<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 7, 1997
QUINTILES TRANSNATIONAL CORP.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 340-23520 56-1714315
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation) Identification Number)
4709 CREEKSTONE DRIVE, RIVERBIRCH BUILDING, SUITE 300,
DURHAM, NORTH CAROLINA 27703-8411
(Address of principal executive offices)
(919) 941-2000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS
Quintiles Transnational Corp. (the "Company") operates in an
environment where governmental regulation affects different aspects of its
business. The following summary description of the regulatory area in which the
Company operates is intended to supplement other public information about the
Company.
GOVERNMENT REGULATION
The laboratory and manufacturing services performed by the Company are
subject to various regulatory requirements designed to ensure the quality and
integrity of the testing process. The industry standard for conducting
pre-clinical and laboratory testing is embodied in good laboratory practices
("GLP") regulations. Good manufacturing practices ("GMP") regulations set forth
the requirements for manufacturing facilities. GLP and GMP have been adopted by
the United States Food and Drug Administration ("FDA"), the Department of Health
in the United Kingdom and by similar regulatory authorities in other parts of
the world. GLP and GMP stipulate requirements for facilities, equipment and
professional staff. The regulations require standardized procedures for studies,
for recording and reporting data and for retaining appropriate records. To help
assure compliance, the Company has established quality assurance controls at its
pre-clinical facilities which monitor ongoing compliance with GLP and GMP
regulations by auditing test data and conducting regular inspections of testing
procedures.
The industry standard for the conduct of clinical research and
development studies is embodied in good clinical practices ("GCP") regulations.
Although GCP has not been formally adopted by the FDA, certain provisions of GCP
have been included in FDA regulations. As a matter of practice, the FDA and many
other regulatory authorities require the test results submitted to such
authorities be based on studies conducted in accordance with GCP. These
regulations include (i) complying with specific regulations governing the
selection of qualified investigators; (ii) obtaining specific written
commitments from the investigators; (iii) verifying that patient informed
consent is obtained; (iv) monitoring the validity and accuracy of data; (v)
verifying drug or device accountability; (vi) instructing investigators to
maintain records and reports; and (vii) permitting appropriate governmental
authorities access to data for their review. The Company must also maintain
reports for each study for specified periods for inspection by the study sponsor
and the FDA during audits. Non-compliance with GCP can result in the
disqualification of data collected during the clinical trial.
The Company's standard operating procedures are written in accordance
with regulations and guidelines appropriate to the region where they will be
used, thus ensuring compliance with GCP. Within Europe, all work is carried out
in accordance with the European Community Note For Guidance "Good Clinical
Practice for Trials on Medicinal Products in the European Community." In
addition, FDA regulations and guidelines serve as a basis for the Company's
North American standard operating procedures. The Company's offices in the
Asia-Pacific region have developed standard operating procedures in accordance
with their local requirements and in harmony with the Company's North American
and European operations. From a transnational perspective, the Company has
implemented common standard operating procedures across regions to assure
consistency whenever it is feasible to do so.
The Company's sales and marketing services are subject to detailed and
comprehensive regulation in each geographic market in which it operates. Such
regulation relates, among other things, to the qualifications of sales
representatives and the use of healthcare professionals in sales functions. In
the United Kingdom, the Company complies with the ABPI Code of Practice for the
Pharmaceutical Industry, which prescribes, among other things, an examination
that must be passed by sales representatives within two years of their taking up
employment, and which prevents the employment of healthcare professionals as
sales representatives. Similar guidelines are in effect in other countries where
the Company offers sales and marketing services.
The Company's U.S. laboratories are subject to licensing and regulation
under federal, state and
<PAGE> 3
local laws relating to hazard communication and employee right-to-know
regulations, the handling and disposal of medical specimens and hazardous waste
and radioactive materials, as well as the safety and health of laboratory
employees. All of the Company's laboratories are operated in material compliance
with applicable federal and state laws and regulations relating to the storage
and disposal of all laboratory specimens including the regulations of the
Environmental Protection Agency, the Nuclear Regulatory Commission, the
Department of Transportation, the National Fire Protection Agency and the
Resource Conservation and Recovery Act. The use of controlled substances in
testing for drugs of abuse is regulated by the United States Drug Enforcement
Administration (the "DEA"). All of the Company's laboratories using controlled
substances for testing purposes are licensed by the DEA. The regulations of the
United States Department of Transportation, the Public Health Service and the
Postal Service apply to the surface and air transportation of laboratory
specimens. The Company's laboratories also comply with International Air
Transport Association regulations, which govern international shipments of
laboratory specimens. Furthermore, when the materials are sent to a foreign
country, the transportation of such materials becomes subject to the laws, rules
and regulations of such foreign country.
In addition to its comprehensive regulation of safety in the workplace,
the United States Occupational Safety and Health Administration has established
extensive requirements relating to workplace safety for health care employers,
whose workers may be exposed to blood-borne pathogens such as HIV and the
hepatitis B virus. These regulations, among other things, require work practice
controls, protective clothing and equipment, training, medical follow-up,
vaccinations and other measures designed to minimize exposure to chemicals, and
transmission of blood-borne and airborne pathogens. Furthermore, relevant
employees of the Company receive initial and periodic training to ensure
compliance with applicable hazardous materials regulations and health and safety
guidelines. Although the Company believes that it is currently in compliance in
all material respects with such federal, state and local laws, failure to comply
could subject the Company to denial of the right to conduct business, fines,
criminal penalties and other enforcement actions.
FINANCIAL STATEMENTS
The following financial statements of Quintiles Transnational Corp. are
being filed in this Form 8-K:
Independent Auditors' Report
Consolidated Statements of Income for the three years ended
December 31, 1994, 1995 and 1996
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1996
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996
Notes to Consolidated Financial Statements
[INSERT FINANCIAL STATEMENTS HERE]
<PAGE> 4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Statements of Income........................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Quintiles Transnational Corp.
We have audited the accompanying consolidated balance sheets of Quintiles
Transnational Corp. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 and 1994 consolidated financial statements
of BRI International, Inc. and Innovex Limited, each of which was combined with
the Company in 1996 in transactions accounted for as poolings of interests.
Total assets of the two businesses represent 39% of the consolidated assets for
1995, and total revenues constituted 42% and 43% of consolidated revenue for
1995 and 1994, respectively. Those statements were audited by other auditors
whose reports have been provided to us, and our opinion, insofar as it relates
to amounts included for BRI International, Inc. and Innovex Limited for 1995 and
1994, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Quintiles Transnational Corp. and
subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
January 29, 1997
Raleigh, North Carolina
F-2
<PAGE> 6
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Professional fee income................................. $620,117 $397,998 $247,595
Less reimbursed costs................................. 82,509 74,306 51,695
-------- -------- --------
Net revenue............................................. 537,608 323,692 195,900
Costs and expenses:
Direct costs.......................................... 272,590 165,313 97,293
General and administrative expense.................... 187,589 113,247 73,432
Depreciation and amortization......................... 24,780 16,903 10,352
Non-recurring costs:
Restructuring costs................................ 13,102 2,373 --
Special pension contribution....................... 2,329 2,329 --
-------- -------- --------
500,390 300,165 181,077
-------- -------- --------
Income from operations.................................. 37,218 23,527 14,823
Other income (expense):
Interest income....................................... 6,947 2,548 1,250
Interest expense...................................... (9,526) (3,765) (2,795)
Non-recurring transaction costs....................... (17,118) -- --
Other................................................. (396) (228) 354
-------- -------- --------
(20,093) (1,445) (1,191)
-------- -------- --------
Income before income taxes.............................. 17,125 22,082 13,632
Income taxes............................................ 11,914 8,181 4,585
-------- -------- --------
Net income.............................................. 5,211 13,901 9,047
Non-equity dividend..................................... (846) -- --
-------- -------- --------
Net income available for common shareholders............ $ 4,365 $ 13,901 $ 9,047
======== ======== ========
Net income per share.................................... $ 0.13 $ 0.45 $ 0.32
======== ======== ========
Weighted average shares outstanding..................... 33,714 31,233 28,044
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 7
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62,032 $ 80,061
Accounts receivable and unbilled services................. 178,579 105,124
Investments............................................... 37,623 --
Prepaid expenses and other current assets................. 12,656 11,182
-------- --------
Total current assets.............................. 290,890 196,367
Property and equipment:
Land, buildings and leasehold improvements................ 50,060 41,411
Equipment and software.................................... 68,321 47,239
Furniture and fixtures.................................... 30,314 14,437
Motor vehicles............................................ 29,771 19,557
-------- --------
178,466 122,644
Less accumulated depreciation............................. 54,286 35,288
-------- --------
124,180 87,356
Intangible and other assets:
Intangibles............................................... 66,804 47,965
Investments............................................... 25,083 --
Deposits and other assets................................. 11,048 2,954
-------- --------
102,935 50,919
-------- --------
Total assets...................................... $518,005 $334,642
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................... $ 9,013 $ 8,667
Accounts payable.......................................... 33,396 18,254
Accrued expenses.......................................... 51,970 33,290
Unearned income........................................... 77,825 42,986
Income taxes payable...................................... 3,047 2,385
Current portion of obligations held under capital
leases................................................. 11,704 7,300
Current portion of long-term debt......................... 1,897 8,021
Other current liabilities................................. 6,030 5,444
-------- --------
Total current liabilities......................... 194,882 126,347
Long-term liabilities:
Obligations held under capital leases, less current
portion................................................ 5,407 3,287
Long-term debt and obligation, less current portion....... 163,285 33,223
Deferred income taxes..................................... 4,747 3,491
Other liabilities......................................... 5,336 6,489
-------- --------
178,775 46,490
-------- --------
Total liabilities................................. 373,657 172,837
Commitments and contingencies
Shareholders' Equity:
Preferred Stock, par value $.01 per share -- authorized
25,000,000 shares, none issued and outstanding......... -- --
Common Stock and additional paid-in capital, par value
$.01 per share -- authorized 200,000,000 shares, issued
and outstanding 33,149,962 and 32,216,251 shares in
1996 and 1995, respectively............................ 139,221 132,223
Retained earnings......................................... 5,702 29,431
Other equity.............................................. (575) 151
-------- --------
Total shareholders' equity........................ 144,348 161,805
-------- --------
Total liabilities and shareholders' equity........ $518,005 $334,642
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 8
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EMPLOYEE
STOCK
OWNERSHIP
ADDITIONAL PLAN LOAN CURRENCY
COMMON PAID-IN RETAINED GUARANTEE TRANSLATION
STOCK CAPITAL EARNINGS & OTHER ADJUSTMENTS TOTAL
------ ---------- -------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, as
previously reported......... $ 72 $ 26,073 $ 11,380 $(1,567) $ (838) $ 35,120
Adjustments for poolings of
interests................... 108 727 4,240 (1,311) 1,212 4,976
---- -------- -------- ------- ------- --------
Balance, December 31, 1993.... 180 26,800 15,620 (2,878) 374 40,096
Issuance of common stock...... 21 36,128 -- -- -- 36,149
Principal payments on ESOP
loan........................ -- -- -- 920 -- 920
Other equity transactions..... -- (171) (6) -- 1,057 880
Net income.................... -- -- 9,047 -- -- 9,047
---- -------- -------- ------- ------- --------
Balance, December 31, 1994.... 201 62,757 24,661 (1,958) 1,431 87,092
Issuance of common stock...... 10 56,893 -- -- -- 56,903
Principal payments on ESOP
loan........................ -- -- -- 401 -- 401
Common stock issued for
acquisitions................ 4 11,799 31 -- -- 11,834
Reduction of liability under
stock option plan, net of
tax......................... -- 693 -- -- -- 693
Dividends paid by pooled
entity...................... -- -- (9,162) -- -- (9,162)
Two-for-one stock split....... 107 (107) -- -- -- --
Other equity transactions..... -- (134) -- -- 277 143
Net income.................... -- -- 13,901 -- -- 13,901
---- -------- -------- ------- ------- --------
Balance, December 31, 1995.... 322 131,901 29,431 (1,557) 1,708 161,805
Common stock issued for
acquisitions................ 3 516 608 -- -- 1,127
Issuance of common stock...... 7 3,739 -- -- -- 3,746
Principal payments on ESOP
loan........................ -- -- -- 420 -- 420
Effect due to change in fiscal
year of pooled company...... -- -- 326 -- -- 326
Recapitalization of pooled
entity...................... -- (202) (29,028) -- -- (29,230)
Tax benefit from the exercise
of non-qualified stock
options..................... -- 2,920 -- -- -- 2,920
Non-equity dividend........... -- -- (846) -- -- (846)
Other equity transactions..... -- 15 -- 45 (1,191) (1,131)
Net income.................... -- -- 5,211 -- -- 5,211
---- -------- -------- ------- ------- --------
Balance, December 31, 1996.... $332 $138,889 $ 5,702 $(1,092) $ 517 $144,348
==== ======== ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 9
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income.................................................. $ 5,211 $13,901 $ 9,047
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 25,397 16,903 10,352
Non-recurring transaction costs........................... 17,118 -- --
Net gain on sale of property and equipment................ (139) (140) (847)
Provision for deferred income tax expense (benefit)....... 731 1,926 (596)
Change in operating assets and liabilities:
Accounts receivable and unbilled services............... (66,205) (36,231) (13,512)
Prepaid expenses and other current assets............... (11,382) (834) (3,477)
Accounts payable and accrued expenses................... 21,431 17,331 12,348
Unearned income......................................... 42,777 21,044 1,797
Income taxes payable and other current liabilities...... 2,805 606 8
Change in fiscal year of pooled entity.................... (9,378) -- --
Other..................................................... (24) (25) (335)
-------- ------- -------
Net cash provided by operating activities................... 28,342 34,481 14,785
Investing activities:
Proceeds from disposition of property and equipment....... 1,429 4,216 3,158
Purchase of investments held to maturity.................. (95,939) -- --
Maturities of investments held to maturity................ 43,345 -- --
Purchase of investments available for sale................ (19,003) -- --
Proceeds from sale of investments available for sale...... 8,936 -- --
Acquisition of property and equipment..................... (39,143) (25,716) (16,073)
Acquisition of businesses, net of cash acquired........... (33,352) (16,571) (1,357)
Payment of non-recurring transaction costs................ (11,440) -- --
Change in fiscal year of pooled entity.................... 2,606 -- --
-------- ------- -------
Net cash used in investing activities....................... (142,561) (38,071) (14,272)
Financing activities:
Increase (decrease) in lines of credit, net............... 2,536 3,917 (609)
Proceeds from issuance of debt............................ 139,650 568 1,355
Repayment of debt......................................... (56,792) (1,371) (4,151)
Principal payments on capital lease obligations........... (9,382) (6,506) (2,890)
Issuance of common stock.................................. 3,575 56,746 35,378
Issuance of debt for capitalization of pooled entity...... 45,197 -- --
Recapitalization of pooled entity......................... (29,230) -- --
Non-equity dividend....................................... (846) -- --
Dividend paid by pooled entity............................ -- (9,162) --
Change in fiscal year of pooled entity.................... 1,399 -- --
Other..................................................... (249) (6,047) 918
-------- ------- -------
Net cash provided by financing activities................... 95,858 38,145 30,001
Effect of foreign currency exchange rate changes on cash.... 332 (119) 572
-------- ------- -------
(Decrease) increase in cash and cash equivalents............ (18,029) 34,436 31,086
Cash and cash equivalents at beginning of year.............. 80,061 45,625 14,539
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 62,032 $80,061 $45,625
======== ======= =======
Supplemental Cash Flow Information:
Interest paid............................................. $ 9,446 $ 2,644 $ 2,621
Income taxes paid......................................... 11,523 8,978 4,417
Non-cash Investing and Financing Activities:
Capitalized leases........................................ 12,867 11,544 4,597
Equity impact of mergers and acquisitions................. (23,253) 11,803 687
</TABLE>
See accompanying notes
F-6
<PAGE> 10
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company is a leading provider of comprehensive contract research and
sales and marketing services to the worldwide pharmaceutical, biotechnology and
medical device industries. Additionally, the Company supports the developing
information needs of the broader healthcare industry by providing health
economics and healthcare policy consulting and disease and health information
management services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Prior to the Company's November 29, 1996 share exchange with Innovex,
Innovex had a fiscal year end of March 31 and the Company had (and continues to
have) a fiscal year end of December 31. As a result, the pooled data presented
for 1992 through 1995 include Innovex's March 31 fiscal year data in combination
with the Company's December 31 fiscal year data. In connection with the share
exchange, Innovex changed its fiscal year end to December 31. Accordingly, the
pooled data presented for 1996 include both Innovex's and the Company's data on
a December 31 year end basis. Because of the difference between Innovex's fiscal
year end in 1995 compared with 1996, Innovex's quarter ended March 31, 1996 data
are included in the Company's pooled data for both 1995 and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currencies
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Revenues, costs and expenses are recorded at average rates of exchange
during the year. Translation adjustments resulting from this process are charged
or credited to equity. Gains and losses on foreign currency transactions are
included in other income (expense).
Revenue Recognition
The Company recognizes net revenue from its contracts on a
percentage-of-completion or per diem basis as work is performed. The Company's
exposure to credit loss is equal to the outstanding accounts receivable and
unbilled services balance. Although the Company does not require collateral for
unpaid balances, credit losses have consistently been within management's
expectations. Certain contracts contain provisions for price redetermination for
cost overruns. Such redetermined amounts are included in service revenue when
realization is assured and the amounts can be reasonably determined. In the
period in which it is determined that a loss will result from the performance of
a contract, the entire amount of the estimated ultimate loss is charged against
income. One client accounted for 11.9% of consolidated net revenue in 1996.
F-7
<PAGE> 11
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unbilled Services and Unearned Income
In general, prerequisites for billings are established by contractual
provisions including predetermined payment schedules, the achievement of
contract milestones or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but clients have not been
billed. Similarly, unearned income represents prebillings for services that have
not yet been rendered.
Reimbursed Costs
Investigator payments are recognized as expense based upon patient
enrollment over the life of the contract. Investigator payments are made based
on predetermined contractual arrangements, which may differ from the recognition
of the expense. Payments to investigators in excess of the expense recognized
are classified as prepaid expenses, and recognized expenses in excess of amounts
paid are classified as accrued expenses.
Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The Company has
excluded from cash and cash equivalents in the accompanying balance sheets cash
held for clients for investigator payments in the amount of $4.6 million and
$3.0 million at December 31, 1996 and 1995, respectively, that pursuant to
agreements with these clients, remains the property of the clients.
The Company's investments in debt and equity securities are classified as
held-to-maturity and available for sale. Investments classified as
held-to-maturity are recorded at amortized cost. Investments classified as
available for sale are measured at market value and net unrealized gains and
losses are recorded as a separate component of stockholders' equity until
realized. Any gains or losses on sales of investments are computed by specific
identification.
Property and Equipment
Property and equipment are carried at historical cost and are depreciated
using the straight-line method over the shorter of the asset's estimated useful
life or the lease term ranging from three to 50 years.
Intangible Assets
Intangibles consist principally of the excess cost over the fair value of
net assets acquired ("goodwill") and are being amortized on a straight-line
basis over periods not exceeding 40 years. Accumulated amortization totaled
$10.5 million and $5.2 million at December 31, 1996 and 1995, respectively.
The carrying values of intangible assets are reviewed if the facts and
circumstances suggest impairment. If this review indicates that carrying values
will not be recoverable, as determined based on undiscounted cash flows over the
remaining amortization period, the Company would reduce carrying values by the
estimated shortfall of cash flows.
Long-Lived Assets
The Company adopted Financial Accounting Standard Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("Statement 121") in the first quarter of 1996. The
adoption of Statement 121 had no material effect on the financial statements in
1996.
F-8
<PAGE> 12
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share
Net income per share has been computed using the weighted average number of
common shares (including the common shares held by the Employee Stock Ownership
Plan) and common share equivalents outstanding during each period. Common
equivalent shares are excluded from the computation in periods in which they
have an anti-dilutive effect. All share and per share data in the financial
statements and notes thereto have been retroactively adjusted to give effect to
the two-for-one stock split in November 1995 and to the pooling of interests
combinations with BRI and Innovex (see Note 3). For all periods presented, the
difference between primary and fully diluted net income per common share is not
significant.
Income Taxes
Income tax expense includes U.S. and international income taxes. Certain
items of income and expense are not reported in tax returns and financial
statements in the same year. The tax effects of these differences are reported
as deferred income taxes. Tax credits are accounted for as a reduction of tax
expense in the year in which the credits reduce taxes payable.
Research and Development Costs
Research and development costs relating principally to new software
applications and computer technology are charged to expense as incurred. These
expenses totaled $2.3 million, $1.9 million and $1.7 million in 1996, 1995 and
1994, respectively.
Foreign Currency Hedging
The Company uses foreign exchange contracts and options 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 recognizes changes in value in
income only when contracts are settled or options are exercised. At December 31,
1996, the Company had forward contracts maturing on December 29, 1999. As of
December 31, 1996, the Company has committed to purchasing approximately
L600,000 (approximately $852,000) under such contracts. The Company is obligated
to purchase up to an additional L8.6 million through December 28, 1999 in
varying amounts as the daily dollar-to-pound exchange rate ranges between 1.5499
and 1.6800.
2. SHAREHOLDERS' EQUITY
On November 26, 1996, the Company's shareholders approved an increase in
the number of authorized shares of the Common Stock from 50,000,000 to
200,000,000.
On July 25, 1996, the Board of Directors authorized an employee stock
purchase plan for all eligible employees effective October 1, 1996. Under the
plan, shares of the Company's Common Stock may be purchased at three month
intervals at 85% of the lower of the fair market value on the first or the last
day of each three month period. Employees may purchase shares having a value not
exceeding the lesser of 15% of their gross compensation during an offering
period or $25,000. During 1996, employees purchased 4,788 shares at $56.3125 per
share. At December 31, 1996, 95,212 shares were reserved for future issuance.
On April 3, 1996, in anticipation of a planned initial public offering,
Innovex was recapitalized by the purchase of the entire issued share capital of
Innovex Holdings Limited (the former holding company of the Innovex Group) from
its shareholders in exchange for a combination of newly issued Ordinary Shares,
Cumulative Participating Preferred Ordinary Shares (the "Preferred Shares"),
Vendor Guaranteed Loan Notes (the "Loan Notes") and cash. In exchange for its
holdings in Innovex Holdings Limited, the
F-9
<PAGE> 13
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal shareholder received 67,994,225 newly issued Ordinary Shares of
Innovex Limited, approximately $26.0 million of Loan Notes and approximately
$2.4 million of cash. In exchange for their respective holdings, certain
investors received 14,285,720 newly issued Preferred Shares, and certain members
of management received 4,637,080 Ordinary Shares. In connection with the
Preferred Shares, the Company paid $846,000 of non-equity dividends in 1996.
Prior to the recapitalization, Innovex paid a dividend of $9.2 million to the
principal shareholder and made a special pension contribution of $2.3 million.
In connection with the Innovex merger, the Company has paid off $56.8 million of
Innovex obligations.
On October 4, 1995, the Company completed a stock offering of 3,500,000
shares of its Common Stock. Of the shares sold, 2,019,960 shares were sold by
the Company and 1,480,040 shares by certain selling shareholders. The offering
provided the Company with approximately $55.9 million, net of expenses.
On October 16, 1995, the Board of Directors authorized a two-for-one split
of the Company's Common Stock in the form of a 100% stock dividend. A total of
10,678,575 shares of Common Stock were issued in connection with the split. The
stated par value of each share was not changed from $.01. A total of $107,000
was reclassified from additional paid in capital to Common Stock. All references
in the financial statements to number of shares, per share amounts, stock option
data and market prices of Common Stock have been restated to retroactively
reflect the stock split.
3. MERGERS AND ACQUISITIONS
On November 29, 1996, the Company acquired 100% of the outstanding stock of
Innovex, an international contract pharmaceutical organization based in Marlow,
United Kingdom, for 9,214,239 shares of the Company's Common Stock and the
exchange of options to purchase 786,226 shares of the Company's Common Stock. On
November 22, 1996, the Company acquired BRI, a global contract research
organization, through an exchange of 100% of BRI's stock for 1,614,862 shares of
the Company's Common Stock. Related to the Innovex and BRI transactions, the
Company recognized approximately $17.1 million in non-recurring transaction
costs and approximately $10.7 million in non-recurring restructuring costs. Both
transactions were accounted for by the pooling of interests method.
Included in the consolidated statements of income for the year ended
December 31, 1996, are the following results of the previously separate
companies.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
(IN THOUSANDS) COMPANY INNOVEX BRI CONSOLIDATED
-------------- -------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net revenue................................. $259,476 $218,891 $59,241 $537,608
Net income (loss) available for common
shareholders.............................. $ 2,437 $ 2,392 $ (464) $ 4,365
</TABLE>
The following are reconciliations of net revenue and net income available
for common shareholders previously reported by the Company for the years ended
December 31, 1995 and 1994, with the combined amounts currently presented in the
financial statements for those years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------
(IN THOUSANDS) COMPANY INNOVEX BRI CONSOLIDATED
-------------- -------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net revenue................................. $156,437 $129,055 $38,200 $323,692
Net income available for common
shareholders.............................. $ 11,259 $ 1,641 $ 1,001 $ 13,901
</TABLE>
F-10
<PAGE> 14
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------
(IN THOUSANDS) COMPANY INNOVEX BRI CONSOLIDATED
-------------- ------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net revenue................................... $90,067 $81,063 $24,770 $195,900
Net income available for common
shareholders................................ $ 6,672 $ 2,083 $ 292 $ 9,047
</TABLE>
On May 13, 1996, the Company acquired the operating assets of Lewin-VHI,
Inc., a healthcare consulting company, for approximately $30 million in cash.
The Company recorded approximately $20 million related to the excess cost over
the fair value of net assets acquired. The acquisition was accounted for as a
purchase and accordingly, the consolidated financial statements include the
results of operations of the business from the date of acquisition.
In addition to the above mergers and acquisitions, the Company has
completed other mergers and acquisitions all of which are immaterial to the
consolidated financial statements.
4. CREDIT ARRANGEMENTS AND OBLIGATIONS
On May 23, 1996, the Company completed a private placement of $143.75
million of 4.25% Convertible Subordinated Notes ("Notes") due May 31, 2000. Net
proceeds to the Company amounted to approximately $139.7 million. The Notes are
convertible into 1,737,160 shares of Common Stock, at the option of the holder,
at a conversion price of $82.75 per share, subject to adjustment under certain
circumstances, at any time after August 21, 1996. The Notes are redeemable, at
the option of the Company, beginning May 31, 1999. Interest is payable on the
notes semi-annually on May 31 and November 30 each year.
The Company has a $15 million unsecured line of credit agreement with a
bank. The line of credit is available through February 1997, and it is
guaranteed by the Company's domestic subsidiaries. Interest is charged either at
the LIBOR rate (5.5625% at December 31, 1996), plus 1.25% to 1.85% or the bank's
prime rate (8.25% at December 31, 1996), at the option of the Company, and the
interest rate is established every 90 days. At December 31, 1996 and 1995, there
was no outstanding balance on the line of credit.
The Company also has a $4 million line of credit with a second U.S. bank.
The line of credit is available through June 30, 1997 and interest is charged at
the bank's prime rate (currently 8.25%). The line of credit had an outstanding
balance of $0 and $2.6 million at December 31, 1996 and 1995, respectively.
The Company has L6.0 million (approximately $10 million) line of credit
which is guaranteed by the Company's United Kingdom subsidiaries. The line of
credit is available through March 31, 1997. Interest is charged at the bank's
base rate (6.0% at December 31, 1996), plus 1.25%, with a minimum of 5.75%. The
line of credit had an outstanding balance of $6.6 million and $160,000 at
December 31, 1996 and 1995, respectively.
The Company has a L5.0 million (approximately $8.5 million) line of credit
with a second U.K. bank. The line of credit is available through April 1997 and
is charged interest at the bank's published base rate (6.0% at December 31,
1996) plus 1.5%. The line of credit had an outstanding balance of $2.4 million
and $5.9 million at December 31, 1996 and 1995, respectively.
In March, 1995, Quintiles Scotland Limited, a wholly-owned subsidiary of
the Company, acquired assets of a drug development facility in Edinburgh,
Scotland from Syntex Pharmaceuticals Limited, a member of the Roche group based
in Basel, Switzerland for a purchase commitment valued at approximately $21.8
million, with payment due in December 1999.
F-11
<PAGE> 15
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt and obligation consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- -------
<S> <C> <C>
4.25% Convertible Subordinated Notes due 2000............... $143,750 $ --
Employee Stock Ownership Plan notes payable, due 1997....... 1,138 1,556
Other notes payable......................................... 1,953 9,459
Loan stock at 10% (15.1% effective interest rate)........... -- 10,715
Long-term obligation........................................ 21,823 19,514
-------- -------
168,664 41,244
Less: current portion............................. 1,897 8,021
unamortized issuance costs.................. 3,482 --
-------- -------
$163,285 $33,223
======== =======
</TABLE>
Maturities of long-term debt and obligation at December 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 1,897
1998........................................................ 697
1999........................................................ 22,161
2000........................................................ 143,854
2001........................................................ 55
--------
$168,664
========
</TABLE>
5. INVESTMENTS
The following is a summary of held-to-maturity securities and
available-for-sale securities by contractual maturity where applicable (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
HELD-TO-MATURITY SECURITIES: COST GAINS LOSSES VALUE
- ---------------------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government Securities --
Maturing in one year or less.............. $ 5,707 $ -- $ -- $ 5,707
Maturing between one and three years...... 9,951 -- -- 9,951
State and Municipal Securities --
Maturing in one year or less.............. 22,327 -- -- 22,327
Maturing between one and three years...... 5,065 -- -- 5,065
Other....................................... 8,564 -- -- 8,564
------- ------- ------- -------
$51,614 $ -- $ -- $51,614
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED MARKET
AVAILABLE-FOR-SALE SECURITIES: COST GAINS LOSSES VALUE
- ------------------------------ ------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government Securities -- Maturing
between one and three years................ $10,008 $59 $-- $10,067
Money Funds.................................. 1,019 6 -- 1,025
------- --- --- -------
$11,027 $65 $-- $11,092
======= === === =======
</TABLE>
Differences between cost and market of $65,000 (less deferred taxes of
$20,190) were credited to shareholders' equity.
F-12
<PAGE> 16
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS RECEIVABLE AND UNBILLED SERVICES
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Trade:
Billed.................................................... $117,196 $ 63,163
Unbilled services......................................... 52,772 35,610
-------- --------
169,968 98,773
Other....................................................... 10,657 7,105
Less allowance for doubtful accounts........................ (2,046) (754)
-------- --------
$178,579 $105,124
======== ========
</TABLE>
The Company provides professional services involved in the development,
testing, approval, sale and marketing of new drugs. Substantially all of the
Company's accounts receivable are due from companies in the pharmaceutical and
biotechnology industries located in the Americas and Europe. The percentage of
accounts receivable and unbilled services by region is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
REGION 1996 1995
- ------ ----- -----
<S> <C> <C>
Americas.................................................... 45% 41%
Europe...................................................... 53 57
Asia-Pacific................................................ 2 2
--- ---
100% 100%
=== ===
</TABLE>
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Compensation and payroll taxes.............................. $21,829 $15,378
Transaction and restructuring costs......................... 16,047 --
Other....................................................... 14,094 17,912
------- -------
$51,970 $33,290
======= =======
</TABLE>
8. LEASES
The Company leases certain office space and equipment under operating
leases. The leases expire at various dates through 2049 with options to cancel
certain leases at five-year increments. Some leases contain renewal options.
Annual rental expenses under these agreements were approximately $20.6 million,
$10.1 million and $7.0 million for the years ended December 31, 1996, 1995 and
1994, respectively. The Company leases certain assets, primarily vehicles, under
capital leases. Capital lease amortization is included with depreciation and
amortization expense and accumulated depreciation in the accompanying financial
statements.
F-13
<PAGE> 17
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of future minimum payments under capitalized
leases and under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997........................................................ $12,959 $23,015
1998........................................................ 5,675 20,101
1999........................................................ 50 13,091
2000........................................................ 4 7,709
2001........................................................ 4 4,738
Thereafter.................................................. -- 17,170
------- -------
Total minimum lease payments................................ 18,692 $85,824
=======
Amounts representing interest............................... 1,581
-------
Present value of net minimum payments....................... 17,111
Current portion............................................. 11,704
-------
Long-term capital lease obligations......................... $ 5,407
=======
</TABLE>
9. INCOME TAXES
The U.S.-based and U.K.-based subsidiaries file consolidated tax returns in
the U.S. and U.K., respectively. The other foreign subsidiaries are taxed
separately under the laws of their respective countries. Income before income
taxes from foreign operations was approximately $20 million, $8 million and $5
million for the years 1996, 1995 and 1994, respectively.
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Current:
Federal................................................. $ 4,530 $4,133 $3,123
State................................................... 1,645 829 719
Foreign................................................. 4,483 1,440 1,328
------- ------ ------
10,658 6,402 5,170
Deferred expense (benefit):
Federal................................................. (682) 598 (854)
Foreign................................................. 1,938 1,181 269
------- ------ ------
$11,914 $8,181 $4,585
======= ====== ======
</TABLE>
F-14
<PAGE> 18
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's consolidated effective tax rate differed from the statutory
rate as set forth below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Federal taxes at statutory rate........................... $ 5,992 $7,507 $4,669
State and local income taxes net of federal benefit....... 980 635 496
Non-deductible transaction costs.......................... 4,761 -- --
Foreign earnings taxed at different rates................. (135) 13 (118)
Foreign losses for which no benefit has been recognized... -- 646 404
Utilization of net operating loss carryforwards........... -- (1,520) (1,244)
Other..................................................... 316 900 378
------- ------ ------
$11,914 $8,181 $4,585
======= ====== ======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $19 million at December 31, 1996. Those earnings are considered to
be indefinitely reinvested, and accordingly, no U.S. federal and state income
taxes have been provided thereon. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various countries.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................. $16,359 $ 6,945
Prepaid expenses.......................................... 1,034 573
Other..................................................... 213 560
------- -------
Total deferred tax liabilities.............................. 17,606 8,078
Deferred tax assets:
Net operating loss carryforwards.......................... 7,028 5,745
Accrued expenses and unearned income...................... 5,345 928
Benefit plans............................................. 675 2,512
Non-deductible transaction costs.......................... 2,206 --
Other..................................................... 2,445 866
------- -------
Total deferred tax assets................................... 17,699 10,051
Valuation allowance for deferred tax assets................. (4,840) (5,464)
------- -------
Net deferred tax assets..................................... 12,859 4,587
------- -------
Net deferred tax liabilities................................ $ 4,747 $ 3,491
======= =======
</TABLE>
The decrease in the Company's valuation allowance for deferred tax assets
from $5,464,000 at December 31, 1995 to $4,840,000 at December 31, 1996 is
primarily due to the net operating losses utilized in 1996 which had been fully
reserved in prior years.
F-15
<PAGE> 19
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's deferred income tax expense (benefit) results from the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------ -----
<S> <C> <C> <C>
Excess (deficiency) of tax over financial reporting:
Depreciation and amortization............................ $ 9,414 $1,681 $ 793
Net operating loss carryforwards......................... (1,907) 1,025 (550)
Accrued expenses and unearned income..................... (4,417) 110 (374)
Benefit plans............................................ -- (656) --
Other items, net......................................... (1,834) (381) (454)
------- ------ -----
$ 1,256 $1,779 $(585)
======= ====== =====
</TABLE>
The U.K. subsidiaries qualify for Scientific Research Allowances (SRAs) for
100% of capital expenditures on certain assets under the Inland Revenue Service
guidelines. For 1996, 1995 and 1994, these allowances were $11 million, $6
million and $3 million, respectively, which helped to generate net operating
loss carryforwards of $3 million to be used to offset taxable income in that
country. Assuming the U.K. subsidiaries continue to invest in qualified capital
expenditures at an adequate level, the portion of the deferred tax liability
relating to the U.K. subsidiaries may be deferred indefinitely. Quintiles
Transnational has state net operating loss carryforwards of approximately $10
million which begin to expire in 2001. Innovex has German net operating loss
carryforwards that do not expire of $10 million to be used to offset taxable
income in that country. In addition, Innovex, Inc. has U.S. net operating loss
carryforwards of approximately $5 million which will expire beginning 2005.
10. EMPLOYEE BENEFIT PLANS
The Company has numerous employee benefit plans for which contributions are
discretionary. Plans exist in the United States, Germany, the United Kingdom,
Ireland, Belgium, France, and Australia which cover substantially all eligible
employees in those countries. Plans include Approved Profit Sharing Schemes in
Great Britain and Ireland which are funded with Company stock, a defined
contribution plan funded by Company stock in Belgium and Australia, defined
contribution plans in Great Britain, a profit sharing scheme in France, and
defined benefit plans in Great Britain and Germany. The defined benefit plan in
Germany is an unfunded plan which is provided for in the balance sheet.
The Company has two leveraged Employee Stock Ownership Plans ("ESOPs")
which provide benefits to eligible employees. Contributions and related
compensation expenses for these plans totaled $585,000, $734,000, and $174,000
in 1996, 1995 and 1994, respectively. Interest paid by the Company on the ESOP
loan was approximately $130,000, $157,000, and $179,000 for 1996, 1995, and
1994, respectively. Shares allocated to participants totaled 938,000 at December
31, 1996. Unallocated shares totaled 178,000 as of December 31, 1996 with a fair
value of $11,820,000.
The Company has two employee savings and investment plans (401(k) Plans)
available to all eligible employees meeting certain specified criteria. The
Company matches employee deferrals at varying percentages, set at the discretion
of the Board of Directors. For the years ended December 31, 1996, 1995 and 1994,
the Company expensed $539,000, $177,000 and $0, respectively as matching
contributions.
On July 25, 1996, the Company's Board of Directors adopted the Quintiles
Transnational Corp. Employee Stock Purchase Plan (the "Purchase Plan") which is
intended to provide eligible employees an opportunity to acquire the Company's
Common Stock. Participating employees have the option to purchase shares at 85%
of the lower of the closing price per share of Common Stock on the first or last
day of the calendar quarter. The Purchase Plan is intended to qualify as an
"employee stock purchase
F-16
<PAGE> 20
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
Board of Directors has reserved 100,000 shares of Common Stock for issuance
under the Purchase Plan. As of December 31, 1996, 4,788 shares were purchased
under the Purchase Plan at a cost of $56.3125 per share.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company has stock option plans to provide incentives to eligible
employees, officers, and directors in the form of incentive stock options,
non-qualified stock options, stock appreciation rights, and restricted stock.
The Board of Directors determines the option price (not to be less than fair
market value of incentive options) at the date of grant. The majority of
options, granted under the Executive Compensation Plan, typically vest twenty
five percent per year over four years, and expire ten years from the date of
grant. Other options including options granted and exchanged as a result of
acquisitions have various vesting schedules and expiration periods.
Information with respect to the consolidated option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding January 1, 1994...................... 633,958 $ 5.70
Granted................................................ 276,400 12.72
Exercised.............................................. (9,666) 3.37
Canceled............................................... (82,586) 6.47
---------
Outstanding at December 31, 1994......................... 818,106 8.14
Granted................................................ 552,655 27.98
Exercised.............................................. (155,870) 5.15
Canceled............................................... (19,580) 10.33
---------
Outstanding at December 31, 1995......................... 1,195,311 17.13
Granted................................................ 2,070,866 68.60
Exercised.............................................. (656,005) 5.06
Canceled............................................... (205,840) 72.64
---------
Outstanding at December 31, 1996......................... 2,404,332 31.92
=========
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995: risk-free interest rate of 6%; dividend yields of
0%; volatility factors of the expected market price of the Company's Common
Stock of 0.4; and an average expected life of the option of one year from the
date of vesting.
F-17
<PAGE> 21
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For options outstanding and exercisable at December 31, 1996 the following
number of options, range of exercise prices, weighted average exercise prices
and weighted average contractual lives existed:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ ----------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
- --------- ---------------- ---------------- ---------------- --------- ----------------
<C> <S> <C> <C> <C> <C>
214,596 $0.015 - $2.07 $ 1.40 6.6 214,596 $ 1.40
262,106 $2,615 - $6.45 5.20 4.9 262,106 5.20
319,072 $8.635 - $12.625 9.59 6.3 308,572 9.61
389,556 $13.24 - $19.00 16.08 7.1 245,056 14.48
165,691 $21.375 - $31.50 28.77 8.8 64,298 28.83
512,641 $41.00 - $61.31 48.82 8.6 48,144 41.15
480,920 $62.50 - $66.25 65.86 8.0 107,022 65.65
59,750 $68.50 - $77.00 75.24 6.7 14,711 77.00
- --------- ---------
2,404,332 $31.92 7.3 1,264,505 $15.95
========= =========
</TABLE>
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are
transferable. In addition, the option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The grant date
Black-Scholes value of the options for 1996 was $10,900,000. Of this amount,
$7,145,000 relates to options issued and exchanged to employees of acquired
companies. The remaining $3,755,000 relates to Quintiles options, representing
7% of operating income. The Black-Scholes value of the options for 1995 was
$739,000 which includes $85,000 relating to acquired companies.
The Company's pro forma information follows (in thousands except for (loss)
earnings per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Net income available for common shareholders................ $ 4,365 $13,901
Pro forma (loss) net income available for common
shareholders.............................................. (6,535) 13,162
Pro forma (loss) earnings per share......................... $ (0.20) $ 0.42
</TABLE>
The effects on net income available for common shareholders and earnings
per share are not likely to be representative of the effects on reported net
income for future years since 1995 reflects expense for only one year's vesting.
F-18
<PAGE> 22
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. OPERATIONS
The following table presents the Company's operations by geographical
location (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Americas.......................................... $235,572 $132,199 $ 84,231
Europe............................................ 289,325 184,506 108,468
Asia-Pacific...................................... 12,711 6,987 3,201
-------- -------- --------
$537,608 $323,692 $195,900
======== ======== ========
Income (loss) from operations:
Americas.......................................... $ 15,228 $ 11,951 $ 7,138
Europe............................................ 21,974 12,016 8,008
Asia-Pacific...................................... 16 (440) (323)
-------- -------- --------
$ 37,218 $ 23,527 $ 14,823
======== ======== ========
Identifiable assets:
Americas.......................................... $267,512 $152,857 $ 96,308
Europe............................................ 241,549 176,609 94,979
Asia-Pacific...................................... 8,944 5,176 2,279
-------- -------- --------
$518,005 $334,642 $193,566
======== ======== ========
</TABLE>
F-19
<PAGE> 23
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PRO FORMA QUARTERLY FINANCIAL DATA (UNAUDITED)
Prior to the Innovex merger, Innovex had a March 31 fiscal year. The pro
forma unaudited quarterly financial data presented below reflect the financial
results of the combined companies on a calendar year basis including
nonrecurring costs. The non-recurring costs consist of transaction and
restructuring costs of $27.8 million in the fourth quarter of 1996 and $4.7
million of one-time restructuring costs and special pension contribution in the
first quarter of 1996. The Company's Consolidated Statements of Income contained
herein reports financial results on a fiscal year basis (which includes Innovex
results for the quarter ended March 31, 1996 in both 1995 and 1996 fiscal
years). The following pro forma quarterly financial information reflects actual
calendar quarter results of operations (in thousands, except for per share
data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue................ $ 110,592 $ 127,416 $ 137,498 $ 162,102
Income from operations..... 7,042 11,519 13,396 5,261
Net income (loss) available
for common
shareholders............. 4,436 6,884 7,831 (14,786)
Earnings (loss) per
share.................... $ 0.13 $ 0.20 $ 0.23 $ (0.45)
Range of stock prices...... $37.000-69.250 $56.500-82.000 $52.500-83.250 $58.250-83.250
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenue................ $ 62,409 $ 72,822 $ 78,546 $ 89,032
Income from operations..... 6,077 5,140 5,921 8,590
Net income available for
common shareholders...... 4,190 2,647 3,645 5,665
Earnings per share......... $ 0.14 $ 0.09 $ 0.12 $ 0.17
Range of stock prices...... $14.500-19.438 $17.250-24.125 $22.000-32.125 $26.250-46.000
</TABLE>
The following pro forma quarterly financial information reflects actual
calendar quarter results of operations excluding non-recurring costs (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue....................... $110,592 $127,416 $137,498 $162,102
Income from operations............ 11,744 11,519 13,396 15,990
Net income available for common
shareholders.................... 8,024 6,884 7,831 9,382
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue....................... $62,409 $72,822 $78,546 $89,032
Income from operations............ 6,077 5,140 5,921 8,590
Net income available for common
shareholders.................... 4,190 2,647 3,645 5,665
</TABLE>
F-20
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
23.01 Consent of Independent Auditors
27.01 Financial Data Schedule
<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 hereunto duly authorized.
QUINTILES TRANSNATIONAL CORP.
By: /s/ Rachel R. Selisker
------------------------------
Dated: February 7, 1997 Rachel R. Selisker
Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference into the Company's Registration
Statements on Form S-8 (Registration Nos. 33-91026, 33-16553 and 33-03603) and
the Registration Statements on Form S-3 (Registration Nos. 333-19009 and
333-00000) of our report dated January 29, 1997 with respect to the
consolidated financial statements of Quintiles Transnational Corp. and
subsidiaries as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996 filed in this Current Report on Form 8-K,
with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Raleigh, North Carolina
February 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 62,032 6,195 86,357
<SECURITIES> 37,623 59,986 35,422
<RECEIVABLES> 180,625 161,548 149,369
<ALLOWANCES> 2,046 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 290,890 236,362 282,755
<PP&E> 178,466 153,393 142,383
<DEPRECIATION> 54,286 47,385 43,154
<TOTAL-ASSETS> 518,005 473,011 462,613
<CURRENT-LIABILITIES> 194,882 173,239 143,827
<BONDS> 168,692 166,163 167,348
0 0 0
0 0 0
<COMMON> 332 327 334
<OTHER-SE> 144,016 125,668 148,417
<TOTAL-LIABILITY-AND-EQUITY> 518,005 473,011 462,613
<SALES> 0 0 0
<TOTAL-REVENUES> 537,608 375,505 238,008
<CGS> 0 0 0
<TOTAL-COSTS> 500,390 343,549 219,447
<OTHER-EXPENSES> 10,567 1,941 (757)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9,526 0 0
<INCOME-PRETAX> 17,125 30,015 17,804
<INCOME-TAX> 11,914 10,232 6,170
<INCOME-CONTINUING> 5,211 19,783 11,634
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,211 19,783 11,634
<EPS-PRIMARY> .13 .57 .34
<EPS-DILUTED> 0 0 0
</TABLE>
