<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File Number 0-22510
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)
11000 WESTON PARKWAY
CARY, NORTH CAROLINA 27513
(Address of principal executive offices) (Zip Code)
(919) 460-9005
(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 25, 1999, there were 18,237,172 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 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT 27 26
</TABLE>
2
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,752 $ 10,867
Accounts receivable, net of allowance for doubtful
accounts of $1,982 in 1999 and $2,548 in 1998 34,013 30,179
Advance payments to investigators -- 492
Income taxes receivable 2,536 3,614
Other current assets 2,203 1,938
--------- ---------
Total current assets 45,504 47,090
Property, plant and equipment:
Land, buildings and leasehold improvements 20,536 20,324
Equipment 33,707 30,500
Furniture and fixtures 4,290 4,570
--------- ---------
58,533 55,394
Less accumulated depreciation 18,943 15,620
--------- ---------
39,590 39,774
Excess of purchase price over net assets acquired 34,079 33,655
Other assets 2,913 2,577
--------- ---------
$ 122,086 $ 123,096
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,605 $ 7,332
Advance billings 7,494 12,562
Payables to investigators 7,685 1,806
Accrued expenses 7,678 7,714
Income taxes payable 1,118 361
Current maturities of long-term debt 114 89
--------- ---------
Total current liabilities 29,694 29,864
Deferred income taxes 4,489 3,411
Long-term debt 343 265
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 18,212,172
in 1999 and 18,230,172 in 1998 182 182
Additional paid-in capital 126,590 127,329
Accumulated deficit (35,192) (31,445)
Accumulated other comprehensive income(loss) (4,020) (6,510)
--------- ---------
Total stockholders' equity 87,560 89,556
--------- ---------
$ 122,086 $ 123,096
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR INCOME (LOSS) PER SHARE)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Service revenue $ 29,775 $ 24,187
Less: Subcontractor costs 6,058 3,186
-------- --------
Net service revenue 23,717 21,001
Costs and expenses:
Direct costs 13,940 14,840
Selling, general and administrative costs 8,728 9,005
Depreciation and amortization 1,507 1,433
Interest income, net of interest expense of $4
in 1999 and $6 in 1998 (55) (142)
-------- --------
Income (loss) before income taxes (403) (4,135)
Provision (benefit) for income taxes 556 118
-------- --------
Net income (loss) $ (959) $ (4,253)
======== ========
Income (loss) per share:
Basic $ (0.05) $ (0.23)
Diluted $ (0.05) $ (0.23)
Number of shares and common stock equivalents
used in computing income (loss) per share:
Basic 18,120 18,219
Diluted 18,120 18,219
</TABLE>
See notes to condensed consolidated financial statements
4
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR LOSS PER SHARE)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Service revenue $ 88,076 $ 82,809
Less: Subcontractor costs 15,442 15,272
-------- --------
Net service revenue 72,634 67,537
Costs and expenses:
Direct costs 43,826 47,247
Selling, general and administrative costs 26,808 28,642
Depreciation and amortization 4,745 4,278
Interest income, net of interest expense of $12
in 1999 and $23 in 1998 (272) (677)
Gain on sale of Ovation (484) --
Nashville lease termination costs 845 --
Restructuring charge -- 6,364
-------- --------
Loss before income taxes (2,834) (18,317)
Provision (benefit) for income taxes 913 (1,348)
-------- --------
Net loss $ (3,747) $(16,969)
======== ========
Loss per share:
Basic $ (0.21) $ (0.93)
Diluted $ (0.21) $ (0.93)
Number of shares and common stock equivalents
used in computing loss per share:
Basic 18,054 18,200
Diluted 18,054 18,200
</TABLE>
See notes to condensed consolidated financial statements
5
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CLINTRIALS RESEARCH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,747) $(16,969)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,780 5,015
Gain on sale of Ovation (484) --
Changes in operating assets and liabilities (1,796) 2,293
Other -- 132
-------- --------
Net cash provided by (used in) operating activities (247) (9,529)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (4,048) (8,833)
Costs associated with option to acquire MPI (301) (1,552)
-------- --------
Net cash used in investing activities (4,349) (10,385)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of common stock options 99 140
Proceeds received on long-term debt borrowings 88 382
-------- --------
Net cash provided by financing activities 187 522
Effect of exchange rate changes on cash 294 (314)
-------- --------
Net increase(decrease) in cash and cash equivalents (4,115) (19,706)
Cash and cash equivalents at beginning of period 10,867 28,275
-------- --------
Cash and cash equivalents at end of period $ 6,752 $ 8,569
======== ========
</TABLE>
See notes to condensed consolidated financial statements
6
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CLINTRIALS RESEARCH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 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, 1998.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed in accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share" ("SFAS No. 128"). 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 period while Diluted EPS also
includes the dilutive effect of common stock equivalents.
Diluted loss per share for the three months ended September 30, 1999 and 1998
does not include the dilutive effect of common stock equivalents (stock options
and warrants) of 453,000 and 457,000, respectively, as their effect would be
anti-dilutive. Diluted loss per share for the nine months ended September 30,
1999 and 1998 does not include the dilutive effect of common stock equivalents
(stock options and warrants) of 468,000 and 417,000, respectively, as their
effect would be anti-dilutive.
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".
3. COMPREHENSIVE INCOME (LOSS)
FASB SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") establishes
rules for reporting and displaying comprehensive income and its components.
Accumulated other comprehensive income (loss) for the Company consists entirely
of accumulated foreign currency translation adjustments and is a separate
component of stockholders' equity under SFAS No. 130.
7
<PAGE> 8
The components of comprehensive income (loss), net of related tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1999 1998
------- --------
<S> <C> <C>
Net income (loss) $ (959) $ (4,253)
Foreign currency translation adjustments 573 (2,630)
------- --------
Comprehensive income (loss) $ (386) $ (6,883)
======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
------- --------
<S> <C> <C>
Net loss $(3,747) $(16,969)
Foreign currency translation adjustments 2,490 (4,279)
------- --------
Comprehensive loss $(1,257) $(21,248)
======= ========
</TABLE>
4. SEGMENT REPORTING
FASB SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") establishes standards for reporting information
about operating segments in annual financial statements and interim financial
reports to stockholders as well as standards for disclosure concerning related
products and services, and geographic areas.
The Company is a full-service contract research organization ("CRO") serving the
pharmaceutical, biotechnology and medical device industries. These research
services comprise two reportable operating segments - Clinical and Preclinical.
Clinical services consist of designing, monitoring, and managing trials of new
pharmaceutical and biotechnology products on humans, and providing clinical data
management, biostatistical, product registration, and pharmacoeconomic services.
Clinical service activities and revenues are performed and earned primarily in
the United States and Europe. The Company's European operations are
headquartered in Maidenhead, U.K. with its primary satellite offices in
Brussels, Belgium and Glasgow, Scotland. The operating results of the Company in
the individual European countries are immaterial and therefore European
operations as a whole are disclosed below. Preclinical services are comprised of
designing and conducting trials of new pharmaceutical and biotechnology products
based primarily upon animal models to produce data required to assess and
evaluate efficacy in and potential risks to humans. Preclinical services are
performed in Montreal, Quebec, Canada. Activity which is not included in the
Clinical or Preclinical segments is shown as "Other" which includes operations
not directly related to the business segments and corporate expenses.
8
<PAGE> 9
Financial data by segment is summarized below (in thousands). Segment assets
have not materially changed since December 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 and 1998
U.S. Europe Total Canada
Clinical Clinical Clinical Preclinical Other Totals
-------- -------- -------- ----------- ----- ------
September 30, 1999
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers $ 6,812 $ 5,082 $ 11,894 $11,823 $ -0- $ 23,717
Segment profit (loss) (2,107) 1 (2,106) 2,441 (793) (458)
September 30, 1998
- ------------------
Net revenues from external customers $ 9,404 $ 2,624 $ 12,028 $ 8,973 $ -0- $ 21,001
Segment profit (loss) (2,682) (2,123) (4,805) 1,733 (1,205) (4,277)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 and 1998
U.S. Europe Total Canada
Clinical Clinical Clinical Preclinical Other Totals
-------- -------- -------- ----------- ----- ------
September 30, 1999
- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers $ 23,029 $ 14,666 $ 37,695 $34,939 $ -0- $ 72,634
Segment profit (loss) (6,757) 373 (6,384) 5,985 (2,346) (2,745)
September 30, 1998
- ------------------
Net revenues from external customers $ 30,596 $ 8,078 $ 38,674 $28,863 $ -0- $ 67,537
Segment profit (loss) (5,402) (7,631) (13,033) 4,651 (10,612) (18,994)
</TABLE>
9
<PAGE> 10
Segment profit (loss) excludes other income (expense) and income taxes and
reconciles to consolidated loss before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------- --------
<S> <C> <C>
Segment profit (loss) $ (458) $ (4,277)
Interest income, net 55 142
------- --------
Income (loss) before income taxes $ (403) $ (4,135)
======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
------- --------
<S> <C> <C>
Segment profit (loss) $(2,745) $(18,994)
Interest income, net 272 677
Gain on sale of Ovation 484 --
Nashville lease termination costs (845) --
------- --------
Income (loss) before income taxes $(2,834) $(18,317)
======= ========
</TABLE>
5. PROVISION (BENEFIT) FOR INCOME TAXES
The Company's provision for income taxes was $0.6 million for the three months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the third quarter of 1998, the Company recognized income tax expense of $0.1
million related to the Company's Canadian operations.
The Company's provision for income taxes was $0.9 million for the nine months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the nine months ended September 30, 1998, the Company recognized an income
tax benefit of $1.4 million. A partial tax benefit was recognized because of the
ability to obtain tax refunds due to a portion of the losses generated in the
first nine months of 1998.
10
<PAGE> 11
6. CREDIT FACILITIES AND DEBT
The Company has a $15.0 million domestic credit facility which has expansion
capabilities to $40.0 million provided the Company meets certain financial
requirements. Credit availability under the Company's domestic line of credit
and foreign line of credit (the "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 banks' prime
interest rate or the London Interbank Offered Rate ("LIBOR"), as elected by the
Company. On September 30, 1999 and 1998, there were no borrowings outstanding
under the Company's lines of credit. Commitment availability at September 30,
1999 has been reduced by issued letters of credit of approximately $732,000.
Borrowings available under the lines of credit are subject to certain financial
and operating covenants.
The Company's Canadian subsidiary has approximately $457,000 of borrowings
outstanding from the Canadian government which bears no interest and is
repayable in four equal annual installments beginning in August 2000 and ending
in August 2003.
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 $530,000 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.
8. RESTRUCTURING CHARGE
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 lease commitments
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 9/30/99
------ ----------
<S> <C> <C>
Write down of assets in connection with closure of
Lexington facility $1,983 $--
Lease costs associated with consolidation of
facilities 1,976 78
Severance costs 2,132 --
Other 273 --
------ ---
$6,364 $78
====== ===
</TABLE>
11
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9. SALE OF OVATION
On January 4, 1999, the Company sold its pharmacoeconomic subsidiary, Ovation,
back to the principals from whom the shares were originally purchased, as part
of the Company's ongoing consolidation of U.S. operations into its Research
Triangle Park, North Carolina ("RTP") facility. Pharmacoeconomic services are
now performed out of the Company's RTP facility as the Company retains the right
to use the ClinTrials Ovation name. The Company received 213,000 shares of the
Company's stock in the sales transaction and recorded a gain on the sale of
$484,000.
10. NASHVILLE LEASE TERMINATION COSTS
The Company entered into an agreement to terminate the lease of its Nashville
office and accrued $845,000 in the first quarter of 1999 for costs related to
the termination of this lease. The termination of this lease relieves the
Company of approximately $11.0 million of future minimum lease payments. The
Company relocated its Corporate office to Research Triangle Park, North Carolina
in the second quarter of 1999.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") which was required to be
adopted in years beginning after June 15, 1999. In July 1999, SFAS No. 137 was
issued as "Accounting for Derivative Investments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" which defers for one
year the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Accordingly, the Company plans to adopt
SFAS No. 133 effective January 1, 2001. The Company's Canadian subsidiary enters
into foreign exchange forward contracts to hedge its United States dollar
denominated contracts in backlog. The Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on the financial
position of the Company.
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<PAGE> 13
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, 1998.
The information set forth and discussed below for the three and nine month
periods ended September 30, 1999 and 1998 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 contracts which range in
duration from a few months to a few years. The contracts usually require a
portion of the contract amount to be paid at or near the time the trial is
initiated with the remaining contract amount paid in intervals based upon the
completion of certain negotiated performance requirements or milestones 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
13
<PAGE> 14
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 the
drug, adverse patient reactions to the drug, or the client's decision to
de-emphasize a particular trial.
Revenue for contracts is recorded in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 81-1
"Accounting for Performance of Construction-Type and Certain Product-Type
Contracts" as costs are incurred and includes estimated earned fees or profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost type of percentage-of-completion method of
accounting). Additionally, the Company may begin work on a project before a
contract is signed for customers with whom the Company has formed a strategic
alliance or has a long-term relationship. Revenue is recognized in the same
manner as signed contracts based upon terms verbally agreed with the customer.
Revenue is affected by the mix of trials conducted and the degree to which labor
and facilities are utilized. The Company recognizes revenue related to contract
modifications when realization is assured and the amounts can be reasonably
determined. When estimated contract costs indicate that a loss will be incurred
on a contract, the entire loss is provided for in such period. 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. Subcontractor costs are
passed through to clients and, in accordance with industry practice, are
included in gross service revenue. Subcontractor costs are accrued on a
straight-line basis over the investigator phase of the contract. 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 is expected to 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
global clinical trials by opening offices in Australia, Chile, France, and
Israel in 1996, Italy and Scotland in 1997, and Poland in 1999.
RESTRUCTURING CHARGE
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 lease commitments
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 9/30/99
------ ----------
<S> <C> <C>
Write down of assets in connection with closure of
Lexington facility $1,983 $--
Lease costs associated with consolidation of
facilities 1,976 78
Severance costs 2,132 --
Other 273 --
------ ---
$6,364 $78
====== ===
</TABLE>
14
<PAGE> 15
RESULTS OF OPERATIONS
The Company's operating segments consist of preclinical trials which are
performed by the Company's Canadian subsidiary and clinical trials which are
performed primarily in the United States and Europe. Summarized below (in
thousands) is the Company's net revenue and segment profit (loss) for the three
and nine months ended September 30, 1999 and 1998 for each reportable segment as
defined by Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information". "Other" includes operations not directly related to the
segments and corporate expenses. See Segment Reporting note to condensed
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Net Revenue:
U.S. Clinical $ 6,812 $ 9,404
Europe Clinical 5,082 2,624
-------- --------
Total Clinical 11,894 12,028
Canada Preclinical 11,823 8,973
-------- --------
Total Company $ 23,717 $ 21,001
======== ========
Segment profit (loss):
U.S. Clinical $ (2,107) $ (2,682)
Europe Clinical 1 (2,123)
-------- --------
Total Clinical (2,106) (4,805)
Canada Preclinical 2,441 1,733
Other (793) (1,205)
-------- --------
Total Company $ (458) $ (4,277)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Net Revenue:
U.S. Clinical $ 23,029 $ 30,596
Europe Clinical 14,666 8,078
-------- --------
Total Clinical 37,695 38,674
Canada Preclinical 34,939 28,863
-------- --------
Total Company $ 72,634 $ 67,537
======== ========
Segment profit (loss):
U.S. Clinical $ (6,757) $ (5,402)
Europe Clinical 373 (7,631)
-------- --------
Total Clinical (6,384) (13,033)
Canada Preclinical 5,985 4,651
Other (2,346) (10,612)
-------- --------
Total Company $ (2,745) $(18,994)
======== ========
</TABLE>
15
<PAGE> 16
The U.S. Clinical segment reported lower net revenues but slightly lower losses
for three months ended September 30, 1999 and lower revenues and higher losses
for the nine month period ended September 30, 1999 compared to the same periods
in 1998. Lower utilization of the direct labor workforce were generally
experienced during 1999.
The Europe Clinical segment reported significantly improved revenues which
resulted in profits for the three and nine month periods ended September 30,
1999 compared to the same periods in 1998 when losses were reported. Several
significant contracts were completed during the three and nine-month periods
ended September 30, 1999 resulting in improved revenues and income. During 1998,
Europe Clinical implemented a new management structure and related marketing and
sales focus.
Canada Preclinical reported higher net revenues and segment profit for both the
three and nine-month periods ended September 30, 1999 compared to the same
periods in 1998. These increases are primarily due to continuing high demand for
specialty studies in the reproduction/infusion areas. These are generally
shorter-term studies with shorter startup times, and thus yield higher margins
because of the higher level of special technology requirements.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net income for the three months ended September 30, 1999 was $959,000, or $0.05
basic and diluted loss per share, compared to a net loss in the same period of
1998 of $4.3 million or $0.23 basic and diluted loss per share. The improvement
in results from operations is primarily attributable to higher income recognized
in the Europe clinical and Canada preclinical segments in the third quarter of
1999 compared to the third quarter of 1998, and a slightly lower loss recorded
by U.S. clinical during 1999 compared to 1998. All three segments showed
improved results.
Net service revenue increased 12.9% to $23.7 million in the three months ended
September 30, 1999 from $21.0 million in the same period in 1998 as increased
revenues in Europe clinical and Canada preclinical more than offset a decrease
in U.S. clinical revenues.
Direct costs decreased 6.1% to $13.9 million in the three months ended September
30, 1999 from $14.8 million in the same period in 1998. Direct costs decreased
as a percentage of net service revenue to 58.8% from 70.7%. 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. In general, the Company's preclinical direct costs in
Canada tend to be lower than the Company's clinical direct costs in the U. S.
and Europe, and the higher percentage of preclinical revenues during the three
months ended September 30, 1999 resulted in a reduction in consolidated direct
costs compared to the same period in 1998.
Selling, general and administrative costs decreased 3.1% to $8.7 million in the
three months ended September 30, 1999 from $9.0 million in the same period in
1998. Selling, general and administrative costs decreased as a percentage of net
service revenue to 36.8% from 42.9%. The relocation of the Corporate Office in
Nashville to the existing facility in Research Triangle Park in April 1999
resulted in lower SG&A costs. 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 5.2% to $1.5 million in the
three months ended September 30, 1999 from $1.4 million in the same period in
1998. Increased depreciation resulting from 1998 and 1999 capital
16
<PAGE> 17
expenditures was partially 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 $55,000 in the third quarter of
1999 compared to $142,000 in the same period of 1998.
The Company's provision for income taxes was $0.6 million for the three months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the third quarter of 1998, the Company recognized income tax expense of $0.1
million related to the Company's Canadian operations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net loss for the nine months ended September 30, 1999 was $3.7 million, or $0.21
basic and diluted loss per share, compared to a net loss in the same period of
1998 of $17.0 million or $0.93 basic and diluted loss per share. The improvement
in results from operations is primarily attributable to higher income recognized
in the Europe clinical and Canada preclinical segments in the nine months ended
September 30, 1999 compared to the same period of 1998, the restructuring charge
of $6.4 million recorded in the nine month period ended September 30, 1998 (none
in 1999), partially offset by a higher loss in U.S. clinical during 1999
compared to 1998.
Net service revenue increased 7.5% to $72.6 million in the nine months ended
September 30, 1999 from $67.5 million in the same period in 1998 as increased
revenues in Europe clinical and Canada preclinical were partially offset by a
decrease in U.S. clinical revenues.
Direct costs decreased 7.2% to $43.8 million in the nine months ended September
30, 1999 from $47.2 million in the same period in 1998. Direct costs decreased
as a percentage of net service revenue to 60.3% from 70.0%. 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. In general, the Company's preclinical direct costs in
Canada tend to be lower than the Company's clinical direct costs in the U. S.
and Europe, and the higher percentage of preclinical revenues during the nine
months ended September 30, 1999 resulted in a reduction in consolidated direct
costs compared to the same period in 1998.
Selling, general and administrative costs decreased 6.4% to $26.8 million in the
nine months ended September 30, 1999 from $28.6 million in the same period in
1998. Selling, general and administrative costs decreased as a percentage of net
service revenue to 36.9% from 42.4%. 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 10.9% to $4.7 million in the
nine months ended September 30, 1999 from $4.3 million in the same period in
1998 as increased depreciation resulting from 1998 and 1999 capital expenditures
was partially 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 $272,000 in the first quarter of
1999 compared to $677,000 in the same period of 1998.
17
<PAGE> 18
On January 4, 1999, the Company sold its pharmacoeconomic subsidiary, Ovation,
back to the principals from whom the shares were originally purchased, as part
of the Company's ongoing consolidation of U.S. operations into its Research
Triangle Park, North Carolina ("RTP") facility. Pharmacoeconomic services are
now performed out of the Company's RTP facility as the Company retained the
right to use the ClinTrials Ovation name. The Company received 213,000 shares of
the Company's stock in the sales transaction and recorded a gain on the sale of
$484,000. The Company also accrued $845,000 in the first quarter of 1999 for
costs related to the termination of its Nashville office lease. The Company
relocated its Corporate office to Research Triangle Park, North Carolina in the
second quarter of 1999.
The Company's provision for income taxes was $0.9 million for the nine months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the nine months ended September 30, 1998, the Company recognized an income
tax benefit of $1.4 million. A partial tax benefit was recognized because of the
ability to obtain tax refunds due to a portion of the losses generated in the
first nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash needs on both a short-term and long-term
basis include 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 lines of credit. 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.
Prerequisites for billings are generally established by contractual provisions
that include predetermined date certain payment schedules (which may include
payment at or near the time the trial is initiated), the achievement of
negotiated performance requirements or milestones, or the submission of required
billing detail. Unbilled receivables arise from those contracts under which
services performed exceed billings which are rendered upon the achievement of
certain negotiated performance requirements or on a date-certain basis. Advance
billings represent contractual billings for services not yet rendered. As of
September 30, 1999, the Company's advance billings were $7.5 million and its
accounts receivable of $34.0 million included $19.3 million of unbilled
receivables. The Company expects to bill and collect these unbilled receivables
within one year of revenue recognition. 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) and 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 (which includes unbilled
receivables) was 105 days at September 30, 1999, compared to 115 days at
December 31, 1998. The number of days sales outstanding in accounts receivable
(which includes unbilled receivables) net of advance billings was 83 days at
September 30, 1999, compared to 75 days at December 31, 1998.
The Company had cash and cash equivalents of $6.8 million at September 30, 1999
as compared to $10.9 million at December 31, 1998.
During the nine months ended September 30, 1999, net cash used by operating
activities totaled $0.6 million, primarily due to a decrease in income tax
receivables of $0.6 million, and an increase in net payables to investigators of
$6.4 million, which were more than offset by a loss before noncash items of $3.7
million and an increase in accounts receivable, net of advance billings of $8.9
million.
18
<PAGE> 19
Cash used in investing activities of $4.3 million during the nine months ended
September 30, 1999 consisted of capital expenditures of $4.0 million and costs
associated with an option to acquire MPI Research, LLC ("MPI?) of $0.3 million.
Capital expenditures have primarily been made for computer system additions and
upgrades, personal computer equipment and expenditures on facility improvements.
In addition to the $4.0 million of capital expenditures incurred in the first
nine months of 1999, capital expenditures are estimated to be approximately $2.9
million in the remainder of 1999.
The Company has a $15.0 million domestic credit facility which has expansion
capabilities to $40.0 million provided the Company meets certain financial
requirements. Credit availability under the Company's 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
September 30, 1999. Commitment availability at September 30, 1999 has been
reduced by issued letters of credit of approximately $732,000. The lines of
credit 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 has approximately $457,000 of borrowings outstanding from
the Canadian government which bears no interest and is repayable in four annual
installments beginning in 2000 and ending in 2003.
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 currency 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 for the next quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") which was required to be
adopted in years beginning after June 15, 1999. In July 1999, SFAS No. 137 was
issued as "Accounting for Derivative Investments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" which defers for one
year the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. Accordingly, the Company plans to adopt
SFAS No. 133 effective January 1, 2001. The Company's Canadian subsidiary enters
into foreign exchange forward contracts to hedge its United States dollar
denominated contracts in backlog. The Company does not anticipate that the
adoption of SFAS No. 133 will have a significant effect on the financial
position of the Company.
19
<PAGE> 20
YEAR 2000 ISSUE
The Company has been engaged in a major effort to minimize the impact of the
Year 2000 date change on its products, services, information systems,
laboratories and facilities. As previously disclosed, the Company targeted
September 30, 1999 for completion of these efforts. All systems are currently
Year 2000 compliant.
The year 2000 challenge is a priority within the Company at every level. Primary
Year 2000 global preparedness responsibility rests with a Year 2000 Project
Manager. The Year 2000 Project Manager is augmented by a group, which has been
assigned specific Year 2000 responsibilities in addition to their regular
assignments. The Year 2000 assignments take priority over their regular
assignments.
The overall strategy for Year 2000 compliance at the Company was to, wherever
possible, to replace potentially non-compliant software and hardware with new
compliant systems. The one exception to this strategy was the Company's clinical
data management systems and supporting subsystems. The Company's clinical data
management systems were successfully upgraded and tested for Year 2000
compliance in April 1999 and are currently being utilized. Since all of these
systems fall under Good Clinical Practices regulations there was extensive
testing and documentation of the upgrade process.
The inventory and assessment phase of the Year 2000 assessment program was
substantially completed during the quarter ended June 30, 1999 with respect to
its information systems, laboratories and facilities. The Company completed the
remediation phase of this effort through a combination of product upgrades and
replacement by September 30, 1999.
Currently, approximately 100% of the Company's information technology
infrastructure has been determined to be Year 2000 ready and is deployed for
use. Furthermore, 100% of the applications requiring Year 2000 remediation that
are supported by the Company's information technology group are now Year 2000
ready and have been deployed. The Company continues to monitor the readiness of
all systems and will do so through the early part of Year 2000. The Company has
completed specific contingency plans, as appropriate.
The Company is also assessing the Year 2000 readiness of the facilities that it
owns or leases worldwide. The Company has completed remediation efforts and has
completed development of applicable contingency plans.
To ensure the continued delivery of third party products and services the
Company's procurement organization has analyzed the Company's supplier's base
and has sent surveys to approximately 70 suppliers. Follow-up efforts have
commenced to obtain feedback from critical suppliers. To supplement this effort,
the Company plans to continue conducting readiness reviews of the Year 2000
status of suppliers ranked most critical based on their relationships with the
Company, the product/service provided, and/or the content of their survey
responses. The Company will continue to monitor the Year 2000 status of its
suppliers to minimize the risk and will develop appropriate contingent responses
as the risk becomes clearer.
The risk resulting from the failure of third parties in the public and private
sector to attain Year 2000 readiness is the same as other firms in the Company's
industry or other business enterprises in general. The following are
representative of the types of risks that could result in the event of one or
more of the Company's information systems, laboratories, or facilities failed to
be Year 2000 ready, or similar major failures by one or more major third party
suppliers to the Company:
Information Systems - could include interruptions or disruptions of
business and transaction processing such as customer billing, payroll,
accounts payable and other operating and information processing, until
systems can be remedied or replaced;
Laboratory Facilities - could include interruptions or disruptions of
data management processes and facilities with delays in delivery of
services, until non-compliant conditions or components can be remedied
or replaced; and
20
<PAGE> 21
Major Suppliers to the Company - could include interruptions or
disruptions of the supply of raw materials, supplies and Year 2000
ready components which could cause interruptions or disruptions and
delays in delivery of services, until the third party suppliers
remedied the problem or contingency measures can be implemented.
Risks of major failures of the Company's principal services and products could
include late delivery of study reports to customers, the cost and resources for
the Company to remedy problems where the Company is obligated or undertakes such
action, and delays in startup of new studies.
The Company believes it has taken the necessary steps to resolve its Year 2000
issues; however, given the possible consequences of failure to resolve
significant Year 2000 issues, there can be no assurance that any one or more
such failures would not have material adverse effects on the Company. The
current estimate of total Year 2000 project costs is $8.2 million. During the
year ended December 31, 1998, the Company spent $2.5 million to purchase
hardware and software and used internal resources of $1.1 million (primarily
salary costs) and during the three and nine months ended September 30, 1999, the
Company spent $0.8 million and $2.3 million, respectively, to purchase hardware
and software and used internal resources of $0.6 million and $2.2 million,
respectively, (primarily salary costs) on its Year 2000 issues. During the
remainder of 1999, the Company estimates it will devote $0.1 million in internal
resources to monitor the effectiveness of its Year 2000 compliance project. Work
projects were prioritized to largely address Year 2000 readiness. As a result,
most of these costs represent costs that would have been incurred in any event.
These amounts covered costs of the Year 2000 readiness work for inventory,
assessment, remediation, testing and deployment including fees and charges of
contractors for outsourced work and consultants' fees. Costs for previously
contemplated updates and replacements of the Company's internal systems and
information systems infrastructure were included in these estimates when such
upgrades or replacements have been accelerated.
While the Year 2000 cost estimates include additional costs, the Company
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, services or financial condition.
The actual outcomes and results could be affected by future factors including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remediate software code problems, critical
suppliers, subcontractors meeting their commitments to be Year 2000 ready and
provide Year 2000 ready products, and timely actions by customers.
FOREIGN CURRENCY
The Company is exposed to foreign currency risk by virtue of its international
operations. The Company conducts business in several foreign countries.
Approximately 72% and 56% of the Company's net revenue for the three months
ended September 30, 1999 and 1998, respectively, and 69% and 57% for the nine
months ended September 30, 1999 and 1998, respectively, were derived from the
Company's operations outside the United States. Since its acquisition in 1996,
the Company's preclinical operations in Canada has generated more than 69% of
the Company's non-U.S. revenue. Accordingly, exposure exists to potentially
adverse movement in foreign currency rates, especially the Canadian dollar and
British pound sterling. Canada and the United Kingdom have traditionally had
relatively stable currencies in recent years and it is expected these conditions
will persist over the next twelve months. However, the Company continually
monitors international events which could affect currency values. Accordingly,
from time to time, the Company uses foreign exchange forward 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 the functional
currency of the Company's foreign subsidiary, but payments on contracts are made
by the client in another currency. The objective of these contracts is to reduce
the effect of foreign currency exchange rate fluctuations on the Company's
foreign subsidiary's operating results.
21
<PAGE> 22
Additionally, 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 with accumulated other comprehensive income (loss) as a
separate component of stockholders' equity. Such adjustments may in the future
be material to the Company's financial statements.
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.
The Company's provision for income taxes was $0.6 million for the three months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the third quarter of 1998, the Company recognized income tax expense of $0.1
million related to the Company's Canadian operations.
The Company's provision for income taxes was $0.9 million for the nine months
ended September 30, 1999. This provision was primarily due to the Company's
Canadian operations. Income taxes associated with the Company's U.S. operations
will be offset by net operating loss carryforwards. Due to restrictions that
accounting standards place on deferred tax assets associated with loss
carryforwards, the Company had previously recorded a valuation allowance for the
deferred tax assets related to these losses. Accordingly, the use of the losses
eliminated the Company's provision for income taxes related to U.S. Operations.
For the nine months ended September 30, 1998, the Company recognized an income
tax benefit of $1.4 million. A partial tax benefit was recognized because of the
ability to obtain tax refunds due to a portion of the losses generated in the
first nine months of 1998.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the Euro, on January 1, 1999. The new currency is in response to
the EMU's policy of economic convergence to harmonize trade policy, eliminate
business costs associated with currency exchange and to promote the free flow of
capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as their local
currency, initially available for currency trading on currency exchanges and non
cash (banking) transactions. The existing local currencies, or legacy
currencies, are planned to remain legal tender through January 1, 2002.
Beginning on January 1, 2002, Euro-denominated bills and coins are planned to be
issued for cash transactions. For a period of nine months from this date, both
legacy currencies and the Euro are planned to be legal tender. On or before July
1, 2002, the participating countries are planning to withdraw all legacy
currency and use the Euro exclusively.
The introduction of the Euro may have potential implications for the Company's
existing operations. Currently, Belgium, France and Italy are the only
participating countries in the EMU in which the Company has operations. While
one cannot predict such events, many authorities expect non-participating
European Union countries, such as the United Kingdom, to eventually join the
EMU. The Company does not currently expect to experience any
22
<PAGE> 23
operational disruptions or to incur any costs as a result of the introduction of
the Euro that would materially affect the Company's liquidity or capital
resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a global provider of preclinical and clinical research services
to pharmaceutical, biotechnology and medical device clients. As such, the
Company's ability to win new outsourced contracts from the pharmaceutical
industry is dependent upon the rate of research and development expenditure by
that industry. This in turn can be influenced by a variety of factors, including
mergers within the pharmaceutical industry, the availability of capital to the
biotechnology industry, and by the impact of government reimbursement rates for
medicare and medicaid programs. Consequently, the success of the company to grow
and win new outsourced contracts is highly dependent upon the ability of the
pharmaceutical and biotechnology industries to continue to spend on R&D at rates
close to or at historical levels.
The Company is exposed to foreign currency risk by virtue of its international
operations. The Company conducts business in several foreign countries.
Approximately 72% and 56% of the Company's net revenue for the three months
ended September 30, 1999 and 1998, respectively, and 69% and 57% for the nine
months ended September 30, 1999 and 1998, respectively, were derived from the
Company's operations outside the United States. Since its acquisition in 1996,
the Company's preclinical operations in Canada has generated more than 69% of
the Company's non-U.S. revenue. Accordingly, exposure exists to potentially
adverse movement in foreign currency rates, especially the Canadian dollar and
British pound sterling. Canada and the United Kingdom have traditionally had
relatively stable currencies in recent years and it is expected these conditions
will persist over the next twelve months. However, the Company continually
monitors international events which could affect currency values. Accordingly,
from time to time, the Company uses foreign exchange forward 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 the functional
currency of the Company's foreign subsidiary, but payments on contracts are made
by the client in another currency. The objective of these contracts is to reduce
the effect of foreign currency exchange rate fluctuations on the Company's
foreign subsidiary's operating results.
Additionally, 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 with accumulated other comprehensive income (loss) as a
separate component of stockholders' equity. Such adjustments may in the future
be material to the Company's financial statements.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
EXHIBIT NO.
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 September 30, 1999.
24
<PAGE> 25
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: October 29, 1999 By: /s/ S. COLIN NEILL
S. Colin Neill
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
<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,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
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