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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 JUNE 30, 1998
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 July 31, 1998, there were 18,230,172 shares of ClinTrials Research Inc.
common stock outstanding.
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CLINTRIALS RESEARCH INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations:
Three Months Ended June 30, 1997 and 1998 2
Six Months Ended June 30, 1997 and 1998 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
EXHIBIT 11
EXHIBIT 27
</TABLE>
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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, JUNE 30,
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,275 $ 12,783
Accounts receivable 33,725 33,000
Advance payments to investigators 939 --
Income taxes receivable 3,167 6,304
Deferred income taxes 2,511 1,001
Other current assets 2,531 3,775
--------- ---------
Total current assets 71,148 56,863
Property, plant and equipment:
Land, buildings and leasehold improvements 16,825 18,710
Equipment 25,625 28,725
Furniture and fixtures 5,347 5,453
--------- ---------
47,797 52,888
Less: accumulated depreciation and amortization 13,025 15,052
--------- ---------
34,772 37,836
Other assets:
Excess of purchase price over net assets acquired 38,687 35,652
Other assets 372 1,997
--------- ---------
39,059 37,649
--------- ---------
$ 144,979 $ 132,348
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,839 $ 6,729
Advance billings 10,468 9,239
Payables to investigators 1,278 1,905
Accrued expenses 7,739 9,083
Income taxes payable 183 138
Current maturities of long-term debt -- 92
--------- ---------
Total current liabilities 26,507 27,186
Deferred income taxes 2,694 3,405
Long-term debt -- 277
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 18,181,765 and
18,195,859 in 1997 and 1998, respectively 182 182
Additional paid-in capital 127,160 127,227
Retained earnings(deficit) (9,313) (22,029)
Accumulated other comprehensive income(loss) (2,251) (3,900)
--------- ---------
Total stockholders' equity 115,778 101,480
--------- ---------
$ 144,979 $ 132,348
========= =========
</TABLE>
See notes to condensed consolidated financial statements
1
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenue:
Service revenue $ 30,629 $ 29,345
Less: Subcontractor costs 4,634 6,457
-------- --------
Net service revenue 25,995 22,888
Operating costs and expenses:
Direct costs 17,417 15,880
Selling, general and administrative costs 9,401 10,009
Depreciation and amortization 1,355 1,391
Restructuring charge -- 6,364
-------- --------
Loss from operations (2,178) (10,756)
Other income(expense):
Interest income 290 218
Interest expense (5) (11)
-------- --------
285 207
-------- --------
Loss before income taxes (1,893) (10,549)
Benefit for income taxes (413) (73)
-------- --------
Net loss $ (1,480) $(10,476)
======== ========
Loss per share:
Basic $ (0.08) $ (0.58)
Diluted $ (0.08) $ (0.58)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,146 18,195
Diluted 18,146 18,195
</TABLE>
See notes to condensed consolidated financial statements
2
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revenue:
Service revenue $ 67,906 $ 58,622
Less: Subcontractor costs 13,308 12,086
-------- --------
Net service revenue 54,598 46,536
Operating costs and expenses:
Direct costs 35,301 32,407
Selling, general and administrative costs 18,297 19,637
Depreciation and amortization 2,649 2,845
Restructuring charge -- 6,364
-------- --------
Loss from operations (1,649) (14,717)
Other income(expense):
Interest income 643 552
Interest expense (16) (17)
-------- --------
627 535
-------- --------
Loss before income taxes (1,022) (14,182)
Benefit for income taxes (290) (1,466)
-------- --------
Net loss $ (732) $(12,716)
======== ========
Loss per share:
Basic $ (0.04) $ (0.70)
Diluted $ (0.04) $ (0.70)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,132 18,190
Diluted 18,132 18,190
</TABLE>
See notes to condensed consolidated financial statements
3
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (732) $(12,716)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,135 3,328
Changes in operating assets and liabilities (9,610) 1,090
Other 52 21
-------- --------
Net cash used in operating activities (7,155) (8,277)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (4,252) (5,971)
Costs associated with purchase of option to
acquire MPI -- (1,552)
-------- --------
Net cash used in investing activities (4,252) (7,523)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 359 46
Proceeds received on long-term debt borrowings -- 382
-------- --------
Net cash provided by financing activities 359 428
Effect of exchange rate changes on cash (19) (120)
-------- --------
Net decrease in cash and cash equivalents (11,067) (15,492)
Cash and cash equivalents at beginning of period 38,134 28,275
-------- --------
Cash and cash equivalents at end of period $ 27,067 $ 12,783
======== ========
</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 six months ended June 30,
1998, 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, 1997.
NOTE 2-EARNINGS (LOSS) PER SHARE
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128") on December
31, 1997. SFAS No. 128 requires presentation of both Basic Earnings per Share
("Basic EPS") and Diluted Earnings per Share ("Diluted EPS"). Basic EPS is based
on the weighted average number of shares of common stock outstanding during the
year while diluted EPS also includes the dilutive effect of common stock
equivalents. Diluted loss per share for the three months ended June 30, 1997 and
1998 does not include common stock equivalents of 332,000 and 248,000,
respectively, as their effect would be anti-dilutive. Diluted loss per share for
the six months ended June 30, 1997 and 1998 does not include common stock
equivalents of 368,000 and 262,000, respectively, as their effect would be
anti-dilutive. Prior period earnings per share amounts have been restated to
present Basic EPS and Diluted EPS. The Company's stock is currently traded in
the Nasdaq Stock Market and sale information is included on the Nasdaq National
Market Issues System under the symbol "CCRO".
NOTE 3-COMPREHENSIVE INCOME (LOSS)
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130")
on January 1, 1998. SFAS No. 130 establishes new rules for reporting and
displaying comprehensive income and its components; however, the adoption of
SFAS No. 130 has no impact on the Company's net income or stockholders' equity.
SFAS No. 130 requires the Company to include foreign currency translation
adjustments, which were previously reported by the Company as a separate
component of stockholders' equity, in other comprehensive income. Accumulated
other comprehensive income consists entirely of accumulated foreign currency
translation adjustments and is a separate component of stockholders' equity
under SFAS No. 130. Prior period amounts have been reclassified to conform to
the requirements of SFAS No. 130.
5
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The components of comprehensive income (loss), net of related tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1997 1998
---- ----
<S> <C> <C>
Net loss $(1,480) $(10,476)
Foreign currency translation adjustments 165 (2,192)
------- --------
Comprehensive loss $(1,315) $(12,668)
======= ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1998
---- ----
<S> <C> <C>
Net loss $ (732) $(12,716)
Foreign currency translation adjustments (866) (1,649)
------- --------
Comprehensive loss $(1,598) $(14,365)
======= ========
</TABLE>
NOTE 4-BENEFIT FOR INCOME TAXES
The effective tax benefit rate was 21.8% and 0.7% for the three months ended
June 30, 1997 and 1998, respectively, and was 28.4% and 10.3% for the six months
ended June 30, 1997 and 1998, respectively. The effective tax benefit rate
declined in 1998 as the Company fully realized its available tax loss carrybacks
in the second quarter of 1998. Due to the restrictions that accounting standards
place on deferred tax assets associated with loss carryforwards, the Company
recorded a valuation allowance of $2.8 million in the second quarter of 1998 for
its deferred tax assets primarily related to the Company's potential tax benefit
associated with its operating loss in the second quarter of 1998.
NOTE 5-LONG-TERM DEBT
In March 1998, the Company replaced its $10.0 million domestic credit facility
with a $15.0 million domestic credit facility which has expansion capabilities
to $40.0 million. Credit availability under the Company's new domestic line of
credit and its foreign line of credit ("Credit Facilities") totals approximately
$18.4 million. The lines are collateralized by certain of the Company's assets
and bear interest at a fluctuating rate based either on the respective bank's
prime interest rate or the London Interbank Offered Rate ("LIBOR"), as elected
by the Company. On June 30, 1998, there were no borrowings outstanding under the
lines of credit. Commitment availability at June 30, 1998 has been reduced by
issued letters of credit of approximately $730,000. Borrowings available under
the lines of credit are subject to certain financial and operating covenants.
In March 1998, the Company's Canadian subsidiary borrowed approximately $382,000
from the Canadian government. This borrowing bears no interest and is repayable
in four annual installments beginning in 1999.
NOTE 6-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 $550,000 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,
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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.
NOTE 7-RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company accrued $1.6 million at December 31, 1997, for restructuring
costs to be incurred in 1998 in reducing its administrative workforce, primarily
in Europe. In the six months ended June 30, 1998, the Company paid $1.4 million
of the restructuring costs, primarily in severance costs to approximately 35
employees. At June 30, 1998, $0.2 million remains in accrued expenses for
restructuring costs expected to be paid by the end of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with leases following
the Company's restructuring decision to consolidate facilities. The 1998
restructuring charge consists of the following (in thousands):
<TABLE>
<CAPTION>
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 6/30/98
------------- ----------
<S> <C> <C>
Write down of assets in connection with closure of
Lexington facility $1,983 $ 485
Lease costs associated with consolidation of facilities 1,976 1,514
Severance costs 2,132 341
Other 273 80
------ ------
$6,364 $2,420
====== ======
</TABLE>
7
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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, 1997.
The information set forth and discussed below for the three and six months ended
June 30, 1998 and 1997 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.
The Company's Form 10-Q includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import. Such statements include
statements concerning 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, other decisions
totally within the control of its clients and its ability to immediately affect
the level of operating expenses, as well as statements concerning the Company's
business strategy, acquisition strategy, operations, cost savings initiatives,
industry, economic performance, financial condition, liquidity and capital
resources, existing government regulations and changes in, or the failure to
comply with, governmental regulations. Such statements are subject to various
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements because of a number of
factors, including those identified in this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that such statements included in this document will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The
forward-looking statements are made as of the date of this document and the
Company assumes no obligation to update such statements or to update the reasons
that actual results could differ from those projected in the forward-looking
statements.
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 and
pharmacoeconomic 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-price, 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, at times 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 may occur for various reasons, including, but not
limited to, unexpected or undesired results, inadequate patient enrollment or
investigator recruitment, production problems resulting in shortages of
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the drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is typically 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. These costs are passed through to
clients and, in accordance with industry practice, are included in gross service
revenue. Subcontractor services may vary significantly from contract to
contract; therefore, changes in gross service revenue may not be indicative of
trends in revenue growth. Accordingly, the Company views net service revenue,
which consists of gross 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% 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 core European operation consists of offices in Maidenhead, United
Kingdom and Brussels, Belgium. The Company expanded its ability to perform
international clinical trials by opening offices in Australia, Chile, France,
and Israel in 1996 and Italy 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 in the fourth quarter of 1997 the Company decided
to reduce its general and administrative workforce (see restructuring charge
discussion below). The Company is focused on generating new business while
controlling its cost structure.
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 50% of its net revenue for the
year ended December 31, 1997. More than half of the non U.S. revenue was
generated by the Company's Canadian subsidiary. Therefore, fluctuations in
exchange rates may have a material effect on the earnings of the Company.
The Company's 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 component of other comprehensive income (loss) in stockholders'
equity. Such adjustments may in the future be material to the Company's
financial statements.
RECENT DEVELOPMENTS
The Company implemented a new business plan in April, 1998 which includes the
following: consolidation of the Company's Lexington, Kentucky data management
operations into the Company's new clinical research center in Research Triangle
Park, North Carolina (see Restructuring Charges below); enhancement of the
management team with the recent hirings of individuals with extensive experience
in clinical drug development, information technology and business development;
implementation of a $3.0 million incremental capital expenditure program to
improve the Company's information technology platform; and acceleration of
marketing efforts for renewed growth of sales.
The Company's new business contracted in the first quarter of 1998 of $11.4
million was significantly less than expected, primarily as a result of lower
clinical sales as the Company focused on implementing the restructuring
announced in December 1997 and developing and implementing its new business plan
discussed above. As a result of
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previously announced contract cancellations in the fourth quarter of 1996 and
first quarter of 1997, a level of new orders insufficient to cover these
cancellations and the underperformance of the Company's European operations, the
Company incurred a loss in fiscal 1997 and expects to incur a loss for fiscal
1998. With the Company's new business plan in place, the Company is now
concentrating its energies on generating new study proposals, streamlining the
proposal review process and implementing a product development focus with its
customers. In the second quarter of 1998 new orders signed improved to $23.8
million.
RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Company determined that its current revenue
levels would not support its general and administrative cost structure. As a
result, the Company recorded a $1.6 million restructuring charge for costs to be
incurred in reducing its administrative workforce, primarily in Europe. At
December 31, 1997, the entire $1.6 million restructuring charge is included in
accrued expenses as no termination benefits were paid as of year end. In the six
months ended June 30, 1998, the Company paid $1.4 million of the restructuring
costs, primarily in severance costs to approximately 35 employees. At June 30,
1998, approximately $0.2 million remains in accrued expenses for termination
benefits expected to be paid by the end of 1998.
On April 24, 1998, the Company announced that its data management operations in
Lexington, Kentucky would be closed and consolidated into its new clinical
research center in Research Triangle Park, North Carolina. The Company recorded
a restructuring charge of $6.4 million in the second quarter of 1998 in
connection with the closing of the Company's Lexington facility, severance costs
for the termination of 90 employees and costs associated with leases following
the Company's restructuring decision to consolidate facilities. The 1998
restructuring charge consists of the following (in thousands):
<TABLE>
<CAPTION>
BALANCE IN
AMOUNT OF ACCRUED
RESTRUCTURING EXPENSES
CHARGE AT 6/30/98
------------- -----------
<S> <C> <C>
Write down of assets in connection with closure of
Lexington facility $1,983 $ 485
Lease costs associated with consolidation of facilities 1,976 1,514
Severance costs 2,132 341
Other 273 80
------ ------
$6,364 $2,420
====== ======
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net loss for the three months ended June 30, 1998 was $10.5 million, or $0.58
diluted loss per share, compared to a net loss in the same period of 1997 of
$1.5 million or $0.08 diluted loss per share. The increase in the net loss is
primarily attributable to the $6.4 million restructuring charge in 1998
(discussed above); the significant decrease in the Company's effective tax
benefit rate (discussed below); the cancellations of contracts, aggregating
approximately $37 million in backlog, which occurred in the fourth quarter of
1996 and first quarter of 1997 (discussed previously) along with a level of new
orders in previous quarters insufficient to cover these cancellations. The
benefits from recent Company decisions to reduce overhead and consolidate
operations have not yet been fully realized. As a result, revenue recognized has
not been sufficient to cover expenses since the second quarter of 1997.
Net service revenue decreased 12.0% to $22.9 million in the 1998 period from
$26.0 million in 1997. This decrease resulted primarily from a level of new
orders insufficient to cover prior period cancellations of contracts previously
discussed.
Direct costs decreased 8.8% to $15.9 million in the three months ended June 30,
1998 from $17.4 million in the same period in 1997. Direct costs increased as a
percentage of net service revenue to 69.4% from 67.0% due to unbillable
resources resulting from the previously discussed project cancellations. Direct
costs are based on the mix of contracts in progress and as a percentage of net
revenue may fluctuate from period to
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period dependent upon the mix of contracts in the backlog. In addition, direct
costs will fluctuate due to changes in labor and facility utilization.
Selling, general and administrative costs increased 6.5% to $10.0 million in the
three months ended June 30, 1998 from $9.4 million in the same period in 1997
primarily due to the opening of the Glasgow facility in November 1997, increases
in lease costs and one-time costs to move into the Company's new clinical
research center in Research Triangle Park, North Carolina. Selling, general and
administrative costs increased as a percentage of net service revenue to 43.7%
from 36.2%. The increase as a percentage of net revenue is primarily
attributable to lower levels of revenue resulting from project cancellations.
Selling, general and administrative costs, which primarily includes compensation
for administrative employees and costs related to facilities, information
technology and marketing, are relatively fixed in the near term while revenue is
subject to fluctuation, therefore, variations in the timing of contracts or the
progress of clinical trials (both delays and accelerations) may cause
significant variations in quarterly operating results.
Depreciation and amortization expense was $1.4 million in the three months ended
June 30, 1998 and 1997 as increased depreciation resulting from 1998 capital
expenditures was offset by a decrease in depreciation and amortization for the
Company's Lexington facility closed in April 1998.
Interest income, net of interest expense, was $0.2 million in the second quarter
of 1998 compared to $0.3 million in the same period of 1997.
The Company's benefit for income taxes was $0.1 million in the three months
ended June 30, 1998 as compared to $0.4 million in the second quarter of 1997.
The effective tax benefit rate in second quarter of 1998 was 0.1% compared to
21.8% in the same period in 1997. The effective tax benefit rate declined in
1998 as the Company fully realized its available tax loss carrybacks in the
second quarter of 1998. Due to the restrictions that accounting standards place
on deferred tax assets associated with loss carryforwards, the Company recorded
a valuation allowance of $2.8 million in the second quarter of 1998 for its
deferred tax assets primarily related to the Company's potential tax benefit
associated with its operating loss in the second quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net loss for the six months ended June 30, 1998 was $12.7 million, or $0.70
diluted loss per share, compared to a net loss in the same period of 1997 of
$0.7 million or $0.04 diluted loss per share. The increase in the net loss is
primarily attributable to the $6.4 million restructuring charge in 1998
(discussed above); the significant decrease in the Company's effective tax
benefit rate (discussed below); the cancellations of contracts, aggregating
approximately $37 million in backlog, which occurred in the fourth quarter of
1996 and first quarter of 1997 (discussed previously) along with a level of new
orders in previous quarters insufficient to cover the previously noted
cancellations; and the underperformance of the Company's European operations. As
a result, revenue recognized has not been sufficient to cover expenses since the
second quarter of 1997.
Net service revenue decreased 14.8% to $46.5 million in the 1998 period from
$54.6 million in 1997. This decrease resulted primarily from a level of new
orders insufficient to cover prior period cancellations of contracts previously
discussed.
Direct costs decreased 8.2% to $32.4 million in the six months ended June 30,
1998 from $35.3 million in the same period in 1997. Direct costs increased as a
percentage of net service revenue to 69.6% from 64.7% due to unbillable
resources resulting from the previously discussed project cancellations and
underperformance of the Company's 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 will fluctuate due to changes in labor and
facility utilization.
Selling, general and administrative costs increased 7.3% to $19.6 million in the
six months ended June 30, 1998 from $18.3 million in the same period in 1997
primarily due to the opening of the Glasgow facility in November 1997, increases
in lease costs and
11
<PAGE> 14
one-time costs to move into the Company's new clinical research center in
Research Triangle Park, North Carolina. Selling, general and administrative
costs increased as a percentage of net service revenue to 42.2% from 33.5%. 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 and costs related
to facilities, information technology and marketing, are relatively fixed in the
near term while revenue is subject to fluctuation, therefore, variations in the
timing of contracts or the progress of clinical trials (both delays and
accelerations) may cause significant variations in quarterly operating results.
Depreciation and amortization expense increased 7.4% to $2.8 million in the six
months ended June 30, 1998 compared to $2.6 million in the same period in 1997.
Interest income, net of interest expense, was $0.5 million in the first six
months of 1998 compared to $0.6 million in the same period of 1997.
The Company's benefit for income taxes was $1.5 million in the six months ended
June 30, 1998 as compared to $0.3 million in the first six months of 1997. The
effective tax benefit rate in the six months ended June 30, 1998 was 10.3%
compared to 28.4% in the same period in 1997. The effective tax benefit rate
declined in 1998 as the Company fully realized its available tax loss carrybacks
in the second quarter of 1998. Due to the restrictions that accounting standards
place on deferred tax assets associated with loss carryforwards, the Company
recorded a valuation allowance of $2.8 million in the second quarter of 1998 for
its deferred tax assets primarily related to the Company's potential tax benefit
associated with its operating loss in the second quarter of 1998.
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 Facilities 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
typically 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 number of days sales outstanding in accounts
receivable was 113 days at June 30, 1998, compared to 117 days at December 31,
1997 and 118 days at June 30, 1997. The number of days sales outstanding in
accounts receivable net of advance billings was 81 days at June 30, 1998
compared to 82 days at December 31, 1997 and 88 days at June 30, 1997.
The Company had cash and cash equivalents of $12.8 million at June 30, 1998 as
compared to $28.3 million at December 31, 1997 and $27.1 million at June 30,
1997.
During the six months ended June 30, 1998, net cash used by operating activities
totaled $8.3 million, primarily due to a loss before depreciation and
amortization of $9.4 million (of which $6.4 million related to the restructuring
charge), an increase in net accounts receivable (net of advance billings) of
$0.5 million and an increase in net tax receivables of $1.0 million, which was
partially offset by an increase in accrued expenses, accounts payable and net
payables to investigators of $2.8 million.
Cash used in investing activities of $7.5 million during the first six months of
1998 consisted of capital expenditures of $6.0 million and the costs associated
with the purchase of an option to acquire MPI, Inc. for $1.6 million. Capital
expenditures have
12
<PAGE> 15
primarily been made for computer system additions and upgrades, personal
computer equipment and expenditures on facility improvements. Capital
expenditures are estimated to be approximately $15.0 million in 1998, of which
approximately one-half relates to leasehold improvements to the Company's new
clinical research center in Research Triangle Park, North Carolina, improvements
to be made to the Company's information technology platform, and expansion of
the Company's preclinical Canadian facility.
In the first quarter of 1998, the Company replaced its $10.0 million domestic
credit facility with a $15.0 million domestic credit facility which has
expansion capabilities to $40.0 million. Credit availability under the Company's
new domestic line of credit and its foreign line of credit (the "Credit
Facilities") totals approximately $18.4 million. There were no borrowings
outstanding under the lines of credit at June 30, 1998. Commitment availability
at June 30, 1998 has been reduced by issued letters of credit of approximately
$730,000. The lines are collateralized by certain of the Company's assets and
amounts outstanding would bear interest at a fluctuating rate based either on
the respective banks' prime interest rate or the London Interbank Offered Rate
("LIBOR"), as elected by the Company. Borrowings available under the lines of
credit are subject to certain financial and operating covenants. The Company's
Canadian subsidiary borrowed approximately $382,000 from the Canadian government
in March 1998. This borrowing bears no interest and is repayable in four annual
installments beginning in 1999.
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 Facilities. Although pressure on cash
reserves is expected, the Company estimates that its sources of cash will be
sufficient to fund the Company's current operations, including planned capital
expenditures, over the next year. 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.
QUARTERLY RESULTS
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,
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 for the next quarter.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of certain computer programs being written
using two digits rather than four digits to define the applicable year. This
software recognizes a date using "00" as the year 1900 rather than 2000 which
could result in system failures, miscalculations, etc. Based upon a recent
assessment, the Company has determined certain software programs and computer
hardware will be modified or replaced as part of its on-going capital
expenditure program so that such programs are Year 2000 compliant. The cost
associated with these modifications and/or replacement is not expected to be
material to the Company. However, there can be no guarantee that the software of
outside vendors on which the Company's systems rely will be timely converted.
EXCHANGE RATE FLUCTUATIONS
The Company conducts business in several foreign countries and as a result
exposure exists to potentially adverse movement in foreign currency rates. The
Company uses 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 objective
13
<PAGE> 16
of these contracts is to reduce the effect of foreign exchange rate fluctuations
on the Company's operating results.
INCOME TAXES
The Company's financial statements do not reflect U.S. or additional foreign
taxes on the possible distribution of undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested. Should the
Company determine the need to distribute these undistributed earnings of foreign
subsidiaries, it would be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes payable to various
countries.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO.
- -----------
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
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: August 14, 1998 By: /s/ JERRY R. MITCHELL, M.D., Ph.D.
Jerry R. Mitchell, M.D., Ph.D.
President and Chief Executive Officer
Date: August 14, 1998 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 per share earnings
(in thousands, except for earnings per share)
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1997 1998
--------- --------
<S> <C> <C>
Net loss $ (1,480) $(10,476)
========= ========
Weighted average shares outstanding
for Basic Loss per Share 18,146 18,195
Dilutive effect of stock options -- --
--------- --------
Weighted average shares outstanding and
dilutive effect of stock options for
Diluted Loss per Share 18,146 18,195
========= ========
Loss per share:
Basic $ (0.08) $ (0.58)
========= ========
Diluted $ (0.08) $ (0.58)
========= ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1997 1998
------- --------
<S> <C> <C>
Net loss $ (732) $(12,716)
======= ========
Weighted average shares outstanding
for Basic Earnings per Share 18,132 18,190
Dilutive effect of stock options -- --
------- --------
Weighted average shares outstanding and
dilutive effect of stock options for
Diluted Loss per Share 18,132 18,190
======= ========
Loss per share:
Basic $ (0.04) $ (0.70)
======= ========
Diluted $ (0.04) $ (0.70)
======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF CLINTRIALS RESEARCH INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,783
<SECURITIES> 0
<RECEIVABLES> 33,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,863
<PP&E> 52,888
<DEPRECIATION> 15,052
<TOTAL-ASSETS> 132,348
<CURRENT-LIABILITIES> 27,186
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 101,298
<TOTAL-LIABILITY-AND-EQUITY> 132,348
<SALES> 0
<TOTAL-REVENUES> 46,536
<CGS> 0
<TOTAL-COSTS> 32,407
<OTHER-EXPENSES> 28,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> (14,182)
<INCOME-TAX> (1,466)
<INCOME-CONTINUING> (12,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,716)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
