<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 33-69586
CLINTRIALS RESEARCH INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1406017
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
20 BURTON HILLS BOULEVARD
SUITE 500
NASHVILLE, TENNESSEE 37215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(615) 665-9665
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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. Yes X No
--- ---
As of October 31, 1997, there were 18,180,704 shares of ClinTrials Research Inc.
common stock outstanding.
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CLINTRIALS RESEARCH INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets............................................................. 1
Condensed Consolidated Statements of Operations:
Three Months Ended September 30, 1996 and 1997.................................................. 2
Nine Months Ended September 30, 1996 and 1997................................................... 3
Condensed Consolidated Statements of Cash Flows................................................... 4
Notes to Condensed Consolidated Financial Statements.............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................ 15
SIGNATURES .................................................................................. 16
</TABLE>
i
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 38,134 $ 25,037
Accounts receivable 37,454 39,346
Advance payments to investigators 549 1,693
Deferred income taxes 2,361 2,278
Other current assets 3,028 2,148
--------- ---------
Total current assets 81,526 70,502
Property, Plant and Equipment:
Land, buildings and leasehold improvements 17,448 17,639
Equipment 20,567 24,635
Furniture and fixtures 4,429 5,256
--------- ---------
42,444 47,530
Less: accumulated depreciation and amortization 8,321 12,003
--------- ---------
34,123 35,527
Other assets:
Excess of purchase price over net assets acquired 41,493 40,265
Other assets 81 393
--------- ---------
41,574 40,658
--------- ---------
$ 157,223 $ 146,687
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,470 $ 4,730
Advance billings 14,797 11,710
Payables to investigators 1,336 1,232
Accrued expenses 4,712 4,841
Income taxes payable 2,286 728
--------- ---------
Total current liabilities 29,601 23,241
Deferred income taxes 2,602 2,642
Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.01 par value - 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock, $.01 par value - 50,000,000 shares
authorized; issued and outstanding 18,114,258 and
18,180,564 in 1996 and 1997, respectively 181 182
Additional paid-in capital 126,773 127,148
Retained earnings (deficit) (2,917) (6,424)
Cumulative foreign currency translation adjustments 983 (102)
--------- ---------
Total stockholders' equity 125,020 120,804
--------- ---------
$ 157,223 $ 146,687
========= =========
</TABLE>
See notes to condensed consolidated financial statements
1
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenue:
Service revenue $ 30,186 $ 27,529
Less: Subcontractor costs 4,508 3,330
-------- --------
Net service revenue 25,678 24,199
Operating costs and expenses:
Direct costs 15,215 17,425
Selling, general and administrative costs 7,072 9,620
Depreciation and amortization 1,137 1,388
-------- --------
Income (loss) from operations 2,254 (4,234)
Other income (expense):
Interest income 316 275
Interest expense (16) (5)
-------- --------
Income (loss) before income taxes 2,554 (3,964)
Provision (benefit) for income taxes 621 (1,189)
-------- --------
Net income (loss) $ 1,933 $ (2,775)
======== ========
Earnings (loss) per common and dilutive common equivalent share:
Net income (loss) $ 0.11 $ (0.15)
======== ========
Weighted average common and dilutive common
equivalent shares outstanding (see exhibit 11) 17,064 18,180
</TABLE>
See notes to condensed consolidated financial statements
2
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenue:
Service revenue $ 83,835 $ 95,435
Less: Subcontractor costs 20,461 16,638
-------- --------
Net service revenue 63,374 78,797
Operating costs and expenses:
Direct costs 37,809 52,726
Selling, general and administrative costs 17,251 27,917
Depreciation and amortization 2,595 4,037
-------- --------
Income (loss) from operations 5,719 (5,883)
Other income (expense):
Interest income 715 918
Interest expense (46) (21)
-------- --------
Income (loss) before income taxes 6,388 (4,986)
Provision (benefit) for income taxes 2,256 (1,479)
-------- --------
Net income (loss) $ 4,132 $ (3,507)
======== ========
Earnings (loss) per common and dilutive common equivalent share:
Net income (loss) $ 0.26 $ (0.19)
======== ========
Weighted average common and dilutive common
equivalent shares outstanding (see exhibit 11) 15,951 18,148
</TABLE>
See notes to condensed consolidated financial statements
3
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net income (loss) $ 4,132 $ (3,507)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 2,740 4,756
Change in operating assets and liabilities (14,794) (8,747)
Other -- 52
-------- --------
Net cash used in operating activities (7,922) (7,446)
Cash flows from investing activities:
Purchases of property, plant and equipment, net (5,505) (5,572)
Acquisition of business, net of cash acquired (59,220) --
Maturities of held-to-maturity securities 1,524 --
-------- --------
Net cash used in investing activities (63,201) (5,572)
Cash flows from financing activities:
Proceeds from issuance of common stock 86,459 376
-------- --------
Net cash provided by financing activities 86,459 376
Effect of exchange rate changes on cash 217 (455)
-------- --------
Net increase (decrease) in cash and cash equivalents 15,553 (13,097)
Cash and cash equivalents at beginning of period 15,507 38,134
-------- --------
Cash and cash equivalents at end of period $ 31,060 $ 25,037
======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
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CLINTRIALS RESEARCH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of ClinTrials Research Inc. (the "Company") 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
accruals) considered necessary for fair presentation have been included. Certain
prior year amounts have been reclassified to conform to the current year
presentation. Operating results for the three and nine months ended September
30, 1997, are not necessarily indicative of the results that may be expected for
other quarters or the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its common stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying condensed consolidated
financial statements give retroactive effect to the merger and include the
combined operations of the Company and Ovation.
Note 2 - Stock Split
On October 25, 1996, the Company declared a 3-for-2 stock split to be
effected in the form of a stock dividend of one-half share for each share of
Company common stock outstanding as of the record date, November 11, 1996. The
dividend was distributed to shareholders on November 25, 1996. Earnings per
common and common equivalent share, stock option and market price data referred
to in the financial statements and notes hereto have been adjusted retroactively
to give effect to the stock split.
Note 3 - Earnings (Loss) per Share
Loss per share for the three and nine months ended September 30, 1997,
is based on weighted average shares outstanding of 18,180,000 and 18,148,000,
respectively, and does not include common stock equivalents as their effect
would be anti-dilutive. For the three and nine months ended September 30, 1996,
dilutive common stock equivalents consisted of stock options representing
486,000 and 507,000 equivalent shares, respectively. The Company's stock is
currently traded in the Nasdaq Stock Market and sale information is included on
Nasdaq National Market Issues System under the symbol "CCRO".
Note 4 - Provision (Benefit) for Income Taxes
The effective tax benefit rate was 30.0% and 29.7% for the three and
nine months ended September 30, 1997, respectively, compared to an effective tax
rate of 24.3% and 35.3% for the three and nine months
5
<PAGE> 8
ended September 30, 1996, respectively. The change in the effective tax rate is
primarily the result of the unrecognized tax benefit associated with foreign net
operating losses, partially offset by research and development tax credits
generated by the Company's Canadian subsidiary. The difference in the effective
tax rate between the three and nine months ended September 30,1996 is primarily
due to investment tax credits of Bio-Research Laboratories Ltd. of Montreal,
Quebec ("Bio-Research") which was acquired in July 1996. Other significant items
that create the difference between the Company's federal statutory and effective
tax rates are state and local taxes, tax-exempt interest income and
nondeductible amortization of goodwill. The Company, in general, will not record
a tax asset for losses incurred in its foreign operations until such time, if
any, that it has three years of profits in the applicable jurisdiction. However,
the Company will recognize a tax benefit for losses incurred in its foreign
operations as the subsidiary generates taxable income to the extent of the
cumulative losses.
Note 5 - Acquisition of Bio-Research
On July 31, 1996, the Company purchased, for $65.0 million in cash, all
of the assets and assumed certain liabilities (the "Acquisition") of
Bio-Research. The Acquisition was financed with the proceeds of a public
offering of 4,485,000 shares of the Company's common stock at $20 per share on
July 24, 1996 (as adjusted for the Company's 3-for-2 stock split). Net proceeds
to the Company from the offering were approximately $84.9 million, $65.0 million
of which was used to fund the Acquisition. The operations of Bio-Research are
included in the Company's results of operations from the date of the
Acquisition.
The Acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed based upon their fair values. The
purchase price allocation was as follows (in thousands):
<TABLE>
<S> <C>
Current assets $16,468
Current liabilities assumed (9,635)
Property, plant and equipment 23,141
Excess of purchase price over net assets acquired 35,026
-------
$65,000
=======
</TABLE>
The following represents the unaudited pro forma results of operations
with increased amortization of intangible assets as if the acquisition had
occurred as of January 1, 1996, as compared to actual results for the same
periods in 1997 (in thousands, except earnings per share):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1996 1997 1996 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net service revenue $28,249 $ 24,199 $79,252 $ 78,797
Income (loss) before income taxes 2,371 (3,964) 6,633 (4,986)
Net income (loss) 1,906 (2,775) 5,044 (3,507)
Earnings (loss) per common and dilutive
common equivalent share $ 0.11 $ (0.15) $ 0.29 $ (0.19)
Weighted average common and dilutive common
equivalent shares outstanding 17,604 18,180 17,553 18,148
</TABLE>
6
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The pro forma information given above does not purport to be indicative
of the results that actually would have been obtained if the operations were
combined during the pro forma period actually presented, and is not intended to
be a projection of future results or trends.
Note 6 - SFAS No. 128
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("SFAS No. 128"). The Company will adopt
SFAS No. 128 on December 31, 1997 and, accordingly, will report basic earnings
(loss) per share ("Basic EPS") and diluted earnings (loss) per share ("Diluted
EPS"). Basic EPS will be based upon the weighted-average number of common shares
outstanding, while Diluted EPS will also give effect to all dilutive potential
common shares that are outstanding during the period. The impact of SFAS No. 128
on earnings (loss) per share is not expected to be material.
Note 7 - Contingencies
In 1991, a customer commenced legal action against the predecessor of
the Company's preclinical subsidiary claiming damages resulting from statistical
errors in carrying out two research studies. Judgment was rendered in February
1997 by the Superior Court of Montreal against the Company's preclinical
subsidiary in the amount of approximately $580,000 plus interest to accrue from
September 1991. The Company's preclinical subsidiary, now responsible for this
action, has reserves adequate to cover the current judgment amount. The
Company's preclinical subsidiary has appealed the amount of the judgment and the
subsidiary's insurance company has appealed the portion of the judgment which
obligates the insurance company to pay the insurance claim related to this
litigation. The Company believes it is entitled, subject to certain limitations,
to indemnification from a former owner of the predecessor for a portion of this
claim. In the opinion of management, the ultimate resolution of such pending
legal proceedings will not have a material effect on the Company's financial
position or results of operations.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
The information set forth and discussed below for the three and
nine-month periods ended September 30, 1997 and 1996 is derived from the
Condensed Consolidated Financial Statements included elsewhere herein. The
financial information set forth and discussed below is unaudited but, in the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The Company's
results of operations for a particular quarter may not be indicative of the
results that may be expected for other quarters or the entire year.
Forward looking statements made in this document involve a number of
risks and uncertainties, including but not limited to the Company's ability to
obtain new business and to accurately estimate the timing of recognition of
revenue in the backlog due to variability in size, scope and duration of
projects, regulatory delays, study results which lead to reductions or
cancellations of projects, and other decisions totally within the control of its
clients.
OVERVIEW
The Company is a full-service contract research organization ("CRO")
serving the pharmaceutical, biotechnology and medical device industries. The
Company designs, monitors and manages preclinical and clinical trials, provides
clinical data management and biostatistical services and offers product
registration services throughout the United States, Canada and Europe. The
Company generates substantially all of its revenue from the preclinical and
clinical testing of new pharmaceutical and biotechnology products.
The Company's contracts are typically fixed priced, multi-year
contracts that usually require a portion of the contract amount to be paid at or
near the time the trial is initiated. The Company generally bills its clients
upon the completion of negotiated performance requirements and, to a lesser
extent, on a date certain basis. The Company's contracts generally may be
terminated with or without cause. In the event of termination, the Company is
typically entitled to all sums owed for work performed through the notice of
termination and all costs associated with termination of the study. In addition,
some of the Company's contracts provide for an early termination fee, the amount
of which usually declines as the trial progresses. Termination or delay in the
performance of a contract occurs for various reasons, including, but not limited
to, unexpected or undesired results, inadequate patient enrollment or
investigator recruitment, production problems resulting in shortages of the
drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is recognized on a percentage of completion basis
as work is performed. Revenue is affected by the mix of trials conducted and the
degree to which labor and facilities are utilized. The Company routinely
subcontracts with third party investigators in connection with multi-site
clinical trials and with other third party service providers for laboratory
analysis and other specialized services.
8
<PAGE> 11
These costs are passed through to clients and, in accordance with industry
practice, are included in service revenue. Subcontractor services may vary
significantly from contract to contract; therefore, changes in service revenue
may not be indicative of trends in revenue growth. Accordingly, the Company
views net service revenue, which consists of service revenue less subcontractor
costs, as its primary measure of revenue growth. The Company has had, and will
continue to have, certain clients from which at least 10 percent of the
Company's overall revenue is generated over multiple contracts. Such
concentrations of business are not uncommon within the CRO industry.
The Company's quarterly operating results may fluctuate as a result of
factors such as delays experienced in implementing or completing particular
clinical trials and termination of clinical trials, the costs associated with
integrating acquired operations, foreign exchange fluctuations, as well as the
costs associated with opening new offices. Since a high percentage of the
Company's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the timing of contracts or the progress of
clinical trials (both delays and accelerations) may cause significant variations
in quarterly operating results. Results of one quarter are not necessarily
indicative of results that may be expected for other quarters or the entire
year.
Since it is common for clients to authorize projects and the Company to
commence providing services before a contract is signed, the Company believes
reported backlog should consist of anticipated net revenue from uncompleted
projects which have been authorized by the client, through a written contract or
otherwise. At September 30, 1997, backlog was approximately $115.0 million, as
compared to approximately $106.8 million at June 30, 1997. The Company believes
that backlog is not a consistent indicator of future results because backlog can
be affected by a number of factors, including the variable size and duration of
projects, many of which are performed over several years. Additionally, projects
may be terminated by the client or delayed by regulatory authorities for many
reasons, including unexpected test results. Moreover, the scope of a project can
change during the course of a study.
The Company's core European operation consists of offices in
Maidenhead, UK and Brussels, Belgium. The Company has expanded its ability to
perform international clinical trials by opening offices in Australia, Chile,
France, and Israel in 1996 and Italy, Canada and Scotland in 1997. The Company
has made significant investments in the marketing and infrastructure of its core
European operations; however, net revenue has not sufficiently grown to cover
the increased expense levels and the Company is focused on generating new
business while evaluating the current cost structure in Europe.
Contracts between the Company's subsidiaries (primarily in Canada and
to a lesser extent in the United Kingdom) and their clients may be denominated
in a currency other than the local currency of the subsidiary. Because
substantially all of the subsidiaries' expenses are paid in the local currency
of the subsidiary, such subsidiaries' earnings related to these contracts could
be affected by fluctuations in exchange rates. Generally, the Company attempts
to contractually limit its future foreign exchange risks with its clients. In
addition, the Company may use future foreign exchange contracts to hedge the
risk of changes in foreign currency exchange rates associated with contracts in
which the expenses for providing services are incurred in one currency and paid
for by the client in another currency. The Company's subsidiaries located
outside the United States generated approximately 48% of its net revenue for the
nine months ended September 30, 1997, over half of which was generated by the
Company's Canadian subsidiary. Therefore, fluctuations in exchange rates may
have a material effect on the earnings of the Company.
9
<PAGE> 12
The Company's condensed consolidated financial statements are
denominated in U.S. dollars and, accordingly, changes in the exchange rates
between the Company's subsidiaries' local currency and the U.S. dollar will
affect the translation of such subsidiaries' financial results into U.S. dollars
for purposes of reporting the Company's consolidated financial results.
Translation adjustments are reported as a separate section of stockholders'
equity. Such adjustments may in the future be material to the Company's
financial statements.
ACQUISITION OF BIO-RESEARCH AND MERGER WITH OVATION
On July 31, 1996, the Company purchased, for $65.0 million in cash, all
of the assets and assumed certain liabilities (the "Acquisition") of
Bio-Research Laboratories Ltd. of Montreal, Quebec ("Bio-Research").
Bio-Research is a leading contract research organization which provides services
to clients in the pharmaceutical, biotechnology, chemical and medical device
industries. Bio-Research designs and conducts preclinical trials, based
primarily upon animal models, that produce the data required to assess and
evaluate efficacy in and potential risks to humans. The Acquisition was financed
with the proceeds of a public offering of 4,485,000 shares of the Company's
common stock at $20 per share on July 24, 1996 (as adjusted for the Company's
3-for-2 stock split). Net proceeds to the Company from the offering were
approximately $84.9 million, $65.0 million of which was used to fund the
Acquisition. The operations of Bio-Research are included in the Company's
results of operations from the date of the Acquisition.
On June 1, 1997, the Company completed a merger with Ovation Healthcare
Research, Incorporated ("Ovation"), a privately held pharmacoeconomic and
consulting firm based in Highland Park, Illinois. The Company issued 250,000
shares of its Common Stock in the merger transaction, which was accounted for as
a pooling of interests and, accordingly, the accompanying consolidated financial
statements give retroactive effect to the merger and include the combined
operations of the Company and Ovation.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1996
Net loss for the third quarter of 1997 was $2.8 million, or $0.15 per
share, compared to net income in the same period of 1996 of $1.9 million or
$0.11 per share. This decrease is primarily attributable to the cancellations of
contracts, aggregating $37 million in backlog, which occurred in the fourth
quarter of 1996 and first quarter of 1997 and the underperformance of the
European operations. The decrease in backlog left the Company with unbillable
resources related to those projects as well as a higher level of direct costs
and selling, general and administrative expenses incurred to cover the expected
higher revenue levels. None of the cancellations were related to service or
quality problems. Backlog of future net revenue increased to $115.0 million (438
contracts from 118 clients) at September 30, 1997, compared to $106.8 million
(438 contracts from 121 clients) at June 30, 1997; however, due to the mix of
contracts in backlog and the underperformance of the European operations, the
Company anticipates that revenue recognized for the remainder of 1997 will not
be sufficient to cover expenses and the Company will report a loss for fiscal
1997. The Company is focusing its business development strategy on growing its
core clinical business.
Net service revenue decreased 5.8% to $24.2 million in the third
quarter of 1997 from $25.7 million in the same period of 1996. Excluding revenue
recognized related to Bio-Research (acquired July 31, 1996)
10
<PAGE> 13
net service revenue decreased 27.8%. This decrease resulted primarily from the
cancellations of contracts previously discussed.
Direct costs increased 14.5% to $17.4 million in the third quarter of
1997 from $15.2 million in the same period of 1996. Costs in 1997 include a
full three months of Bio-Research's operations. Direct costs increased as a
percentage of net service revenue to 72.0% from 59.3% due to unbillable
resources resulting from the previously discussed project cancellations and
underperformance of the European operations. Direct costs are based on the mix
of contracts in progress and as a percentage of net revenue may fluctuate from
period to period dependent upon the mix of contracts in the backlog. In
addition, direct costs may fluctuate due to changes in labor and facility
utilization.
Selling, general and administrative costs increased 36.0% to $9.6
million in the third quarter of 1997 from $7.1 million in the same period of
1996. Costs in 1997 include a full three months of Bio-Research's operations.
Selling, general and administrative costs increased as a percentage of net
service revenue to 39.8% from 27.5%. The increase as a percentage of net revenue
is primarily attributable to lower levels of revenue resulting from project
cancellations and underperformance of the European operations. Selling, general
and administrative costs, which primarily includes compensation for
administrative employees, facilities costs, and marketing costs, are relatively
fixed in the near term while revenue is subject to fluctuation, therefore, minor
variations in the timing of contracts or the progress of clinical trials (both
delays and accelerations) may cause significant variations in quarterly
operating results. In addition, the Company has incurred and will continue to
incur costs related to expanded infrastructure required to open new offices as
described previously.
Depreciation and amortization expense increased 22.1% to $1.4 million
in the third quarter of 1997 compared to $1.1 million in the same period of
1996. The increase is primarily attributable to amortization of goodwill and
depreciation of property, plant, and equipment incurred in the acquisition of
Bio-Research.
Interest income, net of interest expense, decreased to $270,000 in the
third quarter of 1997 from $300,000 in the same period of 1996.
The Company's benefit for income taxes was $1.2 million in the third
quarter of 1997 as compared to a provision of $621,000 in the same period of
1996. The effective tax benefit rate for the third quarter of 1997 was 30.0%
compared to an effective tax rate of 24.3% in 1996. This increase in the
effective rate is primarily the result of research and development tax credits
generated by the Company's Canadian subsidiary partially offset by the
unrecognized tax benefit associated with foreign net operating losses. Other
significant items that create the difference between the Company's federal
statutory and effective tax rates are state and local taxes, tax-exempt interest
income and nondeductible amortization of goodwill. The Company, in general, will
not record a tax asset for losses incurred in its foreign operations until such
time, if any, that it has three years of profits in the applicable jurisdiction.
However, the Company will recognize a tax benefit for losses incurred in its
foreign operations as the subsidiary generates taxable income to the extent of
the cumulative losses.
11
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net loss for the nine months ended September 30, 1997 was $3.5 million,
or $0.19 per share, compared to net income in the same period of 1996 of $4.1
million or $0.26 per share. This decrease is primarily attributable to the
cancellations of contracts, aggregating $37 million in backlog, which occurred
in the fourth quarter of 1996 and first quarter of 1997 and the underperformance
of the European operations. The decrease in backlog left the Company with
unbillable resources related to those projects as well as a higher level of
direct costs and selling, general and administrative expenses incurred to cover
the expected higher revenue levels. None of the cancellations were related to
service or quality problems. Backlog of future net revenue increased to $115.0
million (438 contracts from 118 clients) at September 30, 1997, compared to
$106.8 million (438 contracts from 121 clients) at June 30, 1997; however, due
to the mix of contracts in backlog and the underperformance of the European
operations, the Company anticipates that revenue recognized for the remainder of
1997 will not be sufficient to cover expenses and the Company will report a loss
for fiscal 1997. The Company is focusing its business development strategy on
growing its core clinical business.
Net service revenue increased 24.3% to $78.8 million in the first nine
months of 1997 from $63.4 million in the same period of 1996. Excluding revenue
recognized related to Bio-Research (acquired July 31, 1996) net service revenue
decreased 10.9%. This decrease resulted primarily from the cancellations of
contracts previously discussed.
Direct costs increased 39.5% to $52.7 million in the first nine months
of 1997 from $37.8 million in the same period of 1996. Costs in 1997 include a
full nine months of Bio-Research's operations. Direct costs increased as a
percentage of net service revenue to 66.9% from 59.7% due to unbillable
resources resulting from the previously discussed project cancellations and
underperformance of the European operations. Direct costs are based on the mix
of contracts in progress and as a percentage of net revenue may fluctuate from
period to period dependent upon the mix of contracts in the backlog. In
addition, direct costs may fluctuate due to changes in labor and facility
utilization.
Selling, general and administrative costs increased 61.8% to $27.9
million in the first nine months of 1997 from $17.3 million in the same period
of 1996. Costs in 1997 include a full nine months of Bio-Research's operations.
Selling, general and administrative costs increased as a percentage of net
service revenue to 35.4% from 27.2%. The increase as a percentage of net revenue
is primarily attributable to lower levels of revenue resulting from project
cancellations and underperformance of the European operations. Selling, general
and administrative costs, which primarily includes compensation for
administrative employees, facilities costs, and marketing costs, are relatively
fixed in the near term while revenue is subject to fluctuation, therefore, minor
variations in the timing of contracts or the progress of clinical trials (both
delays and accelerations) may cause significant variations in quarterly
operating results. In addition, the Company has incurred and will continue to
incur costs related to expanded infrastructure required to open new offices as
described previously.
Depreciation and amortization expense increased 55.6% to $4.0 million
in the first nine months of 1997 compared to $2.6 million in the same period of
1996. This increase is primarily attributable to amortization of goodwill and
depreciation of property, plant and equipment incurred in the acquisition of
Bio-Research.
12
<PAGE> 15
Interest income, net of interest expense, increased to $897,000 in the
first nine months of 1997 from $669,000 in the same period of 1996.
The Company's benefit for income taxes was $1.5 million in the first
nine months of 1997 as compared to a provision of $2.3 million in the same
period of 1996. The effective tax benefit rate for the first nine months of 1997
was 29.7% compared to an effective tax rate of 35.3% in 1996. This decrease in
the effective rate is primarily the result of the unrecognized tax benefit
associated with foreign net operating losses, partially offset by research and
development tax credits generated by the Company's Canadian subsidiary. Other
significant items that create the difference between the Company's federal
statutory and effective tax rates are state and local taxes, tax-exempt interest
income and nondeductible amortization of goodwill. The Company, in general, will
not record a tax asset for losses incurred in its foreign operations until such
time, if any, that it has three years of profits in the applicable jurisdiction.
However, the Company will recognize a tax benefit for losses incurred in its
foreign operations as the subsidiary generates taxable income to the extent of
the cumulative losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and
long-term basis are the payment of salaries, office rent and travel expenses, as
well as capital expenditures. The Company has historically financed these
expenditures, as well as acquisitions, with cash flow from operations, issuances
of equity securities and borrowings under its Credit Facility as defined below.
The Company utilizes its working capital to finance these expenditures pending
receipt of its receivables. Contract receipts from the Company's clients vary
according to the terms of each contract.
The Company's contracts usually require a portion of the contract
amount to be paid at or near the time the trial is initiated. Payments are
generally received upon the completion of negotiated performance requirements
and, to a lesser extent, on a date certain basis throughout the life of the
contract. Cash receipts do not correspond to costs incurred and revenue
recognition (which is based on cost-to-cost type of percentage of completion
accounting). Therefore, the Company's cash flow is influenced by the interaction
of changes in receivables and advance billings. The Company typically receives a
low volume of large-dollar cash receipts.
The Company has experienced a trend, which it expects will continue, in
which clients place less emphasis on prepayments and greater emphasis on
payments based on negotiated performance requirements. This trend has increased,
and may continue to increase, days sales outstanding in accounts receivable.
However, the Company does not expect this trend to have a significant impact on
its ability to maintain its overall working capital. The number of days sales
outstanding in accounts receivable was 126 days at September 30, 1997, 90 days
at December 31, 1996, and 91 days at September 30, 1996. The number of days
sales outstanding in accounts receivable net of advanced billings was 88 days at
September 30, 1997, 52 days at December 31, 1996, and 55 days at September 30,
1996. The increase is primarily due to the change in payment methodology
discussed above as well as a reduction in revenue resulting from the previously
discussed contract cancellations.
The Company had cash and cash equivalents of $25.0 million at September
30, 1997 as compared to $31.1 million at September 30, 1996 and $38.1 million at
December 31, 1996.
13
<PAGE> 16
During the nine months ended September 30, 1997, net cash used by
operating activities totaled $7.4 million, primarily due to an increase in
accounts receivable of $1.9 million, a decrease in advance billings of $3.1
million, a decrease in accounts payable of $1.7 million, a decrease in other
current liabilities of $1.4 million, and a decrease in net payables to
investigators of $1.2 million, which was partially offset by income before
non-cash expenses of $1.3 million and a decrease in other current assets of
$0.9 million.
Cash used in investing activities of $5.6 million during the nine
months ended September 30, 1997 consisted principally of capital expenditures.
Capital expenditures have primarily been made for computer system additions and
upgrades and computer equipment for new employees. Annual capital expenditures
were $2.0 million in 1994, $3.8 million in 1995, $7.3 million in 1996, and are
estimated to be approximately $8.5 million in 1997.
The Company has domestic and foreign lines of credit ("Credit
Facility") with banks totaling approximately $13.7 million. There were no
borrowings outstanding under the lines of credit at September 30, 1997.
Commitment availability has been reduced by issued letters of credit of
approximately $1.1 million. The lines are collateralized by the Company's assets
and amounts outstanding would bear interest at the respective banks' prime
interest rates. Borrowings available under the lines of credit are subject to
certain financial and operating covenants.
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, and available borrowings under its Credit Facility. The Company
estimates that such sources of cash will be sufficient to fund the Company's
current operations, including expansions of its foreign operations, at least
through 1997, although some pressure on cash reserves is expected over the
course of the next several months. There may be acquisition or other
growth opportunities which require additional external financing, and the
Company may from time to time seek to obtain additional funds from public or
private issuances of equity or debt securities. There can be no assurances that
such financings will be available on terms acceptable to the Company.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO. PAGE
----
11 Computation of Earnings Per Common and E-1
Common Equivalent Share
27 Financial Data Schedule (SEC use only) E-2
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Company during the quarter ended September
30, 1997.
15
<PAGE> 18
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.
CLINTRIALS RESEARCH INC.
Date: November 13, 1997 By: /s/ WILLIAM C. O'NEIL, JR.
--------------------------------------------
William C. O'Neil, Jr.
Chairman of the Board, President,
and Chief Executive Officer
Date: November 13, 1997 By: /s/ MARY A. CHAPUT
--------------------------------------------
Mary A. Chaput
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE> 1
EXHIBIT 11
CLINTRIALS RESEARCH INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
------- --------
<S> <C> <C>
Net income (loss) $ 1,933 $ (2,775)
======= ========
Weighted average common shares outstanding 16,578 18,180
Net effect of dilutive stock options - based on
treasury stock method using average market price 486 -- (a)
------- --------
Weighted average common and dilutive common
equivalent shares outstanding 17,064 18,180
======= ========
Earnings (loss) per common and dilutive common
equivalent share $ 0.11 $ (0.15)
======= ========
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
------- --------
Net income (loss) $ 4,132 $ (3,507)
======= ========
Weighted average common shares outstanding 15,444 18,148
Net effect of dilutive stock options - based on
treasury stock method using average market price 507 -- (a)
------- --------
Weighted average common and dilutive common
equivalent shares outstanding 15,951 18,148
======= ========
Earnings (loss) per common and dilutive common
equivalent share $ 0.26 $ (0.19)
======= ========
</TABLE>
(a) - The effect of the stock options would be anti-dilutive and is therefore
not included in the calculation for the three and nine months ended
September 30, 1997.
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CLINTRIALS RESEARCH INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,037
<SECURITIES> 0
<RECEIVABLES> 39,346
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,502
<PP&E> 47,530
<DEPRECIATION> 12,003
<TOTAL-ASSETS> 146,687
<CURRENT-LIABILITIES> 23,241
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 120,622
<TOTAL-LIABILITY-AND-EQUITY> 146,687
<SALES> 0
<TOTAL-REVENUES> 78,797
<CGS> 0
<TOTAL-COSTS> 52,726
<OTHER-EXPENSES> 31,954
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (4,986)
<INCOME-TAX> (1,479)
<INCOME-CONTINUING> (3,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,507)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
