening and
compound selection. We provide services under contract to clients in the
pharmaceutical, general chemical, agrochemical, biotechnology and other
industries. In addition, we perform discovery research on compounds for which we
hold a license and for clients in the pharmaceutical industry. We market our
life sciences services primarily in the United States and Europe. To date, our
discovery revenues have all been generated in the United States.
Life Sciences Group
The Company's Life Sciences Group provides services through PPD Development,
Inc. and its wholly owned subsidiaries (collectively "PPD Development") in the
Americas (United States, Canada and South America), Africa, Asia, Europe and the
Pacific Rim. PPD Informatics, a division of PPD Development, provides software
development and system integration services to the pharmaceutical and
biotechnology industries. PPD ATP, a
8
<PAGE>
division of PPD Development, provides customized inbound and outbound
telecommunications programs targeting consumers and healthcare providers.
PPD Development provides its clients services designed to reduce product
development time. This enables our customers to introduce their products into
the marketplace faster and as a result, maximize the period of market
exclusivity and monetary return on their research and development investment.
Additionally, PPD Development's integrated services and broad experience offer
its clients a variable cost alternative to the fixed cost internal development
capabilities. PPD Development's professional CRO services include Phase I
clinical testing, laboratory services, patient and investigator recruitment,
Phase II-IV clinical trial monitoring and management, clinical data management
and biostatistical analysis, regulatory consulting and submissions, medical
writing, pharmacovigilance, and healthcare economics and outcomes research.
PPD Informatics develops and markets specialized software products to support
different aspects of the pharmaceutical research and development process,
including drug discovery, clinical trials and regulatory review. Current PPD
Informatics software products include: TableTrans(R), which automates data
transformation; CrossGraphs(R), which provides graphical displays of complex
research data; ResolveTM, which manages data queries to investigator sites; and
Classify TM, which manages global coding capabilities. PPD Informatics' clients
include international and domestic pharmaceutical and biotechnology companies,
and government agencies, including the FDA.
PPD ATP became a division of the Company through the acquisition of ATP, Inc. in
March 1999. PPD ATP manages telephone inquiries from consumers and healthcare
providers by utilizing on-line, licensed pharmacists, other healthcare
professionals and other customer assistance specialists who are available 24
hours a day, 365 days a year. In addition to telephone inquiries and responses,
PPD ATP also receives and responds to medical information inquiries from
consumers and healthcare providers in writing and via e-mail. PPD ATP creates
and implements customized inbound and outbound telecommunication programs for
pharmaceutical manufacturers, chain drug stores, managed care organizations and
other corporations with healthcare enhancing objectives.
In February 1999, Intek, a subsidiary of the Company, became a subsidiary of
PPGx, Inc., a joint venture with Axys Pharmaceuticals, Inc. PPGx provides broad
pharmacogenomics products and services to pharmaceutical and biotechnology
companies. Pharmacogenomics is the use of genetic information to predict the
safety, toxicity and/or efficacy of drugs in individual patients or groups of
patients. PPD believes that pharmacogenomics is becoming widely adopted as a
drug discovery and development tool and increasingly important as part of an
individual's diagnosis and treatment regimen. PPD owns a minority position in
PPGx, with the option to increase its ownership share at any time. We also have
exclusive marketing rights to PPGx pharmacogenomics products and services, sold
under the brand name Pharmacogenomic Solutions(TM). For more detailed
information on the Company's Life Sciences Group, see the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
Discovery Sciences Group
PPD Discovery, Inc. was established in June 1997 when the Company acquired
SARCO, Inc., a combinational chemistry company, and the GSX System, a functional
genomics platform technology. PPD Discovery focuses on the discovery research
segment of the pharmaceutical research and development outsourcing market. In
May 1998, the Company created PPD GenuPro, Inc., a wholly owned subsidiary,
which holds licenses to a number of compounds in the genitourinary field. PPD
GenuPro manages and performs the discovery research and development of these
compounds and intends to license these compounds to pharmaceutical or
biotechnology companies. In May 1999, the Company formed its PPD Virtual
subsidiary. PPD Virtual provides consultant and management services for product
portfolio management, strategic development and commercial product assessment.
In May 1999, PPD GenuPro was realigned as a division of PPD Virtual. For more
detailed information on the Company's Discovery Sciences Group, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
9
<PAGE>
STATEMENT OF OPERATIONS COMPONENTS
Historically, a majority of our net revenues have been earned under contracts.
These contracts generally range in duration from a few months to a few years.
Revenue from these contracts is recognized under either the percentage of
completion method of accounting or on a time and materials basis as services are
rendered. These contracts may contain provisions for renegotiations for cost
overruns arising from changes in the scope of work. Renegotiated amounts are
included in net revenues when earned and realization is assured. In some cases,
for multi-year contracts a portion of the contract fee is paid at the time the
trial is initiated. These fees are initially deferred and are then recognized as
income over the contract period using the percentage of completion method. We
receive additional payments based upon our achievement of performance-based
milestones over the contract duration. We routinely subcontract with independent
physician investigators in connection with either single or multi-site clinical
trials. Investigator fees are reflected net in revenues because these
investigator fees are paid by the customers to us on a "pass-through basis"
(i.e., without risk or reward to us). Most contracts are terminable either
immediately or upon notice by the client. These contracts typically require
payment to us of expenses to wind down a study, payment of fees earned to date,
and, in some cases, an early termination fee.
We segregate our recurring operating expenses among three categories: direct
costs; selling, general and administrative; and depreciation and amortization.
Direct costs consist of appropriate amounts necessary to complete the revenue
and earnings process, and include direct labor and related benefit charges,
other costs directly related to contracts, and an allocation of facility and
information technology costs. Direct costs, as a percentage of net revenues,
tend and are expected to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving hundreds
of studies conducted during any period of time. Selling, general and
administrative expenses consist primarily of administrative payroll and related
benefit charges, advertising and promotional expenses, recruiting and relocation
expenses, administrative travel and an allocation of facility and information
technology costs. Included in administrative payroll are costs associated with
operational employees managing direct staff, underutilization of direct staff
and administrative support functions.
POTENTIAL VOLATILITY OF QUARTERLY OPERATING RESULTS AND STOCK PRICE
Our quarterly operating results are subject to volatility, and are expected to
continue to be subject to volatility, as a result of factors such as (1) delays
in initiating or completing significant drug development trials, (2) termination
of drug development trials, (3) changes in the mix of services performed, (4)
acquisitions, (5) the timing of start-up expenses for new offices and (6) the
timing of milestone payments under Discovery Sciences contracts. Delays and
terminations of trials are often the result of actions taken by our customers or
regulatory authorities and are not typically controllable by us. Since a large
percentage of the Company's operating costs are relatively fixed while revenue
is subject to fluctuation, minor variations in the commencement, progress or
completion of drug development trials may cause significant variations in
quarterly operating results. To the extent our international business increases,
exchange rate fluctuations and other international business risks might also
influence these results. We believe that comparisons of our quarterly financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance.
Fluctuations in quarterly results or other factors beyond our control could
affect the market price of the Common Stock. Such factors include changes in
earnings estimates by analysts, market conditions in the CRO industry, changes
in environmental, pharmaceutical and biotechnology industries, and general
economic conditions. Any effect on the Common Stock could be unrelated to our
longer-term operating performance.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Versus Three Months Ended June 30, 1999
Net revenue increased 10.2% to $84.0 million for the three months ended June 30,
2000 from $76.3 million for the corresponding 1999 period. The Life Sciences
Group's operations accounted for 97.3% of our net revenue for the second quarter
of 2000. The Life Sciences Group net revenue increased 8.3% to $81.8 million
from the 1999 second quarter. The growth in the Life Sciences Group operations
was primarily attributable to an increase in the size and number of contracts in
the global CRO Phase II-IV division. The Discovery Sciences Group net revenue
increased $1.5 million to $2.2 million from the 1999 second quarter. The growth
in the Discovery Sciences operations was primarily attributable to revenue
generated by the functional genomics division as a result of entering into a
significant new contract in January 2000.
Total direct costs increased 12.8% to $43.7 million for the three months ended
June 30, 2000 from $38.8 million for the corresponding 1999 period. Gross margin
percentage decreased 1.2% from the same period a year ago. The Life Sciences
direct costs increased to $42.0 million in the second quarter of 2000 as
compared to $37.1 million in the second quarter of 1999. The increased direct
cost dollars resulted primarily from increased personnel costs due to the
increase in the size and number of contracts in the Global CRO Phase II-IV
division. The Life Sciences Group gross margin decreased to 48.7% from 50.9%.
This decrease is principally due to the mix of levels of personnel involved in
the contracts performed and an increase in personnel utilization due to quality
initiatives. The Discovery Sciences Group direct costs increased to $1.8 million
in the second quarter of 2000 as compared to $1.7 million in the second quarter
of 1999.
Selling, general and administrative ("SG&A") expenses increased 11.4% to $26.8
million in the second quarter of 2000 from $24.1 million in the same period last
year. The increase is primarily attributable to an investment in additional
administrative personnel and an increase in facility and information technology
costs to support the Company's expanding operations. As a percentage of net
revenue, SG&A expenses increased to 31.9% in 2000 from 31.6% in the same period
last year.
Total depreciation and amortization expense increased $0.6 million to $4.2
million from the same period last year. The increase was related to the
depreciation of the increased investment in property and equipment due primarily
to our growth. Our capital expenditures were $7.4 million for the second quarter
of 2000. Expanded capabilities in our laboratories accounted for approximately
25.1% of this capital investment. Furniture and leasehold improvements in
existing facilities accounted for approximately 14.2%, while the enhancement and
expansion of the Discovery Sciences Group's facilities accounted for
approximately 6.4% of this capital investment. The remaining capital
expenditures were predominately incurred in connection with technology upgrades.
Operating income decreased $0.5 million to $9.3 million in the second quarter of
2000, as compared to $9.8 million in the second quarter of 1999. As a percentage
of net revenue, operating income of 11.0% in 2000 represents a decrease from
12.9% of net revenue in 1999. This decrease was primarily due to the decrease in
our gross margin mentioned above.
Net interest and other income increased $0.6 million to $1.6 million for the
second quarter of 2000. The increase was primarily the result of the increase in
net interest income and an increase in net foreign currency transaction gains.
Our effective tax rate for the three months ended June 30, 2000 decreased to
36.5% from 38.8% for the corresponding 1999 period. This decrease was primarily
due to state tax initiatives completed during the second quarter of 2000.
Because we operate on a global basis, our effective tax rate can vary from
period to period due to the changes in the geographic distribution of our
pre-tax earnings.
11
<PAGE>
Net income of $6.9 million in the second quarter of 2000 represents an increase
of $0.3 million over the same period a year ago. Net income per diluted share of
$0.28 compares to net income per diluted share of $0.27 for the same period last
year.
Six Months Ended June 30, 2000 Versus Six Months Ended June 30, 1999
Net revenue increased 13.7% to $165.8 million for the six months ended June 30,
2000 from $145.9 million for the corresponding 1999 period. The Life Sciences
Group's operations accounted for 96.6% of our net revenue for 2000. The Life
Sciences Group net revenue increased 11.0% to $160.2 million from the same
period in 1999. The growth in the Life Sciences Group operations was primarily
attributable to an increase in the size and number of contracts in the global
CRO Phase II-IV division, along with an increase in our laboratory services. The
Discovery Sciences Group net revenue increased $4.1 million to $5.6 million from
the same period in 1999. The growth in the Discovery Sciences operations was
primarily attributable to revenue generated by the functional genomics division
as a result of entering into a significant new contract in January 2000.
Total direct costs increased 16.5% to $85.8 million for the six months ended
June 30, 2000 from $73.7 million for the corresponding 1999 period. Gross margin
percentage decreased 1.3% from the same period a year ago. The Life Sciences
direct costs increased to $82.4 million in the six months ended June 30, 2000 as
compared to $70.5 million for the same period last year. The increased direct
cost dollars resulted primarily from increased personnel costs due to the
increase in the size and number of contracts in the Global CRO Phase II-IV
division. The Life Sciences Group gross margin decreased to 48.6% from 51.1%.
This decrease is principally due to the mix of levels of personnel involved in
the contracts performed and an increase in personnel utilization due to quality
initiatives. The Discovery Sciences Group direct costs increased to $3.4 million
in 2000 as compared to $3.1 million in 1999.
SG&A expenses increased 15.4% to $53.2 million in 2000 from $46.1 million in the
same period last year. The increase is primarily attributable to an investment
in additional administrative personnel and an increase in facility and
information technology costs to support our expanding operations. As a
percentage of net revenue, SG&A expenses increased to 32.1% in 2000 from 31.6%
in the same period last year.
Total depreciation and amortization expense increased $1.2 million to $8.2
million from the same period last year. The increase was related to the
depreciation of the increased investment in property and equipment due primarily
to our growth. Our capital expenditures were $11.8 million for the first six
months of 2000. Expanded capabilities in our laboratories accounted for
approximately 34.6% of this capital investment. Furniture and leasehold
improvements in existing facilities accounted for approximately 16.6%, while the
enhancement and expansion of the Discovery Sciences Group's facilities accounted
for approximately 8.5% of this capital investment. The remaining capital
expenditures were predominately incurred in connection with the expansion of
existing operations.
During the first quarter of 1999, we recorded merger costs of $0.2 million in
connection with the acquisition of PPD ATP, which was recorded using the pooling
of interests method of accounting. These costs were primarily cash expenses,
such as legal and accounting fees, related to this transaction.
Operating income decreased $0.2 million to $18.6 million in the six months ended
June 30, 2000, as compared to $18.8 million for the same period last year. As a
percentage of net revenue, operating income of 11.2% in 2000 represents a
decrease from 12.9% of net revenue in 1999. This decrease was primarily due to
the decrease in the Company's gross margin mentioned above.
Net interest and other income increased $0.8 million to $3.0 million for the six
months ended June 30, 2000. The increase was primarily the result of the
increase in net interest income and net foreign currency transaction gains.
Our effective tax rate for the six months ended June 30, 2000 decreased to 37.2%
from 38.8% for the corresponding 1999 period. This decrease in our effective tax
rate is primarily due to state tax initiatives completed during the
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<PAGE>
second quarter of 2000. Because we operate on a global basis, our effective tax
rate can vary from period to period due to the changes in the geographic
distribution of our pre-tax earnings.
We recorded a loss from discontinued operations, net of income tax benefit,
related to our environmental sciences segment, of $0.1 million in the first
quarter of 1999. We sold our environmental sciences segment in January 1999.
Net income of $13.6 million represents an improvement of $0.8 million over the
same period a year ago. Net income per diluted share of $0.54 compares to net
income per diluted share of $0.51 for the same period last year.
Liquidity and Capital Resources
As of June 30, 2000, we had $62.8 million of cash and cash equivalents on hand.
We have historically funded our operations and growth, including acquisitions,
with cash flow from operations, borrowings and through the use of the Company's
stock. We are exposed to changes in interest rates on its cash equivalents,
short-term investments, and amounts outstanding under note payable and lines of
credit. Our cash and cash equivalents and short-term investments are invested in
financial instruments with interest rates based on financial market conditions.
For the six months ended June 30, 2000, we had cash flow from operating
activities of $18.9 million as compared to $19.8 million for the same period
last year. For the 2000 period, net income of $13.6 million, depreciation and
amortization of $8.2 million and the net increase of $2.9 million in other
assets and liabilities resulted in this increase in cash flow from operating
activities.
For the six months ended June 30, 2000, our investing activities used $17.8
million in cash. Capital expenditures of $11.8 million, $5.0 million paid for a
cost method investment and the cash paid for Pharmazyme of $1.5 million were
partially offset by $0.5 million received from the repayment of a note
receivable.
For the six months ended June 30, 2000, our financing activities provided $2.3
million in cash, as net proceeds from stock option exercises of $2.7 million
were partially offset by $0.4 million in repayments of long-term debt and
capital lease obligations.
Working capital as of June 30, 2000 was $110.2 million compared to $92.3 million
at June 30, 1999. The increase in working capital was due primarily to the
increase in cash and cash equivalents of $23.5 million offset in part by the
increase in unearned income of $9.3 million. The number of days revenue
outstanding in accounts receivable and unbilled services, net of unearned income
("DSO"), were 52.7 as of June 30, 2000 and 61.5 days as of June 30, 1999. DSO is
calculating using a three-month average of accounts receivable, unbilled
services and unearned income. The decrease in DSO was primarily the result of
the focused effort by management on improving the accounts receivable collection
process.
In June 1998, we obtained a $50.0 million revolving credit facility with First
Union National Bank. Indebtedness under the line is unsecured and subject to
traditional financial covenants relating to financial ratios and tangible net
worth. We do not foresee any difficulty in complying with these covenants during
the remaining term of the facility and expect to be able to renew or replace
this facility in the ordinary course. The unused portion of the loan is
available to provide working capital and for general corporate purposes. As of
June 30, 2000, we had $5.7 million reserved under this facility in the form of a
letter of credit. This credit facility expires in June 2001, at which time any
outstanding balance is due. In addition, we act as guarantor on an $9.0 million
revolving credit facility for PPGx.
In August 1999, we renegotiated a credit facility for $50.0 million with
Wachovia Bank, N.A. Indebtedness under the line is unsecured and subject to
traditional financial covenants relating to financial ratios and tangible net
worth. We do not foresee any difficulty in complying with these covenants during
the remaining term of the facility and expect to be able to renew or replace
this facility in the ordinary course. This credit facility expires in August
2001, at which time any outstanding balance is due. There was no amount
outstanding under this credit facility at June 30, 2000.
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<PAGE>
We expect to continue expanding our operations through internal growth and
strategic acquisitions. We expect these activities will be funded from existing
cash, cash flow from operations, borrowings under our credit facilities and
through the use of the Company's stock. We believe that these sources of
liquidity will be sufficient to fund the Company's current operations for at
least the next 12 months. From time to time, we evaluate acquisitions and other
growth opportunities, which might require additional external financing, and we
might seek funds from public or private issuances of equity or debt securities.
Taxes
Because we conduct operations on a global basis, our effective tax rate has and
will continue to depend upon the geographic distribution of our pretax earnings
among locations with varying tax rates. PPD's profits are further impacted by
changes in the tax rates of the various taxing jurisdictions. In particular, a
the geographic mix of PPD's pre-tax earnings among various tax jurisdictions
changes, PPD's effective tax rate might vary from period to period.
Year 2000 Readiness Disclosure
The Year 2000 issue was the result of computer programs having been written
using two digits, rather than four, to define the applicable year. As a result,
computer systems and/or software used by many companies in a very wide variety
of applications could experience operating difficulties unless they were
modified or upgraded to adequately process information involving, related to or
dependent upon the four digit field.
PPD recognized the need to ensure its operations would not be adversely impacted
by Year 2000 failures and had established an internal review team to address the
Year 2000 issue that encompassed operating and administrative areas of the
Company. The process included an inventory and assessment of affected equipment
and software, development of remediation plans, execution of those plans and
testing of all technology affected by this issue. In addition, we assessed the
Year 2000 issue with significant suppliers and clients.
At year-end all systems were backed up and verified to be operational prior to
the resumption of business after the new year. Only minor Year 2000 issues were
encountered which resulted in an insignificant amount of cost to us. These
issues did not have an impact on the business and all issues were resolved
within the first week. PPD did not experience any Year 2000 issues at any time
in the first two quarters of 2000, including the leap year. PPD has also not
experienced any third party supplier issues. We remain alert to potential Year
2000 related issues that might occur in the future, but believe that there will
be no material impact on operations, liquidity or financial condition.
Exchange Rate Fluctuations and Exchange Controls
PPD is exposed to foreign currency risk by virtue of its international
operations. PPD conducts business in several foreign countries. Approximately
14% and 16% of our net revenues for the three months ended June 30, 2000 and
1999, respectively, were derived from operations outside the United States.
Funds generated by each subsidiary of the Company are generally reinvested in
the country where they are earned. The operations in the United Kingdom
generated more than 40% of the Company's revenue from foreign operations during
the second quarter of 2000. Accordingly, some exposure exists to adverse
movements in the pound sterling and other foreign currencies. The United Kingdom
has traditionally had a relatively stable currency compared to our functional
currency, the U.S. dollar. We anticipate that those conditions will persist for
at least the next 12 months.
The vast majority of the PPD's contracts are entered into by our United States
or United Kingdom subsidiaries. The contracts entered into by the United States
subsidiaries are almost always denominated in United States dollars. Contracts
between PPD's United Kingdom subsidiaries and their clients are generally
denominated in pounds sterling, U.S. dollar or Euros. In most transactions
involving multiple currencies, contractual provisions either limit or reduce the
translation risk.
14
<PAGE>
PPD does have some currency risk resulting from the passage of time between the
invoicing of customers under contracts and the ultimate collection of customer
payments against such invoices. If a contract is denominated in a currency other
than the subsidiary's local currency, PPD recognizes a receivable at the time of
invoicing for the local currency equivalent of the foreign currency invoice
amount. Changes in exchange rates from the time the invoice is prepared and
payment from the customer is received will result in PPD receiving either more
or less in local currency than the local currency equivalent of the invoice
amount at the time the invoice was prepared and the receivable established. This
difference is recognized by PPD as a foreign currency translation gain or loss,
as applicable, and is reported in other expense (income) in PPD's Consolidated
Statements of Operations.
PPD's consolidated financial statements are denominated in U.S. dollars.
Accordingly, changes in exchange rates between the applicable foreign currency
and the U.S. dollar will affect the translation of foreign subsidiaries'
financial results into U.S. dollars for purposes of reporting PPD's consolidated
financial results. The process by which each foreign subsidiary's financial
results are translated to U.S. dollars is as follows: income statement accounts
are translated at average exchange rates for the period; balance sheet assets
and liability accounts are translated at end of period exchange rates; and
equity accounts are translated at historical exchange rates. Translation of the
balance sheet in this manner affects the stockholders' equity account, referred
to as the cumulative translation adjustment account. This account exists only in
the foreign subsidiary's U.S. dollar balance sheet and is necessary to keep the
foreign balance sheet stated in U.S. dollars in balance. Translation adjustments
are reported with accumulated other comprehensive income (loss) as a separate
component of shareholders' equity. To date cumulative translation adjustments
have not been material to PPD's consolidated financial position.
There are no material exchange controls currently in effect in any country in
which PPD's subsidiaries conduct operations on their payment of dividends or
transfer of funds outside the country. Although we perform services for clients
located in a number of foreign jurisdictions, to date we have not experienced
any difficulties in receiving funds remitted from foreign countries. However, if
any such jurisdictions were to impose or modify existing exchange control
restrictions on the remittance of funds to us, these restrictions could have an
adverse effect on our business, financial condition or results of operations.
Inflation
While most of PPD's net revenues are earned under contract, the long-term
contracts (those in excess of one year) generally include an inflation or cost
of living adjustment for the portion of the services to be performed beyond on
year from the contract date. As a result, PPD believes that the effects of
inflation generally do not have a material adverse effect on its operations or
financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Shareholders of the Company was held on May
16, 2000.
At the Annual Meeting, the following proposals were voted
upon:
A proposal to amend the Company's Employee Stock Purchase Plan to
increase the number of shares of the Company's Common Stock reserved for
issuance thereunder from 500,000 shares to 1,250,000 shares was approved by the
following vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
20,576,773 591,837 153,189
</TABLE>
The following directors were elected to office for the ensuing year and
were approved by the following votes:
<TABLE>
<CAPTION>
For Against(1)
--- --------
<S> <C> <C>
Ernest Mario 21,336,261 138,927
Fredric N. Eshelman 21,061,863 413,325
John A. McNeill, Jr. 21,334,094 141,094
Stuart Bondurant 21,336,361 138,827
Frederick Frank 20,191,832 1,283,356
Paul J. Rizzo 21,334,305 140,883
Abraham E. Cohen 21,329,311 145,877
Donald C. Harrison 21,336,361 138,827
</TABLE>
(1) Includes abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.145 Third amendment to Employee Stock Purchase Plan,
dated June 21, 1997.
Exhibit 10.146 Third Amendment to Loan Agreement dated June 23,
2000, between Pharmaceutical Product Development,
Inc. and First Union National Bank.
Exhibit 10.147 Fourth Amendment to Loan Agreement dated June 30,
2000, between Pharmaceutical Product Development,
Inc. and First Union National Bank.
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 June 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL PRODUCT DEVELOPMENT, INC.
----------------------------------------
(Registrant)
By /s/ Linda Baddour
----------------------------------------
Chief Accounting Officer
By /s/ Fred Eshelman
----------------------------------------
Director and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000
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