<PAGE> 1
Rule 424(b)(4)Prospectus
Registration Statements
(No. 333-21393 and No. 333-22921)
4,800,000 SHARES
QUINTILES TRANSNATIONAL CORP.(LOGO)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
Of the 4,800,000 shares of Common Stock offered, 3,840,000 shares are being
offered hereby in the United States and 960,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
Of the 4,800,000 shares of Common Stock offered, 1,415,000 shares are being
sold by the Company and 3,385,000 shares are being sold by the Selling
Shareholders. See "Principal and Selling Shareholders". The Company will not
receive any proceeds from the shares being sold by the Selling Shareholders.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The last reported sale price of the Common Stock, which is quoted under the
symbol "QTRN" on the Nasdaq National Market, on March 6, 1997 was $63.125 per
share. See "Price Range of Common Stock and Dividend Policy".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) SHAREHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share.............................. $62.875 $2.52 $60.355 $60.355
Total(3)............................... $301,800,000 $12,096,000 $85,402,325 $204,301,675
</TABLE>
- ---------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting expenses estimated at $769,288 payable by the Company.
(3) Certain Selling Shareholders have granted to the U.S. Underwriters an option
for 30 days to purchase up to an aggregate of 576,000 additional shares at
the initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, such Selling Shareholders
have granted the International Underwriters a similar option with respect to
an additional 144,000 shares as part of the concurrent international
offering. If such options are exercised in full, the total initial public
offering price, underwriting discount, proceeds to the Company and proceeds
to Selling Shareholders will be $347,070,000, $13,910,400, $85,402,325, and
$247,757,275, respectively. See "Underwriting".
---------------------
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about March 12, 1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
---------------------
The date of this Prospectus is March 6, 1997.
<PAGE> 2
This graphic, titled " Quintiles Global Resources" with the Company's logo,
illustrates the Company's global presence. In the background is a map of the
world, with North and South America in the center, Europe, Africa and part of
Asia to the right and East Asia and Australia to the left. The company's
office locations are listed in three columns overlaying the globe. The first
column illustrates the Company's presence in the Asia-Pacific region, listing
the following locations under the heading "Asia-Pacific"; Osaka, Japan; Tokyo,
Japan; Singapore; Adelaide, Australia; Melbourne, Australia; Sydney, Australia;
and Auckland, New Zealand. The center column shows the Company's presence in
North and South America, listing the following locations under the heading
"Americas": Montreal, Quebec; Mountain View, California; San Francisco,
California; San Diego, California; Washington, DC; Atlanta, Georgia; Lenexa,
Kansas; Rockville, Maryland; Cambridge, Massachusetts; Cranford, New Jersey;
Parsippany, New Jersey; Research Triangle Park, NC; Yardley, Pennsylvania;
Arlington,Virginia; Fairfax, Virginia; and Buenos Aires, Argentina. The right
column, titled "Europe & Africa", illustrates the Company's presence in that
region by listing the following locations: Vienna, Austria; Antwerp, Belgium;
Brussels, Belgium; Louvain-la-Neuve, Belgium; Copenhagen, Denmark; Helsinki,
Finland; Paris, France; Strasbourg, France; Frankfurt, Germany; Freiburg,
Germany; Mannheim, Germany; Dublin, Ireland; Milan, Italy; Edinburgh, Scotland;
Barcelona, Spain; Madrid, Spain; Uppsala, Sweden; Basel, Switzerland;
Hoofddorp, The Netherlands; Leiden, The Netherlands; Rotterdam, The
Netherlands; Battle, United Kingdom; Bracknell, United Kingdom; Esher, United
Kingdom; Ledbury, United Kingdom; London, United Kingdom; Marlow, United
Kingdom; Staines, United Kingdom; and Pretoria, South Africa . The lower left
corner of the graph bears the italicized Legend "Quintiles offices are located
in general metropolitan areas."
2
<PAGE> 3
AVAILABLE INFORMATION
Quintiles Transnational Corp. (the "Company") is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices located
at 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials also may be obtained from the web site that the Commission maintains
at http://www.sec.gov. Quotations relating to the Company's Common Stock appear
on the Nasdaq National Market and such reports and other information concerning
the Company also can be inspected and copied at the offices of the Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006-1506.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 340-23520)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K (as amended by Form
10-K/A) for the fiscal year ended December 31, 1995;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996;
3. The Company's Current Reports on Form 8-K dated April 16, 1996,
October 6, 1996, November 22, 1996 (as amended by Form 8-K/A on January 16,
1997), February 7, 1997 and March 5, 1997;
4. The description of the Company's Common Stock contained in its
Registration Statement on Form 8-A as filed with the Commission on April
11, 1994; and
5. All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares of
Common Stock.
The financial statements of BRI International, Inc. included as pages F-18
through F-72 in the Company's Registration Statement on Form S-4 (File No.
333-12573), filed with the Commission pursuant to the Securities Act on
September 24, 1996 and amended on October 15, 1996, are also incorporated herein
by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to the Company, 4709
Creekstone Drive, Riverbirch Building, Suite 300, Durham, North Carolina
27703-8411, Attention: Corporate Secretary, telephone (919) 941-2000.
---------------------
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement so
superseded shall not be deemed to constitute part of this Prospectus.
---------------------
CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERINGS.
IN ADDITION, IN CONNECTION WITH THESE OFFERINGS, CERTAIN UNDERWRITERS ALSO MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT
OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included or incorporated
by reference in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment options.
Unless otherwise indicated, all financial information contained in this
Prospectus and Quintiles Transnational Corp.'s Consolidated Financial Statements
and notes thereto included in this Prospectus have been restated to reflect the
Company's November 1996 pooling of interests transactions with BRI
International, Inc. and Innovex Limited.
Information contained or incorporated by reference in this Prospectus
contains "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward looking terminology, such as "may", "will", "expect", "anticipate",
"estimate", "believe", or "continue" or the negative thereof or other variations
thereon or comparable terminology. See "Forward Looking Statements". The matters
set forth under the caption "Risk Factors" in this Prospectus constitute
cautionary statements identifying important factors with respect to such forward
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward looking
statements.
Certain information regarding the stages of United States drug development
is contained in Appendix A.
THE COMPANY
Quintiles Transnational Corp. (the "Company") is a leading provider of
full-service contract research, sales and marketing services to the global
pharmaceutical, biotechnology and medical device industries. The Company,
through the use of its extensive information technology capabilities, provides a
broad range of fully-integrated contract services in order to accelerate the
time from discovery to peak market acceptance of a new therapy by offering
traditional contract research services as well as contract sales and marketing
services. In addition, the Company provides health economics and healthcare
policy consulting and disease and health information management services to
support the growing information needs of the healthcare industry. Since 1992,
the Company's annual net revenue has increased from $96.3 million to $537.6
million in 1996, and during the same period, its annual net income available for
common shareholders (excluding non-recurring costs) increased from $2.8 million
to $32.1 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". During 1996, the Company provided services
to 49 of the 50 largest pharmaceutical companies in the world as ranked by 1995
healthcare revenue and to the 11 largest biotechnology companies in the world as
ranked by market capitalization in December 1996. See "Business -- Clients and
Marketing". The Company presently has over 50 offices located in 20 countries
and has approximately 7,375 employees.
Since its inception in 1982, the Company has continued to expand the scope
of its services and geographic presence to support the needs of its clients on a
worldwide basis. The Company has implemented a number of strategic initiatives
to broaden its array of services and create new opportunities for growth. In
November 1996, the Company completed a business combination with Innovex Limited
("Innovex"), an international contract services organization specializing in
managing the sales and marketing of drugs for pharmaceutical companies. Innovex
enables the Company to complement its clinical research focus on obtaining
regulatory approval with services designed to assist clients in achieving market
penetration of new therapies. Also in November 1996, the Company acquired BRI
International, Inc. ("BRI"), a leading international contract research firm
specializing in medical device development and regulatory compliance consulting.
In May 1996, the Company acquired the operating assets of Lewin-VHI, Inc., a
nationally-recognized healthcare consulting firm, and formed a new subsidiary of
the Company, The Lewin Group Inc. ("Lewin"). In February 1996, the Company
acquired PMC Contract Research AB ("PMC"), a contract research organization
("CRO") located in Uppsala, Sweden, which has extensive clinical trials
management expertise. During 1996, the Company added
4
<PAGE> 5
more than 20 new offices through acquisitions and internal growth and commenced
construction of a 171,000 square foot clinical trial drug formulation,
manufacturing, packaging and distribution facility in Bathgate, Scotland. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- General".
The Company has created an organizational structure that enables the
Company to fully integrate its broad range of contract services and cross-sell
them more comprehensively. The Company's contract research services include
clinical trial studies in Phases I through IIIa of drug development, clinical
data management and biostatistical analysis, laboratory services, formulation
and packaging of clinical trial drugs, pre-clinical services, regulatory affairs
and medical device consulting. The Company's services for the perimarketing
period, which the Company defines as the period from two years before to two
years after regulatory approval, include clinical trial studies in Phases IIIb
and IV, as well as pharmaceutical sales and marketing services. The Company's
healthcare consulting services include health economics and healthcare policy
consulting and disease and health information management services. See
"Business -- General".
The Company's focused strategy is to: (i) provide a broad array of
fully-integrated contract services; (ii) offer specialized services in key
therapeutic areas in order to facilitate an expedited drug development process;
(iii) expand its geographic presence to support the worldwide needs of the
pharmaceutical, biotechnology and medical device industries; (iv) increase its
penetration of contract sales and marketing services, particularly in the United
States and Europe, by leveraging the Company's strong contract research presence
in these markets; (v) extend its leadership position in information technology;
and (vi) capitalize on the growing importance of health economics and disease
information management services in the healthcare industry. See
"Business -- Company Strategy".
The Company competes in the CRO industry which typically provides
independent product development services for the pharmaceutical, biotechnology
and medical device industries. Companies in these industries are increasingly
outsourcing product development services to CROs in order to manage the drug and
medical device development process more efficiently and cost-effectively and to
maximize the benefits in time and profit of patent-protected products. CROs
manage clinical trials for drugs, provide scientific evaluations and analyze the
results as required by the applicable regulatory authorities and provide similar
services for the medical device industry. The Company also competes in the
emerging contract sales industry which provides sales and marketing services on
a contract basis to the pharmaceutical industry. The contract sales industry
emerged in the 1980s, most notably in the United Kingdom (the "U.K.") where, the
Company believes, regulatory cost containment pressures on pharmaceutical
companies led such companies to outsource sales and marketing activities
relating to product launch. Contract sales organizations assemble and train a
contract sales force to help launch a pharmaceutical company's newly approved
products. The Company believes that it is the leading company to couple contract
research services with contract sales and marketing services. See
"Business -- Competition".
The Company's principal executive offices are located at 4709 Creekstone
Drive, Riverbirch Building, Suite 300, Durham, North Carolina 27703-8411 and its
telephone number is (919) 941-2000. Unless the context otherwise requires, the
term the "Company" refers to Quintiles Transnational Corp. and its subsidiaries.
5
<PAGE> 6
THE OFFERINGS(1)
<TABLE>
<S> <C> <C>
Common Stock offered by the Company:
U.S. Offering......................... 1,132,000 shares
International Offering................ 283,000 shares
Total......................... 1,415,000 shares
Common Stock offered by the Selling
Shareholders:
U.S. Offering......................... 2,708,000 shares
International Offering................ 677,000 shares
Total......................... 3,385,000 shares
Common Stock to be outstanding after the
Offering.............................. 34,564,962 shares(2)
Nasdaq National Market symbol........... QTRN
Use of Proceeds......................... For working capital, geographic expansion, addition
of new services, potential acquisitions, capital
expenditures and general corporate purposes. See "Use
of Proceeds".
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment options. See
"Underwriting".
(2) Based on 33,149,962 shares of Common Stock outstanding on December 31, 1996.
Does not include 2,404,334 shares issuable upon the exercise of stock
options outstanding as of December 31, 1996.
6
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1992(1) 1993(1) 1994(1) 1995(1) 1996(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Professional fee income...................... $111,745 $159,508 $247,595 $397,998 $620,117
Less reimbursed costs(2):.................. 15,409 17,585 51,695 74,306 82,509
-------- -------- -------- -------- --------
Net revenue.................................. 96,336 141,923 195,900 323,692 537,608
Costs and expenses:
Direct costs............................... 45,957 70,258 97,293 165,313 272,590
General and administrative expense......... 37,833 53,335 73,432 113,247 187,589
Depreciation and amortization.............. 4,607 7,823 10,352 16,903 24,780
Non-recurring costs:
Restructuring costs...................... -- -- -- 2,373 13,102
Special pension contribution............. -- -- -- 2,329 2,329
-------- -------- -------- -------- --------
Total costs and expenses............ 88,397 131,416 181,077 300,165 500,390
-------- -------- -------- -------- --------
Income from operations....................... 7,939 10,507 14,823 23,527 37,218
Non-recurring transaction costs.............. -- -- -- -- (17,118)
Other income (expense)....................... (2,635) (2,890) (1,191) (1,445) (2,975)
-------- -------- -------- -------- --------
Total other income (expense)................. (2,635) (2,890) (1,191) (1,445) (20,093)
-------- -------- -------- -------- --------
Income before income taxes................... 5,304 7,617 13,632 22,082 17,125
Income taxes................................. 2,467 3,272 4,585 8,181 11,914
-------- -------- -------- -------- --------
Income before cumulative effect of accounting
change..................................... 2,837 4,345 9,047 13,901 5,211
Cumulative effect of accounting change....... -- (158) -- -- --
-------- -------- -------- -------- --------
Net income................................... 2,837 4,187 9,047 13,901 5,211
Non-equity dividend.......................... -- -- -- -- (846)
-------- -------- -------- -------- --------
Net income available for common
shareholders............................... $ 2,837 $ 4,187 $ 9,047 $ 13,901 $ 4,365
======== ======== ======== ======== ========
Net income per share......................... $ 0.14 $ 0.17 $ 0.32 $ 0.45 $ 0.13
======== ======== ======== ======== ========
Weighted average shares outstanding(3)....... 20,888 23,972 28,044 31,233 33,714
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 62,032 $146,665
Working capital............................................. 96,008 180,641
Total assets................................................ 518,005 602,638
Long-term debt and obligations, including current portion... 182,293 182,293
Shareholders' equity........................................ 144,348 228,981
</TABLE>
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(1) 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 above 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 above 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.
(2) Reimbursed costs consist primarily of payments to third party physician
investigators, travel and other costs that are billed to and reimbursed by
the Company's clients. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(3) Restated to reflect a two-for-one stock split of the Company's Common Stock
effected as a 100% stock dividend on November 27, 1995.
(4) Adjusted to give effect to the sale of 1,415,000 shares of Common Stock
offered by the Company in the Offerings at the public offering price of
$62.875 per share and the application of the net proceeds therefrom, after
deducting the underwriting discount and offering expenses payable by the
Company.
7
<PAGE> 8
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective purchasers should consider the following factors
carefully in evaluating the Company and its business before purchasing the
shares of Common Stock offered hereby. See also "Forward Looking Statements".
DEPENDENCE ON CERTAIN INDUSTRIES AND CLIENTS
The Company's revenues are highly dependent upon the research and
development and sales and marketing expenditures of the pharmaceutical and
biotechnology industries. The Company has benefited to date from the growing
tendency of pharmaceutical and biotechnology companies to engage independent
outside organizations to conduct large clinical research and sales and marketing
projects. The Company's operations could be materially and adversely affected by
a general economic decline in these industries or by any reduction in the
outsourcing of development or sales and marketing expenditures. The Company has
in the past derived, and may in the future derive, a significant portion of its
net revenue from a relatively limited number of major projects or clients. In
1996, 10 clients accounted for approximately 48% of the Company's consolidated
net revenue. As pharmaceutical companies continue to outsource large projects
and studies to fewer full-service global providers, the concentration of
business could increase. The Company is likely to experience such concentration
in 1997 and in future years. The loss of any such client could materially and
adversely affect the Company. See "Business -- Clients and Marketing".
MANAGEMENT OF GROWTH
The Company has experienced rapid growth over the past 10 years. The
Company believes that its sustained growth places a strain on operational, human
and financial resources. In order to manage its growth, the Company must
continue to improve its operating and administrative systems and to attract and
retain qualified management, professional, scientific and technical personnel.
Foreign operations may involve the additional risks of assimilating differences
in foreign business practices, hiring and retaining qualified personnel, and
overcoming language barriers. The Company has a transnational organizational
structure, comprised of three operating divisions performing complementary
functions with a holding company performing management functions. While this
transnational structure has successfully supported the Company's growth to date,
the Company recently has completed a number of acquisitions, and there can be no
assurance that this structure will continue to be effective. See "Business --
General". Failure to manage growth effectively could have a material adverse
effect on the Company.
ACQUISITION RISKS
Acquisitions involve numerous risks, including difficulties and expenses
incurred in connection with the acquisition and the assimilation of the
operations and services of the acquired companies, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired companies. Acquisitions of foreign companies also may involve
the additional risks of assimilating differences in foreign business practices
and overcoming language barriers. Since February 1996, the Company has completed
four acquisitions, both within the United States and internationally. There can
be no assurance that the Company's past and any future acquisitions will be
successfully integrated into its operations. See "Business -- General". The
Company reviews many acquisition candidates in the ordinary course of business,
and the Company continually is evaluating new acquisition opportunities. Given
the CRO industry consolidation which is occurring, the Company expects to
continue to evaluate and compete for suitable acquisition candidates. There can
be no assurance that the Company will successfully complete future acquisitions
nor that acquisitions, if completed, will contribute favorably to the Company's
operations and future financial condition. Although the Company performs due
diligence investigations on each company or business it seeks to acquire, there
may be liabilities which the Company fails or is unable to discover for which
the Company, as a successor owner, may be liable. The Company generally seeks to
minimize its exposure to such liabilities by obtaining
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<PAGE> 9
indemnification from each seller, which may be supported by deferring payment of
a portion of the purchase price. However, there is no assurance that such
indemnifications, even if obtainable, enforceable and collectible (as to which
there also is no assurance), will be sufficient in amount, scope or duration to
fully offset the potential liabilities arising from the acquisitions.
RISKS RELATING TO CONTRACT SALES SERVICES
Outsourced contract sales services is a relatively new industry outside the
U.K. The Company believes that the contract sales industry emerged in the 1980s,
primarily in the U.K., because of regulatory cost containment pressure on
pharmaceutical companies. As a result, large pharmaceutical companies began to
outsource their sales and marketing activities incident to product launch. There
is a relatively low level of market penetration for outsourced sales and
marketing services in most other countries, including the United States. As
such, companies in this industry are subject to all of the risks inherent in a
new or emerging industry, including an inability to attract and retain clients,
changes in the regulatory regime, an absence of an established earnings history,
the availability of adequately trained sales representatives and additional and
unforeseen costs and expenses. There can be no assurance that the Company will
be able to market successfully its contract sales and marketing services outside
the U.K. See "Business -- Services".
COMPETITION; INDUSTRY CONSOLIDATION
The market for the Company's contract research services is highly
competitive, and the Company competes against traditional CROs, the in-house
research and development departments of pharmaceutical companies, as well as
universities and teaching hospitals. In sales and marketing services, the
Company competes against the in-house sales and marketing departments of
pharmaceutical companies and small local contract sales organizations in each
country in which it operates. The Company also competes against consulting firms
offering healthcare consulting services, including boutique firms specializing
in the healthcare industry and the healthcare departments of large firms.
Expansion by these competitors into other areas in which the Company operates
could affect the Company's competitive position. Increased competition may lead
to price and other forms of competition that may affect the Company's margins.
See "Business -- Competition". Consolidation within the pharmaceutical industry,
as well as a trend by pharmaceutical companies to limit outsourcing to fewer
organizations, has heightened the competition for contract research services. As
a result, consolidation also has occurred among the providers of contract
research services, and several large, full-service providers have emerged,
including the Company. If these consolidation trends continue, they may result
in greater competition among the larger contract research providers for clients
and acquisition candidates.
LOSS OR DELAY OF LARGE CONTRACTS; FIXED PRICE NATURE OF CONTRACTS
Most of the Company's contracts are terminable upon 15-90 days' notice by
the client. Although the contracts typically provide for payment of certain fees
for winding down the study and, in some cases, a termination fee, the loss or
delay of a large contract or the loss or delay of multiple contracts could
adversely affect the Company's future net revenue and profitability. Contracts
may be terminated for a variety of reasons, including the failure of a product
to satisfy safety requirements, unexpected or undesired results of the product,
the client's decision to forego a particular study or insufficient patient
enrollment or investigator recruitment. The Company contracts with investigators
who undertake to recruit large numbers of patients in many of its studies. There
can be no assurance that the Company will always be able to satisfy recruitment
targets, particularly in large studies for which there is little precedent. In
addition, most of the Company's contracts for the provision of its services are
fixed price or fee-for-service subject to a cap. Since the Company's contracts
are predominantly structured in this manner, the Company bears the risk of cost
overruns. Underpricing of contracts or significant cost overruns could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Contract Revenue".
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<PAGE> 10
DEPENDENCE ON PERSONNEL
The Company relies on a number of key executives, including Dennis B.
Gillings, Ph.D., its Chairman of the Board of Directors and Chief Executive
Officer. The Company maintains key man life insurance on Dr. Gillings in the
amount of $3 million. The loss of the services of any key executives could have
a material adverse effect on the Company. In addition, the Company's performance
depends on its ability to attract and retain qualified management and
professional, scientific and technical operating staff, as well as its ability
to recruit qualified representatives for its contract sales services. There can
be no assurance that the Company will be able to continue to attract and retain
qualified personnel.
POTENTIAL LIABILITY
In connection with its provision of contract research services, the Company
contracts with physicians to serve as investigators in conducting clinical
trials to test new drugs on human volunteers. Such testing creates risk of
liability for personal injury to or death of volunteers, particularly to
volunteers with life-threatening illnesses, resulting from adverse reactions to
the drugs administered. Although the Company does not believe it is legally
accountable for the medical care rendered by third party investigators, it is
possible that the Company could be held liable for the claims and expenses
arising from any professional malpractice of the investigators with whom it
contracts or in the event of personal injury to or death of persons
participating in clinical trials. The Company also could be held liable for
errors or omissions in connection with the services it performs. In addition, as
a result of its Phase I clinical trials facilities, the Company could be liable
for the general risks associated with a Phase I facility including, but not
limited to, adverse events resulting from the administration of drugs to
clinical trial participants or the professional malpractice of Phase I medical
care providers. The Company believes that its risks are reduced by contractual
indemnification provisions with clients and investigators, insurance maintained
by clients and investigators and by the Company, various regulatory
requirements, including the use of institutional review boards and the
procurement of each volunteer's informed consent to participate in the study.
The contractual indemnifications generally do not protect the Company against
certain of its own actions such as negligence. The contractual arrangements are
subject to negotiation with clients and the terms and scope of such
indemnification vary from client to client and from trial to trial. The
financial performance of these indemnities is not secured. Therefore, the
Company bears the risk that the indemnifying party may not have the financial
ability to fulfill its indemnification obligations. The Company maintains
professional liability insurance that covers worldwide territories in which the
Company currently does business and includes drug safety issues as well as data
processing errors and omissions. There can be no assurance that the Company will
be able to maintain such insurance coverage on terms acceptable to the Company.
The Company could be materially and adversely affected if it were required to
pay damages or bear the costs of defending any claim outside the scope of or in
excess of a contractual indemnification provision or beyond the level of
insurance coverage or in the event that an indemnifying party does not fulfill
its indemnification obligations.
DEPENDENCE ON GOVERNMENT REGULATION
The Company's contract research business has benefited from the extensive
governmental regulation of the drug development process, particularly in the
United States. In Europe, the general trend has been towards establishing common
standards for clinical testing of new drugs, leading to changes in the various
requirements currently imposed by each country. The Company believes that the
level of regulation is generally less burdensome outside the United States. From
time to time legislation is introduced in the U.S. Congress to substantially
modify regulations administered by the Food and Drug Administration ("FDA")
governing the drug approval process. Changes in regulation in the United States
or elsewhere, including mandatory substitution of generic drugs for patented
drugs, relaxation in the scope of regulatory requirements or the introduction of
simplified drug approval procedures, could decrease the business opportunities
available to the Company. In addition, the failure on the part of the Company to
comply with applicable regulations could result in the termination of ongoing
clinical research
10
<PAGE> 11
or sales and marketing projects or the disqualification of data for submission
to regulatory authorities, either of which could have a material adverse effect
on the Company.
UNCERTAINTY IN HEALTHCARE INDUSTRY AND POSSIBLE HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the pharmaceutical, biotechnology and
medical device industries. Numerous governments have undertaken efforts to
control growing healthcare costs through legislation, regulation and voluntary
agreements with medical care providers and pharmaceutical companies.
Implementation of government healthcare reform may adversely affect research and
development expenditures by pharmaceutical, biotechnology and medical device
companies which could decrease the business opportunities available to the
Company. Management is unable to predict the likelihood of healthcare reform
legislation being enacted or the effects such legislation would have on the
Company.
EXCHANGE RATE FLUCTUATIONS
Approximately 56.5%, 59.2% and 57.0% of the Company's net revenue for the
years ended December 31, 1996, 1995, and 1994, respectively, were derived from
the Company's operations outside the United States. The Company's operations and
financial results could be significantly affected by factors associated with
international operations such as changes in foreign currency exchange rates and
uncertainties relative to regional economic circumstances, as well as by other
risks sometimes associated with international operations. Since the revenue and
expenses of the Company's foreign operations are generally denominated in local
currencies, exchange rate fluctuations between such local currencies and the
U.S. dollar will subject the Company to currency translation risk with respect
to the reported results of its foreign operations. Also, the Company may be
subject to foreign currency transaction risks when the Company's service
contracts are denominated in a currency other than the currency in which the
Company incurs expenses related to such contracts. The Company limits its
foreign currency transaction risks through exchange rate collars stated in its
contracts with clients or the Company hedges the transaction risk with foreign
exchange contracts or options. There can be no assurance that the Company will
not experience fluctuations in financial results from the Company's operations
outside the United States, and there can be no assurance the Company will be
able to contractually or otherwise favorably reduce its currency transaction
risk associated with its service contracts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
VARIATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations have been and can be expected to be
subject to quarterly fluctuations. Quarterly results can fluctuate as a result
of a number of factors, including the timing of start-up expenses for new
offices, acquisitions, the completion or commencement of significant contracts,
changes in the mix of services offered and foreign exchange fluctuations. The
Company believes that quarterly comparisons of its financial results should not
be relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been and may continue to
be subject to wide fluctuations in response to variations in operating results
from quarter to quarter, changes in earnings estimates by analysts, market
conditions in the industry and general economic conditions. See "Price Range of
Common Stock and Dividend Policy".
11
<PAGE> 12
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the shares of
Common Stock offered by the Company in the United States offering (the "U.S.
Offering") and the concurrent international offering (the "International
Offering" and, together with the U.S. Offering, the "Offerings") for the
replenishment of working capital following the Company's repayment in November
1996 of approximately $56.8 million of obligations assumed in the share exchange
with Innovex. The Company intends to use this working capital and the remaining
proceeds from the Offerings for geographic expansion, addition of new services,
potential acquisitions, general corporate purposes and capital expenditures,
including approximately $23.4 million to complete construction of the Company's
171,000 square foot clinical trial drug formulation, manufacturing, packaging
and distribution facility in Bathgate, Scotland. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business".
Pending such uses, the Company intends to invest the net proceeds from the
Offerings in investment grade, interest-bearing securities. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders in the Offerings.
As part of its business strategy, the Company reviews many acquisition
candidates in the ordinary course of business, and the Company continually is
evaluating new acquisition opportunities. There is no assurance that the Company
will complete other acquisitions. No binding agreements or firm commitments
currently exist to make any material acquisition, and no portion of the net
proceeds has been allocated for any specific material acquisition. See "Risk
Factors -- Acquisition Risks".
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has traded publicly on the Nasdaq National
Market under the trading symbol "QTRN" since April 20, 1994, the date that the
Common Stock was first offered to the public. The table below sets forth the
high and low sale prices for the Company's Common Stock for the periods
indicated as reported by the Nasdaq National Market. Such prices are adjusted to
reflect the two-for-one stock split effected as a 100% stock dividend on
November 27, 1995.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Year ended December 31, 1995
First quarter............................................. $19.438 $14.500
Second quarter............................................ 24.125 17.250
Third quarter............................................. 32.125 22.000
Fourth quarter............................................ 46.000 26.250
Year ended December 31, 1996
First quarter............................................. 69.250 37.000
Second quarter............................................ 82.000 56.500
Third quarter............................................. 83.250 52.500
Fourth quarter............................................ 83.250 58.250
Year ended December 31, 1997
First quarter (through March 6, 1997)..................... 78.000 61.500
</TABLE>
On March 6, 1997, the last sale price reported on the Nasdaq National
Market for the Common Stock was $63.125 per share. On December 31, 1996, the
Company had 33,149,962 shares of Common Stock outstanding, and there were
approximately 8,950 beneficial owners of the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock, and one of the Company's existing domestic credit facilities prohibits
the payment of dividends without the prior consent of the lender. The Company
does not anticipate paying any cash dividends in the foreseeable future and
intends to retain future earnings for the development and expansion of its
business.
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1996, and as adjusted to give effect to the sale by the
Company of 1,415,000 shares of Common Stock in the Offerings at the public
offering price of $62.875 per share, and the application of the net proceeds
therefrom, after deducting the underwriting discount and offering expenses
payable by the Company. This table should be read in conjunction with the
Company's audited consolidated financial statements, including the notes
thereto, found elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt and obligation, less current portion......... $163,285 $163,285
-------- --------
Shareholders' equity:
Preferred Stock, $.01 par value, 25,000,000 shares
authorized, none issued................................ -- --
Common Stock and additional paid-in capital, $.01 par
value, 200,000,000 shares authorized, 33,149,962 shares
issued and outstanding, 34,564,962 shares issued and
outstanding as adjusted(1)............................. 139,221 223,854
Other shareholders' equity.................................. (575) (575)
Retained earnings........................................... 5,702 5,702
-------- --------
Total shareholders' equity........................ 144,348 228,981
-------- --------
Total capitalization.............................. $307,633 $392,266
======== ========
</TABLE>
- ---------------
(1) Excludes 2,404,334 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding at December 31, 1996.
13
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected Consolidated Statement of Operations Data set forth below for
each of the years in the three-year period ended December 31, 1996 and the
Consolidated Balance Sheet Data set forth below as of December 31, 1995 and 1996
are derived from the audited consolidated financial statements of the Company
and notes thereto included in this Prospectus. The selected Consolidated
Statement of Operations Data set forth below for each of the years in the
five-year period ended December 31, 1996 and the Consolidated Balance Sheet Data
set forth below as of December 31, 1992, 1993, 1994, 1995 and 1996 are derived
from the audited consolidated financial statements of the Company. See
"Experts". The consolidated financial statements of the Company have been
restated to reflect the November 1996 acquisitions by the Company of BRI and
Innovex in transactions accounted for as poolings of interests. The selected
consolidated financial data presented below should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included herein and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1992(1) 1993(1) 1994(1) 1995(1) 1996(1)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Professional fee income............ $111,745 $159,508 $247,595 $397,998 $620,117
Less reimbursed costs(2):........ 15,409 17,585 51,695 74,306 82,509
-------- -------- -------- -------- --------
Net revenue........................ 96,336 141,923 195,900 323,692 537,608
Costs and expenses:
Direct costs..................... 45,957 70,258 97,293 165,313 272,590
General and administrative
expense....................... 37,833 53,335 73,432 113,247 187,589
Depreciation and amortization.... 4,607 7,823 10,352 16,903 24,780
Non-recurring costs:
Restructuring costs........... -- -- -- 2,373 13,102
Special pension
contribution................ -- -- -- 2,329 2,329
-------- -------- -------- -------- --------
Total costs and
expenses............... 88,397 131,416 181,077 300,165 500,390
-------- -------- -------- -------- --------
Income from operations............. 7,939 10,507 14,823 23,527 37,218
Non-recurring transaction costs.... -- -- -- -- (17,118)
Other income (expense)............. (2,635) (2,890) (1,191) (1,445) (2,975)
-------- -------- -------- -------- --------
Total other income (expense)....... (2,635) (2,890) (1,191) (1,445) (20,093)
-------- -------- -------- -------- --------
Income before income taxes......... 5,304 7,617 13,632 22,082 17,125
Income taxes....................... 2,467 3,272 4,585 8,181 11,914
-------- -------- -------- -------- --------
Income before cumulative effect of
accounting change................ 2,837 4,345 9,047 13,901 5,211
Cumulative effect of accounting
change........................... -- (158) -- -- --
-------- -------- -------- -------- --------
Net income......................... 2,837 4,187 9,047 13,901 5,211
Non-equity dividend................ -- -- -- -- (846)
-------- -------- -------- -------- --------
Net income available for common
shareholders..................... $ 2,837 $ 4,187 $ 9,047 $ 13,901 $ 4,365
======== ======== ======== ======== ========
Net income per share............... $ 0.14 $ 0.17 $ 0.32 $ 0.45 $ 0.13
======== ======== ======== ======== ========
Weighted average shares
outstanding(3)................... 20,888 23,972 28,044 31,233 33,714
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT EMPLOYEES)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 4,333 $ 14,539 $ 45,625 $ 80,061 $ 62,032
Working capital...................... 2,773 16,896 46,384 70,020 96,008
Total assets......................... 70,993 125,366 193,568 334,642 518,005
Long-term debt and obligations,
including current portion.......... 12,931 21,373 21,874 51,831 182,293
Shareholders' equity................. $23,585 $ 40,097 $ 87,092 $161,805 $144,348
Employees............................ 1,376 1,908 2,592 4,372 7,394
</TABLE>
- ---------------
(1) 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 above 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 above 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.
(2) Reimbursed costs consist primarily of payments to third party physician
investigators, travel and other costs that are billed to and reimbursed by
the Company's clients. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
(3) Restated to reflect a two-for-one stock split of the Company's Common Stock
effected as a 100% stock dividend on November 27, 1995.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of full-service contract research, sales
and marketing services to the global 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.
Since its inception in 1982, the Company has followed a focused strategy of
expanding the scope of its services and geographic presence to support the
worldwide needs of its client base. During 1996, through internal expansion and
strategic acquisitions, the Company considerably broadened its array of
services, created new opportunities for growth and enhanced its management team
and scientific and technical operating staff. Specifically:
- On February 15, 1996, the Company acquired PMC, a CRO located in Uppsala,
Sweden. The Company acquired PMC for approximately 273,000 shares of the
Company's Common Stock. Additionally, approximately $1.3 million in cash
was paid to a dissenting shareholder. The acquisition of PMC was accounted
for as a pooling of interests, and all consolidated financial data for
periods subsequent to January 1, 1996 have been restated to include the
results of the pooled company. The financial data of the pooled companies
prior to January 1, 1996 were not materially different from that
previously reported by the Company, and thus have not been restated.
- On May 13, 1996, the Company acquired the operating assets of Lewin-VHI,
Inc., a healthcare consulting firm, headquartered in Fairfax, VA, and
formed a new subsidiary of the Company, Lewin. In connection with this
transaction, the Company paid approximately $30.0 million in cash for the
operating assets of Lewin and issued options to Lewin's management team
and key staff to purchase 203,717 shares of the Company's Common Stock.
- In August 1996, the Company began construction of a new 171,000 square
foot facility in Bathgate, Scotland, for formulation, manufacturing,
packaging and distribution of clinical trial drugs. The Bathgate facility,
currently estimated to be completed in late 1997, is anticipated to house
300 employees and will also include a data management center.
- On November 22, 1996, the Company acquired BRI, a leading international
contract research firm, headquartered in Arlington, VA, specializing in
medical device development and regulatory compliance consulting. The
Company exchanged 1,614,862 shares of its Common Stock for all of BRI's
outstanding shares of capital stock and exchanged options exercisable for
336,112 shares of the Company's Common Stock. The Company recognized in
the fourth quarter of 1996 approximately $2.5 million in non-recurring
transaction costs and approximately $2.3 million in non-recurring
restructuring costs related to the transaction. The acquisition was
accounted for as a pooling of interests, and accordingly, the Company has
restated all historical financial data to include the historical financial
data of BRI.
- On November 29, 1996, the Company effected a share exchange with Innovex,
an international contract services organization headquartered in Marlow,
U.K., specializing in the sales and marketing of drugs for the
pharmaceutical industry. In the Innovex transaction, which was accounted
for as a pooling of interests, the Company acquired 100% of the
outstanding shares of Innovex in exchange for 9,214,239 shares of the
Company's Common Stock and exchanged 786,226 options to purchase shares of
the Company's Common Stock for Innovex stock options. Subsequently, the
Company retired approximately $56.8 million of Innovex obligations. In the
fourth quarter of 1996, related to the Innovex transaction, the Company
recognized approximately $14.5 million in non-recurring transaction costs
and approximately $8.5 million in non-recurring restructuring costs. In
addition, Innovex had previously recognized approximately $2.4 million and
$2.3 million, respectively, in non-recurring restructuring and special
pension costs in the quarter
16
<PAGE> 17
ended March 31, 1996. The Company has restated all historical financial
data to include Innovex historical financial data in accordance with
pooling of interests accounting.
For additional information regarding the transactions and financial
performance discussed and analyzed above, see "Business -- General",
"Incorporation of Certain Documents by Reference" and "Notes to Consolidated
Financial Statements" found elsewhere in this Prospectus.
During the 12 months ended December 31, 1996, the Company added more than
20 offices through its acquisitions and internal growth, expanded its presence
from 16 to 20 countries, and grew from approximately 2,025 employees to
approximately 7,375 employees worldwide. To facilitate the integration of its
acquisitions, capitalize on the synergies each acquisition provides and manage
its internal growth, the Company recently reorganized into three operating
divisions which work closely together to provide the Company's services on an
integrated basis. The Contract Research Division includes clinical trial
studies, clinical data management and biostatistical analysis, laboratory
services, formulation and packaging of clinical trial drugs, pre-clinical
services, regulatory affairs and medical device consulting services. The Innovex
Division includes perimarketing clinical trial studies in Phases IIIb and IV, as
well as the Company's pharmaceutical sales and marketing services. The
Lewin-Benefit Division encompasses the Company's health economics and healthcare
policy consulting and disease and health information management services.
CONTRACT REVENUE
Most of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Generally,
a portion of the contract fee is paid at the time the project is initiated with
performance-based installments payable over the contract duration. Most
contracts are terminable upon 15-90 days' notice by the client, and typically
provide for termination or winding down fees. Also, some client contracts call
for the client to reimburse the Company at cost for certain items such as
investigator payments and travel. These reimbursed costs are deducted from
professional fee income in calculating net revenue. The Company recognizes net
revenue from its contracts on a percentage-of-completion or per diem basis as
work is performed. Consistent with prior years' practice, the Company considers
net revenue its primary measure of revenue growth.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement data as a percentage of net revenue and the percentage change in such
items as compared to prior periods:
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE INCREASE
--------------------
PERCENTAGE OF NET REVENUE 1994 1995
--------------------------- TO TO
1994 1995 1996 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net revenue............................. 100.0% 100.0% 100.0% 65.2% 66.1%
Costs and expenses:
Direct costs.......................... 49.7 51.1 50.7 69.9 64.9
General and administrative expense.... 37.5 35.0 34.9 54.2 65.6
Depreciation and amortization......... 5.3 5.2 4.6 63.3 46.6
Non-recurring costs:
Restructuring costs................ -- 0.7 2.4 n.m.* n.m.*
Special pension contribution....... -- 0.7 0.4 n.m.* n.m.*
Total costs and expenses...... 92.4 92.7 93.1 65.8 66.7
Income from operations.................. 7.6 7.3 6.9 58.7 58.2
Non-recurring transaction costs......... -- -- (3.2) n.m.* n.m.*
Other income (expense) -- net........... (0.6) (0.4) (0.6) n.m.* n.m.*
Income before income taxes.............. 7.0 6.8 3.2 62.0 (22.4)
Income taxes............................ 2.3 2.5 2.2 78.4 45.6
Net income.............................. 4.6 4.3 1.0 53.7 (62.5)
Non-equity dividend..................... -- -- 0.2 n.m.* n.m.*
Net income available for common
shareholders.......................... 4.6% 4.3% 0.8% 53.7% (68.6)%
</TABLE>
- ---------------
* Not meaningful.
The following table sets forth, for the periods indicated, certain income
statement data excluding the effects of the non-recurring costs and
non-recurring transaction costs identified above:
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE INCREASE
-------------------
1995 1996 1995 TO 1996
------- ------- -------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
RESULTS OF OPERATIONS WITHOUT NON-RECURRING
COSTS:
Income from operations......................... $28,229 $52,649 86.5%
Income from operations as a percentage of net
revenue...................................... 8.7% 9.8% 12.6
Net income available for common shareholders... $17,489 $32,121 83.7
Net income available for common shareholders as
a percentage of net revenue.................. 5.4% 6.0% 11.1%
</TABLE>
18
<PAGE> 19
The following table sets forth, for the periods indicated, net revenue data
by geographic region:
<TABLE>
<CAPTION>
% OF % OF % OF
1994 TOTAL 1995 TOTAL 1996 TOTAL
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NET REVENUE:
Americas......................... $ 84,231 43.0% $132,199 40.8% $235,572 43.8%
Europe........................... 108,468 55.4 184,506 57.0 289,325 53.8
Asia-Pacific..................... 3,201 1.6 6,987 2.2 12,711 2.4
-------- ----- -------- ----- -------- -----
Total.................... $195,900 100.0% $323,692 100.0% $537,608 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
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.
Net revenue for the year ended December 31, 1996 was $537.6 million, an
increase of $213.9 million or 66.1% over fiscal 1995 net revenue of $323.7
million. In general, growth occurred across each of the Company's three
geographic regions and within each contract service sector. Factors contributing
to both the regional and service growth include the provision of increased
services rendered under existing contracts, the initiation of services under
contracts awarded subsequent to January 1, 1996 and the Company's acquisitions
(excluding BRI and Innovex) completed during 1996 and 1995 which contributed
approximately $44.8 million in 1996 versus $11.7 million in 1995. Without these
acquisitions, the Company's 1996 net revenue increased by $180.8 million or
57.9% over comparable 1995 net revenue. As a result of the Company's broad range
of contract service offerings, one client accounted for 11.9% of the Company's
1996 net revenue. See "Business -- Clients and Marketing".
Direct costs, which include compensation and related fringe benefits for
billable employees and any other expenses directly related to contracts which
are not included as reimbursed costs, were $272.6 million or 50.7% of 1996 net
revenue versus $165.3 million or 51.1% of 1995 net revenue. The decrease in
direct costs as a percentage of net revenue is primarily attributable to
efficiency realized through the use of information technology in the Company's
provision of services related to global, long-term contracts, offset by
increased costs attributable to the increase in net revenue generated from
contract sales and marketing services, which incur a higher level of direct
costs (but lower general and administrative expenses) relative to net revenue
than contract research services.
General and administrative expense, which includes compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, was $187.6 million or
34.9% of 1996 net revenue versus $113.2 million or 35.0% of 1995 net revenue.
The $74.3 million growth in general and administrative expense is primarily due
to an increase in personnel, facilities and locations, business development and
marketing activities, and outside services brought on by the Company's growth.
Depreciation and amortization was $24.8 million or 4.6% of 1996 net revenue
versus $16.9 million or 5.2% of 1995 net revenue.
Income from operations was $37.2 million or 6.9% of 1996 net revenue versus
$23.5 million or 7.3% of 1995 net revenue. Net of non-recurring costs, income
from operations was $52.6 million or 9.8% of 1996 net revenue versus $28.2
million or 8.7% of 1995 net revenue. During the quarter ended March 31,
19
<PAGE> 20
1996, Innovex recognized two non-recurring charges: a $2.4 million expense for
an Innovex internal reorganization and a related $2.3 million special pension
contribution. Accordingly, the Company's pooled, consolidated financial results
include such charges, totalling $4.7 million, in both the fiscal years ended
December 31, 1996 and 1995. In the fourth quarter of 1996, the Company
recognized approximately $10.7 million in non-recurring restructuring costs
related to the BRI and Innovex transactions.
Other expense increased to $20.1 million in 1996 from $1.4 million in 1995.
Other expense includes approximately $17.1 million of non-recurring acquisition
transaction costs for the year ended December 31, 1996, most of which were not
deductible for tax purposes. Net of such non-recurring transaction costs, other
expense was $3.0 million for 1996 and $1.4 million in 1995. This increase of
approximately $1.5 million was primarily due to an increase of interest and
miscellaneous expense of $5.9 million which was offset by an increase in
interest income of approximately $4.4 million.
The effective tax rate for 1996 was 69.6% versus a 37.0% rate in 1995. The
increase in the 1996 effective tax rate was primarily attributable to the
non-tax deductible, non-recurring acquisition transaction costs incurred and a
portion of the non-recurring costs relating to the Innovex internal
reorganization prior to its pooling of interests with the Company. The lack of
tax relief for the Innovex internal reorganization costs is reflected in both
the effective tax rates for 1996 and 1995. The effective tax rate for 1996 was
33.6% versus a 34.7% rate in 1995 excluding the non-recurring costs. The
Company's effective tax rate may vary as profits in locations with different tax
rates change. See "-- Taxes".
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net revenue for 1995 was $323.7 million versus $195.9 million in 1994, an
increase of $127.8 million or 65.2%. In general, the growth occurred across each
of the Company's three geographic regions. The growth can be attributed
primarily to the increase in services rendered under existing contracts and the
initiation of services under new contract work awarded in 1995. Excluding fiscal
1995 acquisitions, which contributed net revenue of approximately $11.7 million
in that year, the Company's net revenue was $312.0 million, which represented
growth of $116.2 million or 59.3% over 1994.
Direct costs, which include compensation and related fringe benefits for
billable employees and any other expenses directly related to contracts which
are not included as reimbursed costs, were $165.3 million or 51.1% of 1995 net
revenue versus $97.3 million or 49.7% of 1994 net revenue. The increase in
direct costs as a percentage of net revenue is due primarily to costs
attributable to the increasing net revenue from sales and marketing services,
which incur a higher level of direct costs (but lower general and administrative
expenses) relative to revenue than contract research services, the establishment
of start-up operations and direct costs associated with the operational
integration of the Company's acquisitions in 1995.
General and administrative expense, which includes compensation and fringe
benefits for administrative employees, non-billable travel, professional
services, advertising, computer and facility expenses, was $113.2 million or
35.0% of 1995 net revenue versus $73.4 million or 37.5% of 1994 net revenue. The
$39.8 million growth in general and administrative expense is primarily due to
an increase in personnel, facilities and locations, business development and
marketing activities, information technology investments and the use of outside
services brought on by the Company's growth and operation as a publicly-held
company.
Depreciation and amortization was $16.9 million or 5.2% of 1995 net revenue
versus $10.4 million or 5.3% of 1994 net revenue.
Income from operations was $23.5 million or 7.3% of net revenue in 1995
versus $14.8 million or 7.6% of net revenue in 1994. The decrease as a
percentage of net revenue was due to the recognition of two non-recurring
charges: Innovex recorded a $2.4 million expense related to an internal
reorganization and a $2.3 million expense related to a special pension
contribution. Excluding these costs, income from operations would have been
approximately $28.2 million or 8.7% of 1995 net revenue.
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<PAGE> 21
Other expense increased to $1.4 million in 1995 from $1.2 million in 1994.
Net of a 1994 one-time gain of approximately $460,000, other expense decreased
approximately $210,000. This decrease is primarily attributable to an increase
in interest income and other income of approximately $1.7 million, offset by an
increase in interest expense of $970,000 and $475,000 in non-recurring
acquisition transaction costs expensed by the Company in 1995, most of which
were not tax-deductible.
The effective tax rate for 1995 was 37.0% versus a 33.6% rate in 1994. The
increase in the 1995 effective tax rate was primarily attributable to the
non-tax deductible nature of some of the non-recurring costs relating to the
internal reorganization, some of the foreign operating losses and some of the
acquisition transaction costs incurred. The Company's effective tax rate may
vary as profits in locations with different tax rates change. See "-- Taxes".
PRO FORMA QUARTERLY RESULTS
The following table sets forth certain pro forma unaudited quarterly income
statement data of the Company on a calendar year basis, excluding non-recurring
costs, for the two years ended December 31, 1996. See Note 12 of the Notes to
Consolidated Financial Statements included elsewhere in this Prospectus and
Notes 1 and 2 below for certain pro forma unaudited quarterly income statement
data for the same periods which include the effect of such non-recurring costs.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996(1) 1996 1996 1996(2)
-------- -------- --------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Professional fee income....... $82,217 $90,026 $96,966 $107,906 $122,735 $147,544 $158,376 $191,462
Less reimbursed costs....... 19,808 17,204 18,420 18,874 12,143 20,128 20,878 29,360
------- ------- ------- -------- -------- -------- -------- --------
Net revenue................... 62,409 72,822 78,546 89,032 110,592 127,416 137,498 162,102
Costs and expenses:
Direct costs.............. 32,564 36,876 39,193 45,221 56,858 63,138 69,637 82,957
General and administrative
expense................. 20,728 27,083 29,110 30,350 36,662 47,039 47,987 55,901
Depreciation and
amortization............ 3,040 3,723 4,322 4,871 5,328 5,720 6,478 7,254
------- ------- ------- -------- -------- -------- -------- --------
Total costs and expenses...... 56,332 67,682 72,625 80,442 98,848 115,897 124,102 146,112
------- ------- ------- -------- -------- -------- -------- --------
Income from operations........ 6,077 5,140 5,921 8,590 11,744 11,519 13,396 15,990
Other income (expense)........ 32 (722) (504) 15 215 (972) (1,184) (1,034)
------- ------- ------- -------- -------- -------- -------- --------
Income before income taxes.... 6,109 4,418 5,417 8,605 11,959 10,547 12,212 14,956
Income taxes.................. 1,919 1,771 1,772 2,940 3,935 3,349 4,062 5,361
------- ------- ------- -------- -------- -------- -------- --------
Net income.................... 4,190 2,647 3,645 5,665 8,024 7,198 8,150 9,595
Non-equity dividend........... -- -- -- -- -- (314) (319) (213)
------- ------- ------- -------- -------- -------- -------- --------
Net income available for
common shareholders......... $ 4,190 $ 2,647 $ 3,645 $ 5,665 $ 8,024 $ 6,884 $ 7,831 $ 9,382
======= ======= ======= ======== ======== ======== ======== ========
Income from operations as a
percentage of net revenue... 9.7% 7.1% 7.5% 9.6% 10.6% 9.0% 9.7% 9.9%
======= ======= ======= ======== ======== ======== ======== ========
Net income available for
common shareholders as a
percentage of net revenue... 6.7% 3.6% 4.6% 6.4% 7.3% 5.4% 5.7% 5.8%
======= ======= ======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) During the quarter ended March 31, 1996, the Company incurred non-recurring
restructuring costs and a special pension contribution in the aggregate
amount of $4.7 million. Including such non-recurring costs, income from
operations for the quarter ended March 31, 1996 was $7 million and net
income available for common shareholders was $4.4 million.
(2) During the quarter ended December 31, 1996, the Company incurred
non-recurring restructuring costs of $10.7 million and acquisition
transaction costs of $17.1 million. Including such non-recurring costs,
income from operations for the quarter ended December 31, 1996 was $5.3
million and net income (loss) available for common shareholders was ($14.8
million).
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<PAGE> 22
Although the Company's net revenue has increased on a quarterly basis since
the beginning of 1995, income from operations and net income available for
common shareholders, as a percentage of net revenue, have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. Quarterly results can fluctuate as a result of a number of
factors, including the timing of start-up expenses for new offices,
acquisitions, the completion or commencement of significant contracts, changes
in the mix of services offered and foreign exchange fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operations were $28.3 million in 1996 versus
$34.5 million and $14.8 million in 1995 and 1994, respectively. Investing
activities in 1996 were $142.6 million, versus $38.1 million and $14.3 million
in 1995 and 1994, respectively. The change in the amount of cash used in
investing activities is primarily due to the investment of the Company's net
proceeds from the May 1996 private placement of its 4.25% Convertible
Subordinated Notes due May 31, 2000 and its October 1995 equity offering. Such
proceeds were used as follows: $62.7 million was invested in investment-grade,
interest-bearing securities with maturities of greater than 90 days; $11.4
million was used for the payment of non-recurring transaction costs in
connection with business combinations described above; $33.4 million was used
for acquisitions; and $56.8 million was used to retire Innovex obligations
assumed in the share exchange with Innovex. Approximately $45.2 million of the
Innovex obligations was related to debt incurred for the recapitalization of
Innovex in April 1996. Capital asset purchases required $39.1 million in 1996
versus $25.7 million and $16.1 million in 1995 and 1994, respectively. Capital
asset expenditures in 1996 included approximately $5.0 million related to the
Company's purchase of land and commencement of construction of a facility in
Bathgate, Scotland. The remaining capital expenditures were predominantly
incurred in connection with the expansion of existing operations, the
enhancement of information technology capabilities and the opening of new
offices.
Total working capital was $96.0 million at December 31, 1996 compared to
$70.0 million at December 31, 1995. Total accounts receivable and unbilled
services increased 69.9% to $178.6 million at December 31, 1996 from $105.1
million at December 31, 1995, as a result of the growth in net revenue. The
number of days revenue outstanding in accounts receivable and unbilled services,
net of unearned income, was 48 days at December 31, 1996 and December 31, 1995.
In August 1996, the Company began construction of a 171,000 square foot
facility in Bathgate, Scotland, expected to be completed in late 1997.
Management's current best estimate of the total capital required for the
Bathgate facility is U.K. L17.5 million (approximately $28.4 million), which
includes the acquisition of land, construction of the facility and purchase of
machinery and equipment. As of December 31, 1996, the Company had spent
approximately U.K. L3.0 million (approximately $5.0 million) relating to the
acquisition of land and construction of the Bathgate facility. See "Use of
Proceeds".
In November 1996, in conjunction with the Company's share exchange with
Innovex, the Company assumed the following commitments:
- During 1993, Innovex acquired Clinical Research Foundation, an
international contract research organization, for total consideration of
approximately Deutche Marks (DM) 30.0 million, of which a final payment
of approximately DM 6.6 million (approximately $4.0 million) is due from
the Company in April 1997.
- In August 1996, Innovex acquired Eminent, a Spanish contract sales and
marketing services firm. An initial payment of 100 Spanish Pesetas
million was made in August 1996. A remaining amount of up to 700 Spanish
Pesetas million (approximately $5.0 million) would be due over the next
three years if certain performance measures are met.
During 1995, the Company acquired a drug development facility in Edinburgh,
Scotland. Related to this acquisition, the Company entered into a purchase
commitment valued at U.K. L13.0 million (approximately $21.8 million) with
payment due in December 1999. The Company has hedged this
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<PAGE> 23
commitment by purchasing forward contracts. The Company's forward contracts
mature on December 29, 1999, and as of December 31, 1996, the Company had
committed to purchasing approximately U.K. L600,000 (approximately $852,000)
under such contracts.
The Company has renewed its previously expired $15.0 million unsecured line
of credit with a U.S. bank. Also, the Company has a $4.0 million secured line of
credit with a second U.S. bank. Additionally, the Company has available to it a
U.K. L6.0 million unsecured line of credit with a U.K. bank and a U.K. L5.0
million secured overdraft facility with a second U.K. bank. At December 31,
1996, the Company had $19.0 million and U.K. L5.7 million available under these
credit agreements.
All foreign currency denominated amounts due, subsequent to December 31,
1996, have been translated using the Wednesday, January 29, 1997 foreign
exchange rate as published in the January 30, 1997 edition of the Wall Street
Journal.
The Company's primary cash needs on both a short-term and long-term basis
are for working capital, geographic expansion, addition of new services,
potential acquisitions, general corporate purposes and capital expenditures. To
further the Company's strategy of providing a continuum of contract services
across key therapeutic categories for the rapid and cost effective development
and marketing of products for the pharmaceutical, biotechnology and medical
device industries, the Company intends to use the net proceeds of the Offerings
as described under "Use of Proceeds".
Based on its current operating plan, the Company believes that its
available cash and cash equivalents, together with cash flow from operations,
borrowings under its line of credit agreements and net proceeds from the
Offerings will be sufficient to meet its foreseeable cash needs.
FOREIGN CURRENCY
Approximately 56.5%, 59.2% and 57.0% of the Company's net revenue for the
years ended December 31, 1996, 1995, and 1994, respectively, were derived from
the Company's operations outside the United States. The Company's consolidated
financial statements are denominated in U.S. dollars, and accordingly, changes
in the exchange rate between foreign currencies 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.
The Company may be subject to foreign currency transaction risks when the
Company's service contracts are denominated in a currency other than the
currency in which the Company incurs expenses related to such contracts. The
Company limits its foreign currency transaction risks through exchange rate
collars stated in its contracts with clients or the Company hedges the
transaction risk with foreign exchange contracts or options. The Company
recognizes changes in value in income only when contracts are settled or options
are exercised. There were no open foreign exchange contracts or options relating
to service contracts at December 31, 1996.
TAXES
Since the Company conducts operations on a global basis, the Company's
effective tax rate has depended and will continue to depend on the amount of
profits in locations with varying tax rates. The Company's results of operations
will be impacted by changes in the tax rates of the various jurisdictions and by
changes in any applicable tax treaties. In particular, as the portion of the
Company's non-U.S. business increases, the Company's effective tax rate may vary
significantly from period to period. The Company's effective tax rate may also
depend upon the extent to which the Company is allowed (and is able to use under
applicable limitations) United States foreign tax credits in respect of taxes
paid on its foreign operations.
INFLATION
The Company believes the effects of inflation generally do not have a
material adverse impact on its operations or financial condition.
23
<PAGE> 24
BUSINESS
GENERAL
The Company is a leading provider of full-service contract research, sales
and marketing services to the global pharmaceutical, biotechnology and medical
device industries. Supported by its extensive information technology
capabilities, the Company provides a broad range of fully-integrated contract
services in order to accelerate the time from discovery to peak market
acceptance of a new therapy by offering traditional contract research services
as well as contract sales and marketing services. In addition, the Company also
supports the developing information needs of the healthcare industry by
providing health economics and healthcare policy consulting and disease and
health information management services.
The Company has grown rapidly, experiencing a five year compound annual
growth rate in net revenue and net income available for common shareholders
(excluding non-recurring costs) of 53.7% and 83.4%, respectively. This growth
has been the result of internal expansion, augmented with strategic
acquisitions. In 1996, the Company's net revenue and net income available for
common shareholders, excluding non-recurring charges, was $537.6 million and
$32.1 million, respectively, provided by over 50 offices located in 20
countries, and approximately 7,375 employees. During 1996, the Company provided
services to 49 of the 50 largest pharmaceutical companies in the world, as
ranked by 1995 healthcare revenue, and to the 11 largest biotechnology companies
in the world, as ranked by market capitalization in December 1996. See
"-- Clients and Marketing".
Since its inception in 1982, the Company has continued to expand the scope
of its services and its geographic presence to support the needs of its clients
on a worldwide basis. The Company has implemented a number of strategic
initiatives to broaden its array of services and create new opportunities for
growth. In November 1996, the Company completed a share exchange for all of the
outstanding shares of Innovex, an international contract services organization
specializing in contract research, sales and marketing of new therapies for
pharmaceutical companies. Innovex's contract sales and marketing and clinical
research activities are concentrated on the perimarketing phase of product life,
which the Company defines as the period from two years before to two years after
regulatory approval. Innovex enables the Company to complement its clinical
research focus on obtaining regulatory approval with services designed to assist
clients in achieving market penetration of new therapies. Accordingly, with the
addition of Innovex, the Company is now able to provide late stage clinical
trials and product launch services to clients during a critical and costly stage
of bringing a product to market.
Also in November 1996, the Company acquired BRI, a leading international
contract research firm specializing in medical device development and regulatory
compliance consulting. The addition of BRI allows the Company to offer contract
services to medical device developers, and consulting services relating to good
manufacturing practices ("GMP"), good clinical practices ("GCP") and good
laboratory practices ("GLP"). In May 1996, the Company acquired the operating
assets of Lewin-VHI, Inc., a nationally-recognized healthcare consulting firm,
and formed Lewin as a new subsidiary of the Company. Combined with Benefit
International, a firm specializing in pharmacoeconomic and quality of life
evaluations that was acquired by the Company in May 1995, Lewin serves as the
foundation for the Company's efforts to offer broad-based disease and health
information management services. In February 1996, the Company acquired PMC, a
CRO located in Uppsala, Sweden which has extensive clinical trials management
expertise as well as a Phase I clinical trial testing unit and an analytical
laboratory. This acquisition enabled the Company to expand its ability to
provide drug development services in Scandinavia and position the Company for
further growth in that important region for drug development. Also in 1996, in
order to increase its capacity in clinical trial drug formulation,
manufacturing, packaging and distribution, the Company began construction of a
171,000 square foot facility in Bathgate, Scotland. The Bathgate facility also
will house a clinical data management center. See "Management's Discussion and
Analysis of Financial Position and Results of Operations" and "Incorporation of
Certain Documents by Reference". See "Use of Proceeds".
24
<PAGE> 25
To facilitate the integration of these acquisitions and to capitalize on
the synergies each acquisition provides, the Company recently reorganized into
three operating divisions which work closely together to provide the Company's
services on an integrated basis. The Contract Research Division covers services
through Phase IIIa clinical trials, including study design, clinical data
management and biostatistical analysis, laboratory services, formulation and
packaging of clinical trial drugs, pre-clinical services, regulatory affairs and
medical device consulting. The Innovex Division includes perimarketing clinical
studies in Phases IIIb and IV, as well as the Company's pharmaceutical sales and
marketing services. Finally, the Lewin-Benefit Division encompasses the
Company's health economics and healthcare policy consulting and disease and
health information management services. The divisions provide an organizational
framework for the Company to cross-sell its services and enable it to offer both
product development and sales and marketing services to clients. Accordingly,
the Company believes its breadth of services strengthens its competitive
position as it looks to become the provider of choice for pharmaceutical,
biotechnology and medical device companies and the broader healthcare industry.
INDUSTRY OVERVIEW
The CRO industry provides independent product development services
primarily for the pharmaceutical and biotechnology industries. Companies in
these industries outsource product development services to CROs in order to
manage the drug development process more efficiently and cost-effectively to
maximize the benefits in time and profit of patent-protected products. CROs
derive substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. The CRO industry has
evolved from providing primarily pre-clinical services in the 1970s to a
full-service industry, offering services during the pre-clinical, clinical and
post-marketing phases of development for new therapies. In addition to managing
clinical trials, CROs provide scientific evaluations and analyze the results
according to good clinical and laboratory practices as required by the
applicable regulatory authorities. CROs serving the medical device industry
provide similar services designed to assist medical device developers in
obtaining regulatory approval.
The Company believes that a separate industry has developed providing sales
and marketing services on a contract basis to the pharmaceutical industry.
Pharmaceutical companies incur substantial expenses on sales and marketing
activities, particularly at product launch to achieve peak market penetration.
The introduction of a new drug requires the availability of a large number of
specially-trained sales personnel, sometimes at short notice. The contract sales
industry emerged in the 1980s, most notably in the U.K. where regulatory cost
containment pressure, the Company believes, led pharmaceutical companies to
search for a more cost-effective way to launch new products. As a result, in
order to convert high fixed costs into variable costs, large pharmaceutical
companies began to outsource their sales and marketing activities related to
product launch. The Company believes that, at present, similar cost containment
dynamics are shaping the demand for contract sales and marketing services in
additional markets, such as the United States and Germany. Large contract sales
organizations can accelerate the time to peak market acceptance of a new drug by
expeditiously assembling and training a contract sales force to launch a
pharmaceutical company's newly approved products. Contract sales organizations
are able to recruit the necessary personnel by utilizing extensive databases of
pharmaceutical sales representatives. The Company believes that contract sales
and marketing opportunities could emerge in the medical device and biotechnology
industries as well.
The Company believes that there is a significant market opportunity for
companies focusing on the perimarketing phase of a product life cycle. The
perimarketing period is characterized by significant spending on large scale
clinical trials and sales staff requirements necessary to gain commercial
acceptance of products. The Company believes that organizations offering
integrated product development and sales and marketing services during the
perimarketing period will be able to further shorten the product development
cycle and accelerate market penetration so that drug sponsors can maximize the
duration of a drug's commercial life under patent protection, and therefore
maximize related revenue and return on investment. Accordingly, the Company
believes that such organizations will have a competitive advantage over
companies that compete only in either the CRO or contract sales industries.
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<PAGE> 26
The CRO industry is highly fragmented, consisting of several hundred small,
limited-service providers, several medium-sized CROs and only a few companies
with full-service global capabilities. The contract sales and marketing industry
also is highly fragmented, primarily characterized by local organizations
operating within their home countries. Prior to its combination with the
Company, Innovex was the largest contract sales organization in the U.K. and was
expanding its services into international markets, particularly in the United
States and Germany. The Company believes that, through its combination with
Innovex, it is the leading global organization to combine the full spectrum of
services typically offered by the CRO industry with contract sales and marketing
services.
TRENDS AFFECTING OUTSOURCING
Worldwide spending on pharmaceutical products and medical devices is
increasing due to a combination of factors, including aging populations and a
growing number of pharmaceutical and medical device products that provide
enhanced therapeutic benefits. At the same time, regulatory pressures and
pricing constraints have intensified as governments and private healthcare
payors seek to manage the growth of total healthcare expenditures. These
developments have led to intense competition in the pharmaceutical,
biotechnology and medical device industries, where innovation, more focused
research and development, rapid product introduction and cost-effectiveness have
become key competitive factors. The Company believes that in response to these
developments, pharmaceutical, biotechnology and medical device companies are
increasingly outsourcing a variety of activities associated with product
development and pharmaceutical sales and marketing to specialist third party
service providers such as the Company. Although outsourcing has been prevalent
for long periods of time in many industries, outsourcing to CROs and contract
sales organizations is a relatively recent trend and one that is still evolving.
Through such outsourcing, drug and medical device developers are attempting to
reduce fixed costs and accelerate the time to market, commercial acceptance and
market penetration of their products, with the aim of maximizing their return on
investment.
The Company estimates that 1995 global expenditures by the pharmaceutical
and biotechnology industries on drug development services of the type offered by
the CRO industry were approximately $25 billion of which approximately $2.5
billion were outsourced to CROs. Based upon industry data, the Company believes
that global expenditures on sales and marketing services of the type offered by
the contract sales industry are greater than expenditures on drug development,
and that the percentage currently outsourced is smaller than the percentage of
outsourced drug development services. The Company believes that the following
factors will contribute to the increased use of drug development and contract
sales and marketing outsourcing and an expansion of the scope of services
outsourced:
COMPETITIVE PRESSURES TO CONTAIN COSTS AND ACCELERATE TIME TO MARKET. Over
the last several years, pharmaceutical companies have faced significant margin
pressures from patent expirations, market acceptance of generic drugs,
regulatory pressures to reduce drug prices and market forces, particularly
managed care. The pharmaceutical industry is consolidating as companies seek to
reduce costs and increase revenues through business combinations. As a result,
many pharmaceutical companies have focused on more efficient ways of conducting
business and on research innovation to ensure future product pipeline. The need
to increase the speed of new product development and market acceptance has
become paramount in order to maximize the period of marketing exclusivity for
patent-protected products. Increasingly, pharmaceutical companies have turned to
outsourcing both as a means of reducing fixed costs and accelerating the drug
development process. The Company believes large drug sponsors also are moving
toward outsourcing greater portions of a new product's development to a single,
multinational full-service provider, rather than contracting specific phases to
several different providers. The Company believes that outsourcing providers
with the ability to provide fully-integrated services on a multinational basis
for the entire product continuum from discovery to peak marketing will benefit
from this trend.
GLOBALIZATION OF THE MARKETPLACE. Pharmaceutical, biotechnology and
medical device companies are increasingly attempting to expand the market for
new products by pursuing regulatory approvals and commercialization in multiple
countries simultaneously rather than sequentially as they have in the past.
26
<PAGE> 27
Expanding the market for a drug or medical device is particularly important
because of limited patent lives and high development costs. However, building
and maintaining the internal infrastructure to pursue regulatory approval and
commercialization in smaller markets is costly for these companies. The Company
believes that in order to respond to these pressures and gain access to the
global marketplace, pharmaceutical, biotechnology and medical device companies
are increasingly outsourcing to service providers that are established in key
geographic markets worldwide and that are capable of coordinating concurrent
regulatory approvals or serving as the developer's presence in a particular
country. The Company believes that organizations with advanced global data
management capabilities, global presence, the ability to prepare regulatory
submissions in multiple jurisdictions and the ability to offer sales and
marketing support will benefit from these trends.
IMPORTANCE OF SALES AND MARKETING ACTIVITIES. In addition to expenditures
on research and development, pharmaceutical and biotechnology companies incur
substantial expenditures on sales and marketing activities. Such expenditures
are especially concentrated from the time of product launch through market
penetration. During this period, pharmaceutical and biotechnology companies
generally require the availability of a large number of specially-trained sales
personnel on short notice for a limited duration. Additionally, these companies
engage in specialized marketing of their products to prescribers and other
decision makers, such as managed care providers and other intermediaries, in
order to persuade them to prescribe their product in preference to alternative
drugs, or to include their product in the list of drugs (the "formulary") that
affiliate physicians may prescribe. Cost containment pressures have accelerated
the use of third party services to provide specialized sales and marketing teams
in certain European countries, and the Company believes similar trends in the
United States will drive the expansion of the United States market for such
services. The Company believes that pharmaceutical and biotechnology companies
will increasingly turn to third-party service providers capable of replicating
or supplementing the internal sales and marketing functions of the large drug
companies as a variable cost alternative to developing and maintaining such
resources in-house. Additionally, the Company believes that biotechnology
companies will increasingly turn to outsourcing for sales and marketing services
as an alternative to entering into licensing arrangements with large
pharmaceutical companies that may limit the drug developer's ability to maximize
profits from commercialization of the product.
STRINGENT REGULATION; NEED FOR SOPHISTICATED INFORMATION
TECHNOLOGY. Regulatory requirements throughout the world have caused an
increase in the volume of data required for regulatory filings and escalated the
demands for data collection and analysis during the drug and medical device
development processes. Pharmaceutical companies, often developing drugs in
therapeutic areas where other drugs are already marketed, need larger, more
complicated trials to demonstrate superiority over existing therapies. Due to
the data demands of regulatory requirements, the need for advanced technological
capabilities has become more important, thus, the pharmaceutical, biotechnology
and medical device industries are outsourcing to organizations with strong data
management capabilities and technological expertise.
Also, the Company believes that recent efforts to develop global harmonized
regulatory standards will increase the importance of advanced information
technology capabilities in global drug development. In recent years, the FDA and
corresponding regulatory agencies of Canada, Japan and Europe have commenced
discussions for the purpose of developing harmonized standards for both the
conduct of pre-clinical and clinical studies and the format and content of
applications for new drug approval. Further, the FDA encourages the use of
computer assisted filings in an effort to expedite the approval process. The
Company believes that organizations with expertise in information technology and
in the changing regulatory environment will have a competitive advantage.
GROWTH IN BIOTECHNOLOGY AND GENOMICS INDUSTRIES. The United States
biotechnology and genomics industries have grown rapidly over the last 10 years
and are developing significant numbers of new therapies which will increasingly
enter clinical trials. Many biotechnology and genomics companies do not have the
necessary staff, in-house expertise or financial resources to conduct clinical
trials or to market and sell products as they gain regulatory approval and
therefore are looking to outsourcing as a cost-effective alternative. As more
biotechnology and genomics products receive regulatory approvals,
27
<PAGE> 28
the Company believes that demand for outsourced sales and marketing services
will increase. Moreover, the biotechnology and genomics industries are expanding
in Europe, and the Company believes that such industries will expand in the
Asia-Pacific region as governments in that region adopt policies favorable to
the development of biotechnology products.
MEDICAL DEVICE INDUSTRY GROWTH. The medical device industry worldwide has
grown rapidly over the last two decades. Many new products and technologies are
currently under development, creating within the medical device industry a need
for more regulatory and clinical trial expertise. At the same time, requirements
for government approval of medical devices have become increasingly stringent.
The Company believes that medical device development companies are increasingly
outsourcing for expertise in complex technologies, global clinical program
management and reimbursement and regulatory compliance. The Company believes
that a company with expertise in medical device development will have a
competitive advantage as outsourcing increases.
COMPANY STRATEGY
The Company's strategy is to provide a continuum of fully-integrated
contract services globally across key therapeutic categories for the rapid and
cost-effective development and marketing of products for the pharmaceutical,
biotechnology and medical device industries. The Company believes that it is
able to address the significant and expanding outsourcing needs of these markets
as its services span the entire product development and launch process from the
pre-clinical stage to the ultimate sales and marketing of the products.
Therefore, the Company continues to expand its geographic presence, service
offerings and therapeutic specializations through internal growth and strategic
acquisitions while continuing to invest in sophisticated information technology
critical to meeting the complex needs of its clients. This strategy has driven
the rapid growth of the Company and continues to provide for future growth
opportunities. In addition, in conjunction with its Lewin-Benefit Division, this
strategy provides a platform for the Company to become a significant provider of
health economics and healthcare policy consulting and disease and health
information management services to product manufacturers and healthcare service
providers. The main components of the Company's strategy are:
PROVIDE A BROAD ARRAY OF FULLY-INTEGRATED CONTRACT SERVICES. The Company,
as part of its strategy to provide a broad array of fully-integrated contract
services to the pharmaceutical, biotechnology and medical device industries, has
increased its range of services to encompass the continuum from discovery
through commercial acceptance of products. The Company believes that the ability
to offer such a full spectrum of contract services distinguishes it from
organizations limited to providing only contract clinical research or contract
sales and marketing services. This strategy enables the Company to cross-sell
its services more comprehensively. In addition, as large pharmaceutical clients
move towards forming alliances with preferred outsourcing organizations, the
Company believes that such clients will seek to form relationships primarily
with the largest, most innovative full-service third party service providers.
ENHANCE THERAPEUTIC AREA SPECIALIZATION. The Company believes that it is
better able to serve its pharmaceutical and biotechnology clients' needs by
offering therapeutic specializations within its full range of drug development
and promotional services. As pharmaceutical and biotechnology companies attempt
to get drugs to market and to achieve market penetration faster, the Company
believes that the ability to provide specialized therapeutic expertise is
necessary to compete for clients' business. The Company has specialized business
units and extensive expertise in the therapeutic areas of central nervous
system, cardiovascular, infectious, and respiratory diseases as well as in the
field of oncology. The Company also has significant clinical trials experience
in the therapeutic areas of endocrinological, gastroenterological, genitourinary
and musculoskeletal diseases. The Company has broadened its therapeutic
expertise both internally and through acquisitions and considers strategic
acquisitions on an ongoing basis to further strengthen its therapeutic
specializations.
EXPAND GEOGRAPHIC PRESENCE. The Company believes that the capability to
provide its services in most major and developing pharmaceutical markets
enhances its ability to compete for business from
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large multinational pharmaceutical and biotechnology companies. With over 50
offices in 20 countries, the Company believes that it is a leader in
pharmaceutical outsourcing in its ability to provide global services. Recently,
the Company has focused on expanding its presence in the Asia-Pacific region and
is exploring business opportunities in China and India.
INCREASE PENETRATION OF PERIMARKETING SERVICES. The Company believes that
its expertise in providing contract services during the perimarketing phase
provides a significant opportunity for growth. The Company's perimarketing
services include Phase IIIb and IV clinical trials, which focus on product
efficacy and product sales and marketing services. Pharmaceutical and
biotechnology companies typically spend significant funds on a product during
the perimarketing phase. The Company's strategy is to expand its perimarketing
services, particularly in the United States and Europe, by leveraging its strong
presence in those markets where the Company is currently providing clinical
research services. The Company may develop sales and marketing services for a
particular market internally or acquire existing local sales and marketing
service providers. The Company intends to cross-sell its perimarketing services
to its existing contract research clients in those markets, as well as to
attract new clients who are interested only in outsourcing the high costs
associated with perimarketing activities.
EXTEND LEADERSHIP IN INFORMATION TECHNOLOGY. The Company seeks to extend
its leadership in information technology in order to provide state-of-the-art
drug and medical device development, perimarketing and health information
management services on a worldwide basis. The Company believes that it has built
an extensive and effective global information technology network for gathering,
managing and analyzing clinical trials data and that its information technology
provides a competitive advantage. Fundamentally, the Company's information
technology supports its transnational structure by enabling all offices to
exchange information with each other so that several offices worldwide can work
simultaneously on a project. This network enables the Company's new offices to
begin contributing immediately to the Company's transnational projects. The
Company's data systems are able to concurrently compile and analyze large
volumes of data from multinational trials and prepare regulatory submissions for
filings on a global basis. The Company also uses its extensive information
technology network to support its contract sales and marketing services. The
Company has a sophisticated system for the centralized management of sales
activities across a broad geographic area, as well as an advanced system to
facilitate the recruitment of sales representatives and assembly of sales forces
on short notice from a database of 54,000 sales representatives. The Company
believes that these systems bring added value to its clients by significantly
enhancing its ability to assemble a targeted sales force on an expedited basis
and accelerate the time to product launch.
CAPITALIZE ON THE GROWING IMPORTANCE OF HEALTH ECONOMICS AND DISEASE
INFORMATION MANAGEMENT SERVICES IN THE HEALTHCARE INDUSTRY. The Company is
positioning itself to capitalize on the growing importance of health economics
and healthcare policy consulting and disease and health information management
services by leveraging its capabilities and expertise to provide information-
based healthcare services. In a rapidly changing healthcare environment
dominated by managed care, the healthcare industry is focusing on methods of
providing quality care at a lesser cost. Thus, the ability to measure healthcare
outcomes and apply cost-benefit analysis to the treatment of diseases has
substantial value to many interests in the healthcare industry. The Company
believes that its capabilities in health economics consulting and disease
management information services, through its Lewin-Benefit Division, position it
to serve the emerging needs of not only managed care organizations, hospitals,
governments, healthcare providers and insurance companies, but also product
manufacturers, in the development of cost-effective integrated healthcare
solutions.
SERVICES
The Company provides globally integrated contract research, sales and
marketing services to the pharmaceutical, biotechnology and medical device
industries. The Company also offers health economics and healthcare policy
consulting and disease and health information management services.
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The Company provides its clients with a continuum of services that develops
a laboratory discovery into a product sale. The Company is organized in three
operating divisions that interface with the client at complementary points in
the process. Within the divisional structure, there is considerable overlap in
specific services and a free flow of communication to best meet each client's
needs. Traditional CRO services range from pre-clinical testing to Phase IIIa
clinical trials and are handled by the Contract Research Division. Once the
product has reached Phase IIIb clinical trials and is therefore in the
perimarketing period, client services generally are provided by the Innovex
Division. These two divisions generate significant amounts of data that are
processed and analyzed by a sophisticated information technology system.
Information technology is at the core of the Company's operations because it
enhances the quality of the Company's services and allows the free flow of
information between the divisions that is key to maximizing the value delivered
by the Company. In addition, the data can be used and further developed by the
Lewin-Benefit Division, which handles disease and health information management.
These concepts are illustrated by the following chart:
(CHART)
The Company's services are described in greater detail below:
CONTRACT RESEARCH SERVICES
CLINICAL TRIAL SERVICES. The Company offers comprehensive clinical trials
services which are the basis for obtaining regulatory approval for drugs and
medical devices. The Company has specialized business units and extensive
experience in the therapeutic areas of the central nervous system,
cardiovascular, infectious and respiratory diseases as well as in the field of
oncology. The Company also has significant clinical trials experience in the
therapeutic areas of endocrinological, gastroenterological, genitourinary and
musculoskeletal diseases. The Company is experienced in managing large trials
involving several thousand patients at several hundred sites and in
multinational trials conducted simultaneously in the Americas, Europe, the
Asia-Pacific region and South Africa.
The Company provides its clients with one or more of the following core
clinical trials services:
Study Design. The Company uses its broad development expertise to
serve its clients in the critical area of study design by assisting in the
preparation of the study protocol and design of case report forms ("CRFs").
The protocol defines the medical issues to be examined, the number of
patients required to produce statistically valid results, the period of
time over which they must be
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<PAGE> 31
This chart uses four columns to display how the Company's services support
its clients' drug development needs. The far left column, titled "Customer
Requirements," illustrates the services the Company provides to its clients from
discovery to product commercialization; such services are listed within a
vertical arrow which points towards the bottom of the page. At the top of the
arrow is the word "Discovery" and the arrow points towards the bottom of the
page at the word "Product." The services listed within the arrow, from top to
bottom are: Pre-Clinical Testing; Formulation, Manufacturing, Packaging; Study
Design; Investigator Recruitment; Clinical Trials Laboratory; Study Monitoring;
Data Management; Biostatistical Analysis; Regulatory Affairs; Phase I Trials to
Phase IIIa Trials; Phase IIIb Trials; Phase IV Trials; and Sales and Marketing.
The next three columns are displayed under the common header "Quintiles
Organization." These columns are represented as rectangles of various sizes.
The second column is a rectangle which is as long as the arrow in the first
column and is divided into two unequal portions by a dotted line extending from
above "Phase IIIb Trials" inside the arrow across the second column. This
column shows how the services listed in the arrow are divided between the
Company's CRO Services and Perimarketing Services. Approximately one-half of
the rectangle above the dotted line corresponds to the Company's CRO services
and is labelled "Contract Research Services" and the remaining portion of the
rectangle corresponds to the Company's perimarketing services and is labelled
"Perimarketing Services." The third column, made up of a rectangle as long as
the rectangle in the second column, simply labelled as "Information Technology,"
illustrates that the Company's information technology is an integral part of all
the Company's services and the interface between them. Two double arrows point
each way between columns two and three; similarly, a double arrow points each
way between columns three and four, which contains a square, approximately
one-fourth the length of the rectangles in columns two and three, that
represents the Company's disease and health information management services and
is titled "Disease and Health Information Management Services."
<PAGE> 32
tracked, the frequency and dosage of drug administration and the study
procedures. The study's success often depends on the protocol's ability to
predict correctly the requirements of the applicable regulatory
authorities.
Investigator Recruitment. During clinical trials, the drug is
administered to patients by physicians, also referred to as investigators,
at hospitals, clinics or other locations, also referred to as sites. The
Company's ability to identify and recruit investigators with the
appropriate expertise and an adequate base of patients who satisfy the
requirements of the study protocol is critical to the success of the trial.
The Company has access to several thousand investigators who have conducted
clinical trials worldwide for the Company.
Study Monitoring. The Company provides study monitoring services
which include investigational site initiation, patient enrollment
assistance and data collection and clarification. Site visits serve to
assure the quality of the data which are gathered according to GCP and to
meet the sponsors' and regulatory agencies' requirements as specified in
the study protocol.
Clinical Data Management and Biostatistical Services. The Company's
clinical data management and biostatistical services were the original
foundations of the Company, and the Company believes that they are two of
the Company's primary competitive strengths. The Company has extensive
experience in the United States and Europe in the creation of scientific
databases for all phases of the drug development process, including the
creation of customized databases to meet client-specific formats,
integrated databases to support New Drug Application ("NDA") submissions
and databases in accordance with FDA and European specifications. The
Company believes that its global database capabilities are a significant
competitive advantage, particularly in large-scale multi-jurisdictional
trials involving thousands of patients at hundreds of sites. For example,
during 1996 the Company managed the NDA submission process for six
large-scale programs. The largest program included approximately 3,000
patients located throughout the United States, Europe and Japan.
Phase I Services. The Company has Phase I units located in London,
England, Uppsala, Sweden, Freiburg, Germany and Lenexa, Kansas. The
services offered by these units include dose ranging,
bioavailability/bioequivalence studies, pharmacokinetic/pharmacodynamic
modeling, first administration to humans, multiple dose tolerance, dose
effect relationship and metabolism studies. Because its Phase I units focus
primarily on studies for new, innovative products, rather than generics,
the Company believes there is greater opportunity for winning contracts for
larger, later stage studies of such innovative products.
In addition to the Company's core clinical trials management services, the
Company provides its clients with the following specialized services:
Centralized Clinical Trial Laboratory. In addition to providing
comprehensive safety and efficacy testing for clinical trials, the
Company's centralized clinical trial laboratory provides site-specific
study materials, customized lab report design and specimen archival and
management on behalf of a study sponsor. The centralized laboratory offers
a 48-hour turnaround time for laboratory results and is capable of
providing direct electronic integration of laboratory data into safety and
efficacy reports for NDA submissions.
Formulation, Manufacturing and Packaging Services. The Company offers
services in the design and development of pharmaceutical dose forms as well
as the manufacture of study drug and placebos and the appropriate packaging
of these for double blinded studies. These services can expedite the drug
development process because clinical trials are often postponed by delays
in the manufacture of study drug materials. The Company is expanding its
capacity for delivering these services through the construction of a new
171,000 square foot facility at Bathgate, Scotland which the Company
believes will be one of the largest specialist clinical trial supplies
units in the world. The Company anticipates construction will be completed
in late 1997. The facility also will house a clinical
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data management center. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and "Use of
Proceeds".
PRE-CLINICAL SERVICES. The Company's pre-clinical unit in Edinburgh,
Scotland is part of a drug development facility acquired by the Company in 1995
from Syntex Pharmaceuticals Limited. This unit, combined with the Company's
pre-clinical facility in Ledbury, England, provides clients with a wide array of
pre-clinical and toxicology services. These services are designed to produce the
data required to identify, quantify, and evaluate the risks to humans resulting
from the manufacture or use of pharmaceutical and biotechnology products,
including developmental and reproductive toxicology, genetic toxicology,
neurotoxicology, carcinogenicity testing, pharmacology, analytical chemistry,
pathology, metabolism and pharmacokinetics.
REGULATORY AFFAIRS SERVICES. The Company provides comprehensive medical
and regulatory services for its pharmaceutical and biotechnology clients. The
Company's medical services include medical oversight of studies, review and
interpretation of adverse experiences, medical writing of reports and study
protocols and strategic planning of drug development programs. Regulatory
services for product registration include regulatory strategy design, document
preparation, consultation, and liaison with various regulatory agencies. The
Company's regulatory affairs professionals help to define the steps necessary to
obtain registration in the most expeditious manner. The Company is able to
provide such services in numerous countries to meet its clients' needs to launch
products in multiple countries simultaneously.
MEDICAL DEVICE SERVICES. With its acquisition of BRI in November 1996, the
Company believes it obtained a leading international contract research firm
specializing in medical devices and regulatory consulting. The Company's service
offerings include: review of global strategies for device development and
introduction; identifying regulatory requirements in targeted markets; clinical
study design and planning; data management; statistical analysis of report
preparations; global clinical trial management and monitoring capabilities;
consultation on quality control and quality assurance issues; regulatory
filings; compliance with United States, European and European Union regulations
relating to medical devices; long-range planning for multinational product
launches; compliance with legislative requirements for market access;
post-marketing requirements; managing relationships with national governments
and regulatory authorities; European pricing strategies; and European personnel
and recruitment services.
PERIMARKETING SERVICES (INNOVEX)
The Company provides services to the pharmaceutical industry with a
strategic focus on the commercial launch of new drugs. These services include
contract sales, marketing and Phases IIIb and IV clinical trials. The Company
believes that there is significant potential for future growth in the market for
such contract services. The Company is well-positioned to benefit from this
opportunity by cross-selling its sales and marketing outsourcing capabilities to
its contract research clients. Similarly, the Company believes that its existing
and new sales and marketing relationships will benefit its future contract
research opportunities.
SALES AND MARKETING SERVICES. The Company offers a flexible range of
contract sales services which are delivered through dedicated and syndicated
sales teams. Dedicated sales teams are comprised of sales representatives
recruited by the Company in accordance with client specifications to conduct
sales efforts for a particular client. Dedicated sales teams can be managed by
the Company or can report directly to the client, depending on client
preference. In certain circumstances, the Company can transfer an entire
dedicated sales team to the client for an additional placement fee. Syndicated
sales teams promote a number of drugs for different clients and are generally
managed directly by the Company. The Company's contract sales teams form a
highly skilled network of professionals that afford clients substantial
flexibility in selecting the extent and cost of promoting products as well as
their level of involvement in managing the sales effort.
The Company believes that speed of recruitment, quality of training and
management of sales representatives, supported by advanced information
technology, are key to providing clients with a sales
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force tailored to meet their geographic and scheduling needs. The Company's
ability to assemble a sales team quickly is a product of combining the talents
of experienced personnel for screening and interviewing candidates with the use
of information technology, such as scanning and resume tracking systems, to
expedite recruitment. In the United States, the Company maintains an electronic
database of 54,000 resumes and has recruited as many as 125 sales
representatives per week. In addition, the Company has established relationships
with specialist healthcare recruitment agencies in Europe, particularly the
U.K., and the United States to assist in its recruiting efforts. A
client-specific national sales force can be recruited by the Company in as few
as eight weeks, whereas the Company believes pharmaceutical companies often take
six to nine months to build an internal sales force. Sound hiring procedures,
such as the Company's candidate assessment program, background screenings and
drug testing programs, supplemented by the Company's internal training and
development programs, help to ensure the quality of recruited personnel. Once
the sales teams are assembled, the Company uses its electronic territory
management system ("ETMS") to enhance the speed, effectiveness and
accountability to clients of its contract sales activities. This system is
currently being used in the United States and is being implemented in the U.K.
The Company intends to further expand the use of ETMS in the U.K. and
internationally in 1997.
The Company also provides a range of specialized marketing services
specifically for pharmaceutical companies aimed at influencing the decisions of
patients and physicians and accelerating the acceptance of drugs into treatment
guidelines and formularies. Such services are typically purchased by the
marketing departments of pharmaceutical companies, however, marketing of new
products often receives substantial attention from senior executives, creating
an opportunity for the Company to interact with the strategists of the
pharmaceutical industry. The Company believes that its commercial orientation,
clinical and promotional expertise and international experience enable it to
tailor programs to specific client needs in a wide range of geographic markets
and therapeutic areas.
The market for outsourced contract sales and marketing services in the
pharmaceutical industry has been predominantly national in nature and is most
highly developed in the U.K. where the Company estimates that one out of every
four pharmaceutical sales representatives is a contract sales representative. In
1996 the Company derived $76.7 million of its net revenue from the contract
sales and marketing services of its U.K. operations. The Company believes that
contract sales and marketing generally is more developed in the U.K. because
regulatory cost containment pressures occurred much earlier there than in other
markets. Although there is a much lower level of market penetration for
outsourced sales and marketing services in most other countries, the market has
been growing, particularly in the United States and Germany, where increased
cost containment pressures have emerged. Net revenue from the Company's contract
sales and marketing services in the United States and Germany for 1996 was $55.4
million and $14.4 million, respectively. The Company also currently offers
contract sales and marketing services in The Netherlands, Sweden and Spain and
is seeking to develop such services in other parts of the world.
CONTRACT RESEARCH SERVICES. The Company also provides contract research
services, primarily for Phase IIIb and Phase IV clinical trials during the
perimarketing period. The Company believes that this focus on Phase IIIb and
Phase IV trials complements the Company's sales and marketing activities and
enables the Company to integrate marketing considerations with the design of
late stage clinical research protocols. The Company believes this coordination
between clinical investigators and marketing professionals enables it to add
value during the sales and marketing of a product.
HEALTH ECONOMICS AND DISEASE INFORMATION MANAGEMENT SERVICES (LEWIN-BENEFIT)
The Company offers a wide range of health economics and disease management
information services to private and public sector clients to develop solutions
in the public policy, managed care and medical technology arenas of healthcare.
The Company's capabilities encompass health economics and healthcare policy
research and consulting and disease and health information management services.
The Company serves clients throughout the healthcare industry, including federal
and state government
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<PAGE> 35
agencies, associations, hospitals, physician groups, managed care organizations,
industry suppliers, pharmaceutical companies and insurers.
HEALTHCARE POLICY RESEARCH AND CONSULTING. The Company's healthcare policy
research and healthcare consulting services are designed to assist clients in
evaluating healthcare programs and policies and developing strategies for doing
business in the highly regulated healthcare environment. The Company has over
100 consultants, including clinicians, economists, marketing professionals and
former high-level government executives with experience in the private sector,
providing interdisciplinary skills and expert capabilities in corporate
strategic planning and management, program and policy development, financial and
cost-effectiveness analysis, evaluation design, microsimulation modeling and
data analysis across five general practice areas: public health and finance
policy, healthcare organizations, economic analysis, managed care and medical
technology. The Company has access to more than 76 healthcare-related databases
and has developed the expertise to analyze such complex data to respond to its
clients' information needs. These services represent the core competencies of
Lewin, a nationally-recognized healthcare consulting firm acquired by the
Company in 1996. The Company believes that it can leverage Lewin's reputation,
expertise and access to providers and policymakers to cross-sell its other
health economics and information management services beyond its current market.
HEALTH ECONOMICS CONSULTING AND DISEASE INFORMATION MANAGEMENT
SERVICES. The Company's health economics consulting and disease information
management services focus on applying healthcare outcomes analysis to the
economic valuation of drugs and the treatment of diseases using data generated
from its clinical trials services. These services enable regulators, health care
providers and third parties to assess the pricing and cost-effectiveness of new
medical therapies. The Company believes that such economic valuation of drugs
will play an important role in the future determination of drug pricing.
Additionally, France, Germany, the U.K., Canada and Australia require
cost-benefit analyses in regulatory submissions, and the Company believes that
other countries may adopt similar requirements in the future. The Company
believes that it will benefit from cross-selling these services to its
pharmaceutical and biotechnology clients which are subject to pressures from
managed care providers and regulators to demonstrate the cost-effectiveness of
new products.
PLATFORM FOR FUTURE GROWTH. The Company is positioning itself to serve as
a health information interface between the users of healthcare services and the
developers of healthcare treatments by developing health information management
services designed to evaluate alternative healthcare solutions and provide third
parties with the tools to select among them. While hospitals and healthcare
provider organizations are placing intense pressure on the prices of products
and services, the public is highly concerned about the resulting quality of
care. The Company believes that purchasers of healthcare services, such as
individuals and employers, as well as public interest groups and governments,
are becoming increasingly interested in the value of care, as a function of its
cost and level of quality, and accordingly, are seeking ways to measure and
weigh the value of various healthcare alternatives.
INFORMATION TECHNOLOGY
All of the Company's services are enhanced by the Company's ongoing
investment in information technology. The Company believes that it was a pioneer
in the CRO industry in building a comprehensive global information technology
network for gathering, managing and analyzing clinical trials data. The
Company's information technology systems consist of a wide area network linking
approximately 50 local area networks and interconnecting over 6,000
microcomputers worldwide. The Company continues to improve and expand this
network, supported by the development of data management software to further
streamline the drug development process. The Company's network enables the
exchange of information among the Company's offices on a worldwide basis,
facilitating concurrent multinational clinical trials and regulatory
submissions. In addition, through the Company's innovative systems, clients are
able to gain direct access to key data with respect to their products in
testing, such as adverse events, CRFs and clinical laboratory testing results on
a current basis. Clients using the Company's sales and marketing services can
access information related to sales calls and provide feedback about the
performance of the Company's sales representatives. The Company's sales and
marketing services are
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further supported by its ETMS for planning, targeting, reporting, analysis and
communications of sales and marketing activities, allowing the Company to
centralize management of sales activities across a broad geographic area. The
Company currently uses this system in the United States and is implementing it
in the U.K. The Company intends to further expand the use of ETMS in the U.K.
and internationally in 1997. Additionally, the Company utilizes an enhanced
system for screening and tracking resumes as the cornerstone of its efforts to
rapidly recruit qualified sales representatives.
Some of the Company's internally developed systems which facilitate its
drug development services, sales and marketing services and overall business
management are described below:
<TABLE>
<S> <C>
INNTRAX....... Computerized clinical trial administrative management
system.
QTONE(TM)..... Touchtone and voice response patient information system.
QCANDA(TM).... System for electronic submission and review of NDA data.
QSTAR(TM)..... Imaging technology process which eliminates time and
minimizes errors in data management by electronically
routing and tracking optically scanned CRFs.
QLIMS(TM)..... A laboratory data management system which provides protocol-
specific validity checks.
QNET(TM)...... System which allows electronic monitoring of laboratory test
data.
QNOW(TM)...... Client contact management and investigator database.
IBDIS......... Client news-tracking system.
</TABLE>
The Company's information technology systems are supported by approximately
170 employees worldwide who are committed to the ongoing development of
technology solutions to support the Company's services on a worldwide basis. See
"-- Company Strategy -- Extend Leadership in Information Technology".
CLIENTS AND MARKETING
The Company coordinates its business development efforts across its service
offerings through a central business development function. The Company believes
that it is best able to capitalize on the synergies arising from its broad array
of fully-integrated contract services by cross-selling its services at a
centralized level. In addition, the Company believes that this structure allows
the Company to serve its clients more effectively, while permitting the
divisions to focus on the services provided.
The Company's business development function directs the activities of
business development personnel in each of the Company's United States locations
as well as the Company's locations in the U.K., Belgium, Canada, France,
Germany, Ireland, Italy, Japan, The Netherlands, Argentina, Denmark, Australia,
Spain, Sweden and Singapore. Most of the Company's business development
personnel have technical or scientific backgrounds and many are physicians,
pharmacologists, statisticians or regulatory affairs professionals. The Company
coordinates its worldwide marketing efforts through a computerized system
integrated into each of the Company's offices that is actively marketing
services.
The Company provides its clinical research services and sales and marketing
services on a global basis to the pharmaceutical, biotechnology and medical
device industries. In addition, the Company provides health economics and
healthcare policy consulting and disease and health information management
services to the United States healthcare industry and governments. For the year
ended December 31, 1996, approximately 43.8% of the Company's net revenue was
attributed to operations in the Americas, 53.8% to European operations and 2.4%
to Asia-Pacific operations. The Company has provided services during 1996 to 49
of the 50 largest pharmaceutical companies in the world, as ranked by 1995
healthcare revenue, and to the 11 largest biotechnology companies in the world,
as ranked by market capitalization in December, 1996. In 1996, the Company
represented over 300 clients, including some of the largest American, European
and Japanese pharmaceutical companies.
In 1996, Novartis AG accounted for 11.9% of the Company's consolidated net
revenue. The Company has in the past derived, and may in the future derive, a
significant portion of its net revenue
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from a relatively limited number of major projects or clients. Concentrations of
business in the CRO industry are not uncommon and are increasing as large
pharmaceutical companies are outsourcing larger projects to fewer full-service
providers. The Company is likely to experience such concentration in future
years. See "Risk Factors -- Dependence on Certain Industries and Clients".
COMPETITION
The market for the Company's contract research services is highly
competitive, and the Company competes against traditional CROs, the in-house
research and development departments of pharmaceutical companies, as well as
universities and teaching hospitals. Within the CRO industry, there are several
hundred small, limited-service providers, several medium-sized firms, and only a
few full-service companies with global capabilities. The Company believes that
it is the only company offering full-service contract research services with
annualized net revenue exceeding $500 million. Consolidation in the CRO industry
will likely result in greater competition among the larger contract research
providers for clients and acquisition candidates. The Company's primary contract
research competitors include Covance Pharmaceutical Product Development, Inc.,
PAREXEL International Corp. and ClinTrials Research, Inc. In sales and marketing
services, the Company competes against the in-house sales and marketing
departments of pharmaceutical companies and small local contract sales
organizations in each country in which it operates. The Company also competes
against consulting firms offering healthcare consulting services, including
boutique firms specializing in the healthcare industry and the healthcare
departments of large firms.
Competitive factors for contract research services include previous
experience, medical and scientific experience in specific therapeutic areas, the
quality of contract research, the ability to organize and manage large-scale
trials on a global basis, the ability to manage large and complex medical
databases, the ability to provide statistical and regulatory services, the
ability to recruit investigators, the ability to integrate information
technology with systems to improve the efficiency of contract research, an
international presence with strategically located facilities, financial
viability, and price. The primary competitive factors affecting contract sales
and marketing services are the ability to quickly assemble, train and manage
large qualified sales forces to handle broad scale launches of new drugs and
price. Competitive factors affecting healthcare consulting services include
experience, reputation, access to data, ability to analyze data and price. The
Company believes that it competes favorably in these areas. In addition, the
Company believes that the synergies arising from integrating contract research
services with contract sales and marketing services, supported by global
operations and information technology, differentiate the Company from its
competitors.
EMPLOYEES
The Company has approximately 7,375 employees, comprised of approximately
3,325 in the Americas, 3,925 in Europe and Africa and 125 in the Asia-Pacific
region, and over 50 offices in 20 countries.
36
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- --------
<S> <C> <C>
Dennis B. Gillings, Ph.D.(1).............. 52 Chairman of the Board of Directors and
Chief Executive Officer
Barrie S. Haigh(5)........................ 58 Vice Chairman of the Board of Directors
and Director of Corporate Development
Santo J. Costa(7)......................... 51 President, Chief Operating Officer and
Director
Rachel R. Selisker(7)..................... 41 Chief Financial Officer, Executive Vice
President Finance, Treasurer and Director
Gregory D. Porter......................... 40 Executive Vice President, Chief
Administrative and Legal Officer, and
Secretary
Ludo J. Reynders, Ph.D.(4) ............... 43 Chief Executive Officer, CRO Division, and
Director
David F. White............................ 53 Chief Executive Officer, Innovex Division
Lawrence S. Lewin(6)(7)................... 58 Chief Executive Officer, Lewin-Benefit
Division, and Director
Paul Knott, Ph.D.(6)...................... 43 Senior Vice President, International
Strategic Development, and Director
Eric J. Souetre, M.D., Ph.D. ............. 42 President, Benefit International, SNC, a
subsidiary of the Company, and Director
Robert C. Bishop, Ph.D.(1)(3)(5).......... 54 Director
Chester W. Douglass, Ph.D.(1)(3)(4)....... 56 Director
John G. Fryer, Ph.D.(3)(4)................ 59 Director
Arthur M. Pappas(1)(2)(5)................. 49 Director
Richard H. Thompson(1)(2)................. 60 Director
Vaughn D. Bryson(2)(6).................... 58 Director
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Quality Committee
(5) Member of Nominations Committee
(6) Member of Policy Committee
(7) Member of Human Resources Committee
Dennis B. Gillings, Ph.D. founded the Company in 1982 and has served as
Chief Executive Officer and Chairman of the Board of Directors since its
inception. From 1972 to 1988, Dr. Gillings served as a professor in the
Department of Biostatistics at the University of North Carolina at Chapel Hill.
During his tenure as a professor, he was active in statistical consulting for
the pharmaceutical industry. Dr. Gillings currently serves on the Board of
Directors of the University of North Carolina School of Public Health
Foundation. Dr. Gillings has been published widely in scientific and medical
journals. Dr. Gillings received a Diploma in Mathematical Statistics from the
University of Cambridge and a Ph.D. in Mathematics from the University of
Exeter.
Barrie S. Haigh became Vice Chairman of the Board of Directors and Director
of Corporate Development on January 1, 1997. Mr. Haigh founded Innovex in 1979
and served as its Chairman until
37
<PAGE> 39
November 1996 when Innovex merged with the Company. From 1979 until August 1994,
Mr. Haigh served as Chief Executive Officer and Chairman of the Board of
Innovex. Previously, Mr. Haigh held management positions with Syntex, Merck
Sharp and Dohme. Mr. Haigh is a member of the Board of Management of the
Association of the British Pharmaceutical Industry and a Fellow of the Royal
Pharmaceutical Society of Great Britain for distinction in the profession of
Pharmacy. Mr. Haigh received a degree in pharmacy from Bradford University.
Santo J. Costa became President and Chief Operating Officer of the Company
on April 1, 1994 and has been a director since April 1994. From July 1, 1993 to
March 31, 1994, Mr. Costa directed the affairs of his own consulting firm, Santo
J. Costa & Associates, which focused on pharmaceutical and biotechnology
companies. Prior to June 30, 1993, Mr. Costa served seven years at Glaxo, Inc.,
a pharmaceutical company, as Senior Vice President Administration and General
Counsel and a member of the Board of Directors. Mr. Costa serves as a director
of NPS Pharmaceuticals Inc. Mr. Costa received his law degree from St. John's
University.
Rachel R. Selisker, a certified public accountant, serves as Chief
Financial Officer and Executive Vice President Finance for the Company and has
been the Company's principal financial officer since 1987. Ms. Selisker has
served as a director of the Company since November 2, 1995. From 1981 to 1987,
Ms. Selisker was with the accounting firm of Oppenheim, Appel, Dixon & Co. in
Raleigh, North Carolina.
Gregory D. Porter has served as Executive Vice President, Chief
Administrative and Legal Officer, General Counsel and Secretary since January 1,
1997. Mr. Porter joined the Company in September 1994 as Vice President, General
Counsel and Secretary. From 1982 to September 1994, Mr. Porter was in the
private practice of law. From 1981 to 1982, Mr. Porter clerked with the
Honorable William Matthew Byrne of the U.S. District Court for the Central
District of California. Mr. Porter received his law degree from the University
of North Carolina at Chapel Hill.
Ludo J. Reynders, Ph.D. serves as Chief Executive Officer of the Company's
CRO Division. He has managed European clinical operations since joining the
Company in 1988. Dr. Reynders has served as a director of the Company since
January 1, 1995. Prior to joining the Company, Dr. Reynders managed the
biostatistics and data management department of the Bristol-Myers Co.
Pharmaceutical Research and Development Division, located in Brussels, Belgium.
Dr. Reynders received an M.S. and Ph.D. in Applied Sciences from the University
of Louvain, Louvain, Belgium.
David F. White serves as the Chief Executive Officer of the Company's
Innovex Division. Mr. White joined Innovex as Chief Executive Officer in
September 1994 from ICI plc. At ICI, he had a broad career principally in the
pharmaceutical business. After successive appointments as Managing Director of
Stuart Pharmaceuticals from June 1984 to October 1985 and General Manager, ICI
Pharmaceuticals (U.K.) to December 1988, he was promoted to lead the global
plastics and acrylics businesses.
Lawrence S. Lewin has served as the Chief Executive Officer of the
Company's Lewin-Benefit Division and has served as the Chief Executive Officer
of The Lewin Group, Inc., a subsidiary of the Company, since May 1996. Mr. Lewin
has been a director of the Company since June 1996. Between November 1992 and
May 1996, Mr. Lewin served as the Chairman and Chief Executive Officer of
Lewin-VHI, Inc., a healthcare consulting firm specializing in performing
economic analyses, product profiles, and strategic development for healthcare
reform and medical reimbursement and the establishment of medical guidelines.
Mr. Lewin serves as a director of Apache Medical Systems, Inc. and as a member
of the advisory boards of the Hambrecht & Quist Healthcare Investors Fund and
the Hambrecht & Quist Life Sciences Fund. Mr. Lewin received an M.B.A. from
Harvard Business School.
Paul Knott, Ph.D. became a director of the Company on January 1, 1997 and
serves as Senior Vice President International Strategic Development. Dr. Knott
served as Group Finance Director of Innovex from November 1992 to November 1996.
Prior to joining Innovex in November 1992, Dr. Knott directed the affairs of his
own consulting firm. From March 1990 to January 1992, Dr. Knott served as Group
Finance Director of Stormgard Plc, an office supplies group of companies quoted
on the London Stock Exchange. Prior to that time, Dr. Knott spent 11 years with
KPMG, where he achieved a senior management position in a corporate finance
department in London. He is a fellow of the Institute of
38
<PAGE> 40
Chartered Accountants in England and Wales. Dr. Knott received a Ph.D. in
Geomorphology from the University of London.
Eric J. Souetre, M.D., Ph.D. has been President and Chief Executive Officer
of Benefit International, SNC, a subsidiary of the Company, since May 1995 and
has served as a director since November 2, 1995. Previously, Dr. Souetre served
as President and Chief Executive Officer of Benefit International, S.A. since
1990. Dr. Souetre concurrently holds an assistant professorship at Paris
University and a research associate position at the University of Pennsylvania.
Dr. Souetre is board certified in psychiatry and licensed to practice in France
and Europe. Dr. Souetre received his medical degree from Nice Medical School,
France. He earned a Ph.D. in Neurosciences from Marseille University, and an
M.B.A. from the Institut Superieur des Affaires, Paris.
Robert C. Bishop, Ph.D. has served as a director since April 1994. Since
May 1992, Dr. Bishop has served as President, Chief Executive Officer and
director of AutoImmune, Inc., a biotechnology company. From February 1991 to
April 1992, Dr. Bishop served as President of Allergan Therapeutics Group, a
division of Allergan, Inc., an eye and skin care company. From August 1989 to
February 1991, Dr. Bishop served as President of Allergan Pharmaceuticals, a
division of Allergan, Inc. Dr. Bishop received an M.B.A. from the University of
Miami and a Ph.D. in Biochemistry from the University of Southern California.
Chester W. Douglass, Ph.D. has served as a director of the Company since
1983. Dr. Douglass is Professor and Chairman of the Department of Oral Health
Policy and Epidemiology, Harvard University School of Dental Medicine and has
served 30 years in various academic appointments at Temple University, the
University of North Carolina at Chapel Hill, and Harvard University. Dr.
Douglass received a D.M.D. from Temple University School of Dentistry, an M.P.H.
from the University of Michigan School of Public Health and a Ph.D. from the
University of Michigan Rackham School of Graduate Studies.
John G. Fryer, Ph.D. has served as a director of the Company since 1988.
Dr. Fryer is a research professor in the Department of Biostatistics at the
University of North Carolina at Chapel Hill and has over 25 years of academic
experience in biostatistics. Dr. Fryer received a Ph.D. in Statistics from the
University of London.
Arthur M. Pappas has served as a director since September 1994. Mr. Pappas
is Chairman and Chief Executive Officer of A.M. Pappas & Associates, LLC, an
international management and consulting services company and investor in high
technology and life sciences industries. Mr. Pappas previously served as a
director on the board of Glaxo Holdings plc with executive and board
responsibilities for operations in Asia Pacific, Latin America and Canada. Mr.
Pappas also serves as a director of GeneMedicine, Inc., Embrex, Inc. and
KeraVision, Inc. Mr. Pappas' 26 years of experience in the healthcare industry
also includes positions with Merrell Dow Pharmaceuticals and Abbott Laboratories
International, Inc. Mr. Pappas received an M.B.A. in Finance from Xavier
University.
Richard H. Thompson has served as a director of the Company since 1991. Mr.
Thompson is Executive Chairman and co-founder of the Thompson Clive Group, an
international venture capital firm based in London, England, where he has served
since 1977. Mr. Thompson is on the board of directors of Thompson Clive
Investments plc, an authorized investment trust quoted on the London Stock
Exchange, and is on the board of directors of a number of private companies. Mr.
Thompson received an M.A. in Engineering from the University of Cambridge.
Vaughn D. Bryson has served as a director since March 1, 1997. Mr. Bryson
served as Vice Chairman of Vector Securities International, Inc. from April 1994
to December 1996. Presently, Mr. Bryson serves as a consultant to Vector
Securities International, Inc. Previously, Mr. Bryson spent a 32-year career at
Eli Lilly & Co., where he served until his retirement as President and Chief
Executive Officer, beginning in 1991, and as a director beginning in 1984. Mr.
Bryson is a director of ARIAD Pharmaceuticals, Inc., Endovascular Technologies,
Inc., Fusion Medical Technologies, Inc., Napro Biotherapeutics, Inc. and
Perclose, Inc. Mr. Bryson holds an M.B.A. from Stanford University.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the shareholders elect the members
of one of the three classes to a three year term
39
<PAGE> 41
of office. Messrs. Gillings, Douglass, Thompson and Souetre serve in the class
whose term expires in 1997; Messrs. Bishop, Costa, Pappas and Reynders serve in
the class whose term expires in 1998 and Dr. Fryer and Mrs. Selisker serve in
the class whose term expires in 1999. Messrs. Lewin, Haigh, Knott and Bryson
were appointed by the Board of Directors and as such their terms will expire at
the 1997 annual meeting of shareholders.
The Board of Directors has an Executive Committee, Audit Committee,
Compensation Committee, Quality Committee, Nominations Committee, Policy
Committee and Human Resources Committee. The Executive Committee may exercise
all of the power of the Board of Directors during intervals between meetings of
the Board. The Audit Committee reviews the results and scope of the audit and
other services provided by the Company's independent auditors. The Compensation
Committee is responsible for the approval of compensation arrangements for
officers of the Company and the review of the Company's compensation plans and
policies. The Quality Committee oversees the reporting of serious adverse events
for the Company's studies and establishes policies regarding scientific
integrity and quality assurance. The Nominations Committee nominates individuals
to serve on the Board of Directors for shareholder approval. The Policy
Committee is responsible for reviewing conflicts of interest arising from the
provision of services to a wide variety of clients and overseeing the conflicts
resolution process. The Human Resources Committee oversees strategic global
human resources issues.
40
<PAGE> 42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1996, and as adjusted
to reflect the sale of the shares of Common Stock offered in the Offerings, (i)
by each person known by the Company to own beneficially more than five percent
of the Common Stock, (ii) by each director and director nominee, (iii) by each
executive officer, (iv) by all directors and executive officers of the Company
as a group and (v) by each Selling Shareholder. Except as otherwise indicated,
the persons or entities listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse and except to the extent of certain shares of
Common Stock owned by certain spouses, subsequent to December 31, 1996, who are
also offering shares in the Offerings as Selling Shareholders as described in
the footnotes following this table.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR BEING OWNED AFTER
TO OFFERING(1) OFFERED(2) OFFERING(1)
-------------------- ---------- --------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
---------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Dennis B. Gillings, Ph.D.(3)............. 3,717,214 11.2% -- 3,717,214 10.7%
Barrie S. Haigh(4)....................... 5,426,696 16.4% 451,981 4,974,715 14.4%
Santo J. Costa(5)........................ 54,936 * 5,000 49,936 *
Rachel R. Selisker(6).................... 87,608 * -- 87,608 *
Gregory D. Porter(7)..................... 7,168 * 600 6,568 *
Ludo J. Reynders, Ph.D.(8)............... 93,472 * 15,000 78,472 *
David F. White (9)....................... 91,481 * 1,500 89,981 *
Lawrence S. Lewin (10)................... 19,609 * -- 19,609 *
Paul Knott, Ph.D.(11).................... 131,144 * 49,589 81,555 *
Eric J. Souetre, M.D., Ph.D.(12)......... 329,204 * -- 329,204 *
Robert C. Bishop(13)..................... 11,626 * -- 11,626 *
Chester W. Douglass, Ph.D.(14)........... 276,500 * -- 276,500 *
John G. Fryer, Ph.D.(15)................. 381,096 1.1% -- 381,096 1.1%
Arthur M. Pappas(16)..................... 26,800 * -- 26,800 *
Richard H. Thompson(17).................. 526,222 1.6% -- 526,222 1.5%
Vaughn D. Bryson......................... -- * -- -- *
Stella D. Haigh(18)...................... 5,426,696 16.4% 451,981 4,974,715 14.4%
Barrie Haigh Children's Settlement No.
1(4)(18)............................... 281,092 * 100,000 181,092 *
Barrie Haigh Children's Settlement No.
2(4)(18)............................... 281,092 * 75,000 206,092 *
Lloyds Development Capital
Limited(19)(20)........................ 427,204 1.3% 300,000 127,204 *
MSS Nominees Limited
(Account 758170)(19)(21)............... 140,467 * 118,376 22,091 *
MSS Nominees Limited
(Account 758979)(19)(21)............... 62,746 * 52,879 9,867 *
MSS Nominees Limited
(Account 757549)(19)(21)............... 561,948 1.7% 473,568 88,380 *
MSS Nominees Limited
(Account 778392)(19)(21)............... 47,748 * 40,237 7,511 *
General Accident Executor and Trustee
Company Limited (Account
H715)(19)(21).......................... 187,316 * 157,856 29,460 *
General Accident Executor and Trustee
Company Limited (Account
H716)(19)(21).......................... 46,848 * 39,479 7,369 *
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR BEING OWNED AFTER
TO OFFERING(1) OFFERED(2) OFFERING(1)
-------------------- ---------- --------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
---------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
David Martin Fleet(22)................... 85,709 * 19,450 66,259 *
Jonathan Kenneth Bolter(23).............. 50,036 * 6,316 43,720 *
Nicholas John McCooke(24)................ 25,140 * 8,525 16,615 *
Christopher S. Morley(25)................ 44,022 * 7,136 36,886 *
HSBC Private Equity Investments
Limited(19)............................ 1,943,108 5.9% 1,637,508 305,600 *
Vintner's Place
68 Upper Thames Street
London EC4V 3BJ
England
Pilgrim Baxter & Associates, Ltd.(26).... 2,220,900 6.7% -- 2,220,900 6.4%
1255 Drummers Lane
Suite 300
Wayne, PA 19087-1590
All directors and executive officers as a
group (16 persons)(27)................. 11,180,776 33.4% 523,670 10,657,106 30.6%
</TABLE>
- ---------------
* Less than one percent
(1) Based on 33,149,962 shares of Common Stock outstanding on December 31,
1996, and 34,564,962 shares of Common Stock outstanding immediately after
the Offerings. Pursuant to the rules of the Commission, certain shares of
the Company's Common Stock which a person has the right to acquire within
60 days pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(2) If the Underwriters' over-allotment options are exercised in full, the
following Selling Shareholders will sell, in the aggregate, up to an
additional 720,000 shares of Common Stock as follows: HSBC Private Equity
Investments Limited (305,600 shares), MSS Nominees Limited (Account 758170)
(22,091 shares), MSS Nominees Limited (Account 758979) (9,867 shares), MSS
Nominees Limited (Account 757549) (88,380 shares), MSS Nominees Limited
(Account 778392) (7,511 shares), General Accident Executor and Trustee
Company Limited (Account H715) (29,460 shares), General Accident Executor
and Trustee Company Limited (Account H716) (7,369 shares), Barrie S. Haigh
(124,722 shares), Stella D. Haigh (50,000 shares), Barrie Haigh Children's
Settlement No. 1 (50,000 shares) and Barrie Haigh Children's Settlement No.
2 (25,000 shares).
(3) Includes 34,508 shares subject to presently exercisable stock options and
76,786 shares held by the Company's Employee Stock Ownership Plan ("ESOP")
for Dr. Gillings' account. Includes 3,302 shares owned by Dr. Gillings'
daughter, 120,000 shares owned by the Gillings Family Limited Partnership,
of which Dr. Gillings and his wife are the general partners, and 128,709
shares owned by Dr. Gillings' wife. Dr. Gillings disclaims beneficial
ownership of all shares owned by his wife and all shares in the Gillings
Family Limited Partnership, except to the extent of his interest therein.
(4) Includes 4,302,327 shares acquired in connection with the Company's share
exchange with Innovex. Includes 562,185 shares held by Mr. Haigh's wife
(Stella D. Haigh), 281,092 shares held by Barrie Haigh Children's
Settlement No. 1 and 281,092 shares held by Barrie Haigh Children's
Settlement No. 2. In the Offerings, Mr. Haigh is offering 226,981 shares,
his wife, Stella D. Haigh, is offering 50,000 shares, Barrie Haigh
Children's Settlement No. 1 is offering 100,000 shares and Barrie Haigh
Children's Settlement No. 2 is offering 75,000 shares.
(5) Includes 53,535 shares subject to presently exercisable stock options and
1,201 shares held by the Company's ESOP for Mr. Costa's account.
42
<PAGE> 44
(6) Includes 26,725 shares subject to presently exercisable stock options and
20,591 shares held by the Company's ESOP for Ms. Selisker's account.
(7) Includes 6,729 shares subject to presently exercisable stock options and
439 shares held by the Company's ESOP for Mr. Porter's account.
(8) Includes 47,443 shares subject to presently exercisable stock options and
1,649 shares held by the Quintiles (UK) Limited Approved Profit Sharing
Scheme for Dr. Reynders' account.
(9) Includes 91,481 shares acquired in connection with the Company's share
exchange with Innovex of which 11,971 shares are held in trust of which Mr.
White is trustee. After December 31, 1996, Mr. White transferred 11,672
shares to his spouse, Irene White, 1,000 of which are being offered by Mrs.
White in the Offerings.
(10) Includes 19,609 shares subject to presently exercisable stock options
acquired in connection with the Company's purchase of the assets of
Lewin-VHI, Inc.
(11) Includes 74,138 shares subject to presently exercisable stock options and a
total of 57,006 shares acquired in connection with the Company's share
exchange with Innovex held in two trusts of which Dr. Knott is trustee.
After December 31, 1996, Dr. Knott exercised options to acquire 49,589
shares and transferred 24,500 of such shares to his spouse, Kathryn M.
Knott, all of which are being offered by Mrs. Knott in the Offerings.
(12) Includes 825 shares subject to presently exercisable stock options and 293
shares held by the Company's ESOP for Dr. Souetre's account. Includes
328,086 shares owned by ACTA, a Luxembourg company owned by Dr. Souetre.
(13) Includes 7,626 shares subject to presently exercisable stock options.
(14) Includes 9,000 shares subject to presently exercisable stock options.
Includes 58,500 shares owned by the Douglass Family Limited Partnership of
which Dr. Douglass is the sole general partner. Dr. Douglass disclaims
beneficial ownership of the shares held by the limited partnership except
to the extent of his pecuniary interest therein.
(15) Includes 8,748 shares subject to presently exercisable stock options.
(16) Includes 6,000 shares subject to presently exercisable stock options.
Includes 400 shares held by Mr. Pappas' son and 400 shares held by Mr.
Pappas' daughter for which Mr. Pappas holds power of attorney.
(17) Includes 16,520 shares held in trust for Mr. Thompson and his wife and
2,502 shares subject to presently exercisable options. Also includes
500,000 shares owned by Thompson Clive Investments plc. The board of
directors of Thompson Clive Investments plc, of which Mr. Thompson is a
director, exercises sole voting and investment power with respect to the
shares owned by Thompson Clive Investments plc. Thompson Clive & Partners
Limited, of which Mr. Thompson is chairman, serves as the manager of
Thompson Clive Investments plc. Mr. Thompson disclaims beneficial ownership
of the shares owned by Thompson Clive Investments plc, except to the extent
of his interest in Thompson Clive Investments plc.
(18) Includes 562,185 shares acquired in connection with the Company's share
exchange with Innovex and 4,302,327 shares held by Mrs. Haigh's husband,
Barrie S. Haigh. Also includes 281,092 shares held by Barrie Haigh
Children's Settlement No. 1 and 281,092 shares held by Barrie Haigh
Children's Settlement No. 2. In the Offerings, Mrs. Haigh is offering
50,000 shares, her husband, Barrie S. Haigh is offering 226,981 shares,
Barrie Haigh Children's Settlement No. 1 is offering 100,000 shares and
Barrie Haigh Children's Settlement No. 2 is offering 75,000 shares.
(19) Shares reported herein represent shares of Common Stock acquired in the
Company's share exchange for all of the outstanding shares of Innovex and
shares subject to presently exercisable options received in connection with
the share exchange.
(20) Subsequent to December 31, 1996, Lloyds Development Capital Limited
transferred beneficial ownership of 126,000 shares to Lloyds Bank plc.
(21) These Selling Shareholders hold legal title on behalf of certain beneficial
owners.
(22) Includes 51,505 shares subject to presently exercisable stock options and
34,204 shares acquired in connection with the Company's share exchange with
Innovex. After December 31, 1996, Mr. Fleet transferred 10,000 shares to
his spouse, Victoria S. Fleet, all of which are being offered by Mrs. Fleet
in the Offerings.
43
<PAGE> 45
(23) Includes 32,934 shares subject to presently exercisable stock options and
9,121 shares acquired in connection with the Company's share exchange with
Innovex. Includes 7,981 shares held in trust of which Mr. Bolter is
trustee. After December 31, 1996, Mr. Bolter transferred 3,158 shares to
his spouse, Sally-Ann Bolter, which are being offered by Mrs. Bolter in the
Offerings.
(24) Includes 10,878 shares acquired in connection with the Company's share
exchange with Innovex of which 3,990 shares were transferred to Mr.
McCooke's spouse, Susan McCooke, all of which are being offered by Mrs.
McCooke in the Offerings. Includes 14,262 shares held in two trusts of
which Mr. McCooke is trustee.
(25) Includes 7,182 shares subject to presently exercisable stock options and
8,337 shares acquired in connection with the Company's share exchange with
Innovex of which 3,568 were transferred to Mr. Morley's spouse, Elaine
Morley, all of which are being offered by Mrs. Morley in the Offerings.
Includes 28,503 shares held in trust of which Mr. Morley is trustee.
(26) Includes 2,220,900 shares beneficially held by Pilgrim Baxter & Associates,
Ltd. as reported on its Schedule 13G dated February 14, 1997.
(27) Includes 297,388 shares subject to presently exercisable stock options and
100,959 shares held by the Company's employee stock ownership plans for the
account of individual executive officers and directors.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has authorized 200 million shares of Common Stock, $.01 par
value per share. As of December 31, 1996, 33,149,962 shares of Common Stock were
issued and outstanding and beneficially held by approximately 8,950
shareholders. Holders of Common Stock are entitled to one vote for each share
held on matters which are submitted to a vote of shareholders and are not
entitled to cumulative voting in the election of directors. Subject to any
preferential rights of holders of Preferred Stock, holders of Common Stock are
entitled to receive dividends, if any, as declared from time to time by the
Board of Directors out of assets legally available for such purpose. See "Price
Range of Common Stock and Dividend Policy". On liquidation, holders of Common
Stock are entitled to a pro rata portion of all assets available for
distribution after payment of creditors and the liquidation preference of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights or other rights to subscribe for additional shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
upon issuance, validly issued, fully paid and non-assessable.
PREFERRED STOCK
The Company has authorized 25 million shares of Preferred Stock, $.01 par
value per share, none of which has been issued. The Company may issue shares of
Preferred Stock in one or more series as may be determined by the Company's
Board of Directors, who may establish, from time to time, the number of shares
to be included in each series, may fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, and may increase or decrease the number of shares of any
such series without any further vote or action by the shareholders. Any
Preferred Stock so issued by the Board of Directors may rank senior to the
Common Stock with respect to the payment of dividends or upon liquidation,
dissolution or winding up of the Company, or both. In addition, any such shares
of Preferred Stock may have class or series voting rights. Under certain
circumstances the issuance of Preferred Stock or the existence of the unissued
Preferred Stock may tend to discourage or render more difficult a merger or
other change in control of the Company.
CERTAIN ARTICLES OF INCORPORATION AND BYLAWS PROVISIONS HAVING POTENTIAL
ANTI-TAKEOVER EFFECTS
General
A number of provisions of the Company's Articles of Incorporation and
Bylaws address matters of corporate governance and the rights of shareholders.
The following summary of such provisions is not intended to be complete and is
qualified in all respects by the Company's Articles of Incorporation and Bylaws.
Certain of these provisions, as well as the ability of the Board of Directors to
issue shares of Preferred Stock and to set the voting rights, preferences and
other terms thereof, may delay or prevent takeover attempts not first approved
by the Board of Directors (including takeovers which certain shareholders may
deem to be in their best interests.) These provisions also could delay or
frustrate the removal of incumbent directors or the assumption of control by
shareholders. All references to the Company's Articles of Incorporation refer to
the Company's Amended and Restated Articles of Incorporation in effect as of the
date of this Prospectus.
Classification of Board of Directors
The Articles of Incorporation provide that the Board of Directors of the
Company is divided into three classes as nearly equal in number as possible. The
directors of each class will serve a term of three years. As a result of the
classification of the Board of Directors, approximately one-third of the members
of the Board of Directors will be elected each year, and, two annual meetings
will be required for the Company's shareholders to change a majority of the
members constituting the Board of Directors.
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<PAGE> 47
Nomination and Removal of Directors; Filling Vacancies
The Company's Bylaws provide that nominations to the Board of Directors may
only be made by the Board of Directors, a nominating committee of the Board or
by any shareholder entitled to vote in elections of directors who complies with
certain notice procedures. In addition, the Articles of Incorporation provide
that (i) a director may be removed by the shareholders only upon the affirmative
vote of the holders of two-thirds of the voting power of all shares of capital
stock entitled to vote generally in the election of directors and (ii) vacancies
on the Board of Directors may be filled only by the Board of Directors. The
purpose of this provision is to prevent a majority shareholder from
circumventing the classified board system by removing directors and filling the
vacancies with new individuals selected by that shareholder. Accordingly, the
provision may have the effect of impeding efforts to gain control of the Board
by anyone who obtains a controlling interest in the Company's Common Stock.
Amendment of Articles of Incorporation
The Articles of Incorporation of the Company provide that amendments to the
Articles of Incorporation may be adopted only upon the affirmative vote of the
holders of at least two-thirds of the voting power of all shares of capital
stock of the Company entitled to vote thereon. However, if such amendment has
received the prior approval by an affirmative vote of a majority of
Disinterested Directors, as defined below, then the affirmative vote of the
holders of at least a majority of the voting power of all shares of capital
stock of the Company entitled to vote thereon, or such greater percentage
approval as required by North Carolina law, is sufficient to adopt such
amendment. A Disinterested Director is defined as any member of the Board of
Directors who is unaffiliated with, and not a nominee of, a Control Person, as
defined below, and was a member of the Board of Directors prior to the time a
Control Person became such, and any successor of a Disinterested Director who is
unaffiliated with, and not a nominee of, a Control Person, who is recommended to
succeed a Disinterested Director by a majority of Disinterested Directors then
on the Board of Directors. A Control Person is defined as any corporation,
person, group, or other entity, which together with its affiliates, prior to a
Business Combination, as defined below, beneficially owns 10% or more of the
shares of any class of equity or convertible securities of the Company, and any
affiliate of any such corporation, person, group, or other entity; provided,
however, any corporation, person, group or other entity which, together with its
affiliates, prior to January 1, 1994 beneficially owned 10% or more of the
shares of any class of equity or convertible securities of the Company, and any
affiliate of any such party, is not considered to be a Control Person.
Amendment of Bylaws
Subject to certain restrictions described below, either the Board of
Directors or the shareholders of the Company may amend the Company's Bylaws. The
Board of Directors may amend the Bylaws and adopt new Bylaws except that: (i) a
bylaw adopted or amended by the shareholders may not be readopted, amended, or
repealed by the Board of Directors if neither the Articles of Incorporation nor
a bylaw adopted by the shareholders authorizes the Board of Directors to adopt,
amend, or repeal that particular bylaw or the Bylaws generally; (ii) a bylaw
that fixes a greater quorum or voting requirement for the Board of Directors may
not be adopted by the Board of Directors by a vote of less than a majority of
the directors then in office and may not itself be amended by a quorum or vote
of directors less than the quorum or vote therein prescribed or prescribed by a
bylaw adopted or amended by the shareholders; and (iii) if a bylaw fixing a
greater quorum or voting requirement for the Board of Directors is originally
adopted by the shareholders, it may be amended or repealed only by the
shareholders, unless the Bylaws permit amendment or repeal by the Board of
Directors. The shareholders of the Company generally may adopt, amend, or repeal
the Bylaws upon the affirmative vote of the holders of two-thirds of the voting
power of all shares of capital stock entitled to vote thereon.
Supermajority Vote Requirement
The Articles of Incorporation of the Company provide that, unless otherwise
more restrictively required by applicable law, any Business Combination, as
defined below, must be approved by a majority
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<PAGE> 48
of a quorum of the Board of Directors and must receive the level of shareholder
approval, if any, as follows: (i) to the extent shareholder approval is
otherwise required by law, by an affirmative vote of the shareholders holding at
least a majority of the shares of capital stock of the Company entitled to vote
thereon, provided that such Business Combination has been approved by an
affirmative vote of at least two-thirds of the full Board of Directors before
such Business Combination is submitted for approval to the shareholders or (ii)
by an affirmative vote of the shareholders holding at least two-thirds of the
shares of capital stock of the Company entitled to vote thereon provided that
such Business Combination has been approved by an affirmative vote of at least a
majority of a quorum of the Board of Directors (but less than two-thirds of the
full Board of Directors). In addition, if the Business Combination is approved
by the affirmative vote of the shareholders holding at least two-thirds of the
shares of Common Stock entitled to vote and by a majority of a quorum of the
Board of Directors but less than two-thirds of the full Board of Directors, the
Business Combination must grant to shareholders not voting to approve the
Business Combination certain "fair price" rights.
The Company's Articles of Incorporation define a Business Combination as
(i) any merger or consolidation of the Company into any other corporation,
person, group, or other entity where the Company is not the surviving or
resulting entity; (ii) any merger or consolidation of the Company with or into
any Control Person or with any corporation, person, group or other entity where
the merger or consolidation is proposed by or on behalf of a Control Person;
(iii) any sale, lease, exchange, or other disposition of all or substantially
all of the assets of the Company; (iv) any sale, lease, exchange, or other
disposition of more than 10% of the total assets of the Company to a Control
Person; (v) the issuance of any securities of the Company to a Control Person;
(vi) the acquisition by the Company of any securities of a Control Person unless
such acquisition begins prior to the person becoming a Control Person or is an
attempt to prevent the Control Person from obtaining greater control of the
Company; (vii) the acquisition by the Company of all or substantially all of the
assets of any Control Person or any entity where the acquisition is proposed by
or on behalf of a Control Person; (viii) the adoption of any plan or proposal
for the liquidation or dissolution of the Company which is proposed by or on
behalf of a Control Person; (ix) any reclassification of securities or
recapitalization of the Company which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Company which is beneficially owned or controlled
by a Control Person; (x) any of the above transactions which are between the
Company and any of its subsidiaries and which are proposed by or on behalf of
any Control Person; or (xi) any agreement, plan, contract, or other arrangement
providing for any of the above transactions.
The requirement of a supermajority vote of shareholders to approve certain
business transactions, as described above, may discourage a change in control of
the Company by allowing shareholders holding less than a majority of the shares
of Common Stock to prevent a transaction favored by shareholders holding a
majority of such shares. Also, in some circumstances, the Board of Directors
could cause a two-thirds vote to be required to approve a transaction thereby
enabling management to retain control over the affairs of the Company and their
positions with the Company.
Fair Price Provision
The "fair price" provision of the Company's Articles of Incorporation
applies to Business Combinations which have not received the approval of
two-thirds of the full Board of Directors and only to shareholders who vote
against such Business Combinations and who elect to sell their shares to the
Company for cash at their fair price. This "fair price" provision requires that
the consideration for such shares be paid in cash by the Company and that the
price per share be at least equal to the greater of the following:
(i) The highest price per share paid for the Company's Common Stock
during the four years immediately preceding the Business Combination vote
by any shareholder who beneficially owned five percent or more of the
Company's Common Stock and who votes in favor of the Business Combination;
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<PAGE> 49
(ii) The cash value of the highest price per share previously offered
pursuant to a tender offer to the shareholders of the Company within the
four years immediately preceding the Business Combination vote; or
(iii) The highest price per share, including commissions and fees,
paid by a Control Person in acquiring any of its holdings of the Company's
Common Stock.
The fair price provision is intended to prevent some of the potential
inequities of two-step takeover attempts by encouraging negotiations with the
Company. However, some shareholders may find the fair price provision
disadvantageous to the extent it discourages changes in control in which
shareholders might receive for at least some of their shares a substantial
premium above the market price at the time an acquisition transaction is made.
The Company is not aware of any pending or threatened effort to acquire
control of the Company or to change management. The Board of Directors does not
presently intend to propose any additional anti-takeover provisions.
Constituencies
The Company's Articles of Incorporation expressly authorize the Board of
Directors of the Company, any committee of the Board of Directors, or any
individual director in determining what is in the best interest of the Company
and its shareholders, to consider, in addition to the long-term and short-term
interests of the shareholders, the social and economic effects of the matter to
be considered on the Company and its subsidiaries, their employees, clients,
creditors, and the communities in which the Company and its subsidiaries operate
or are located. When evaluating a business combination or a proposal by another
person to make a business combination or a tender offer or any other proposal
relating to a potential change in control of the Company, the Board of Directors
may consider such matters as the business and financial condition and earnings
prospects of the acquiring person, and the possible effect of such condition
upon the Company and its subsidiaries and the communities in which the Company
and its subsidiaries operate, the competence, experience, and integrity of the
acquiring person and its management and the prospects for successful conclusion
of the business combination, offer or proposal. The consideration of any of the
above factors is completely discretionary with the Company's Board of Directors.
The constituency provision of the Company's Articles of Incorporation may
discourage or make more difficult certain acquisition proposals or business
combinations and therefore, may adversely affect the ability of shareholders to
benefit from certain transactions opposed by the Company's Board of Directors.
Special Meetings of Shareholders
The Company's Bylaws provide that special meetings of shareholders may be
called only by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President or holders of 25% or more of the voting power
of the outstanding shares of the Company. As a result, this provision would
prevent shareholders owning less than 25% of the voting power of the outstanding
Common Stock from compelling shareholder consideration of any proposal (such as
a proposal for a Business Combination) over the opposition of the Company's
Board of Directors.
Shareholder Proposals
The Company's Bylaws provide that shareholders who desire to bring any
business before a meeting of shareholders must follow specified procedures
including advance written notice to the Company. The shareholder proposal
provision may make it more difficult for shareholder proposals to be considered
at shareholder meetings.
Transfer Agent and Registrar
The Company's transfer agent and registrar for its Common Stock is First
Union National Bank of North Carolina, Charlotte, North Carolina.
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<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Based upon 33,149,962 shares of Common Stock outstanding on December 31,
1996, upon completion of the Offerings, the Company will have 34,564,962 shares
of Common Stock issued and outstanding. Of these shares, 4,800,000 shares
offered in the Offerings, (plus an additional 720,000 if the Underwriters'
over-allotment options are exercised in full) and the 9,689,732 shares
registered and sold in the Company's two public offerings in 1994 and 1995,
respectively, issued in the acquisition of BRI and issued pursuant to the
Company's registration statements on Form S-8 under the Securities Act, will be
fully tradable without further registration or other restriction under the
Securities Act, excluding shares held by "affiliates" of the Company, as that
term is defined in Rule 144 promulgated under the Securities Act. Of the
remaining 20,075,230 shares of Common Stock outstanding, 14,500,884 shares have
been issued and outstanding for more than three years, were issued pursuant to
Rule 701 under the Securities Act or were issued in reliance on Regulation S
promulgated under the Securities Act and may trade without restriction under the
Securities Act, except shares held by affiliates of the Company. See "Principal
and Selling Shareholders". The remaining 5,574,346 shares of Common Stock
outstanding are "restricted securities" within the meaning of Rule 144 (the
"Restricted Securities").
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) whose restricted securities have
been outstanding for at least two years, including a person who may be deemed an
"affiliate" of the Company, may only sell a number of shares within any
three-month period which does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock (approximately 345,649
shares after the Offerings) or (ii) the average weekly trading volume in the
Company's Common Stock in the four calendar weeks immediately preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. A person who is not an affiliate of the issuer, has not been an
affiliate within 90 days prior to the sale and has owned the restricted
securities for at least three years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above. The Commission
has adopted amendments to Rule 144, effective April 29, 1997, to reduce the
holding periods. Such amendments, when they become effective, will permit
resales of restricted securities held for one year, rather than two, subject to
the volume, manner of sale, notice and public information requirements of Rule
144, and will allow resales of restricted securities held by non-affiliates for
two years, rather than three years, pursuant to Rule 144(k) without regard to
the other limitations of Rule 144.
The Company issued 9,214,239 shares in November 1996 in a share exchange
for all of the outstanding stock of Innovex (the "Exchange"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview". Such shares are the subject of a registration rights
agreement, as amended (the "Registration Rights Agreement"), a copy of which is
included and incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus is a part. Of the shares issued by the
Company in the Exchange, 3,364,400 shares (plus an additional 720,000 shares if
the Underwriters' over-allotment options are exercised in full) are being
offered in the Offerings by former shareholders of Innovex. Of these shares,
5,548,658 shares remain Restricted Securities. See "-- Registration Rights".
As of December 31, 1996, options for the purchase of an aggregate of
2,404,334 shares were outstanding under the Company's stock option plans. Of
such amount, options for 1,264,505 shares of Common Stock are vested and
exercisable as of December 31, 1996. The Company has either registered such
shares on Form S-8 or such shares are eligible for resale under Rule 701 of the
Securities Act. Shares of Common Stock issued upon the exercise of options
granted under the Company's option plans or otherwise issued pursuant to the
Company's employee stock purchase plan will be available for sale in the public
market without restriction to the extent that they are held by persons who are
not affiliates of the Company and by affiliates, pursuant to Rule 144 (without
observance of the holding period requirement) or Rule 701.
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<PAGE> 51
The Company has reserved 1,740,000 shares of Common Stock, subject to
adjustment in certain circumstances, for issuance upon conversion of the
Company's 4.25% Convertible Subordinated Notes due May 31, 2000 (the
"Convertible Notes"). Each $1,000 principal amount of the Convertible Notes is
convertible into Common Stock at any time at an initial conversion price of
$82.75 per share. The Company has registered under the Securities Act
$126,075,000 principal amount of the Convertible Notes, and the shares into
which such Convertible Notes are convertible, in a registration statement on
Form S-3 for resale by certain selling holders, in accordance with a
registration rights agreement relating thereto. Shares transferred by selling
holders pursuant to such registration statement will be freely tradable;
otherwise, shares of Common Stock issuable upon conversion of the Convertible
Notes will be Restricted Securities.
The Selling Shareholders, executive officers and directors of the Company
have agreed pursuant to the Underwriting Agreement and other agreements that
during the period beginning from the date that is 30 days prior to the closings
of the Offerings and continuing to and including the date 90 days after the date
of this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than the shares of Common Stock
offered by the Selling Shareholders in the Offerings, or pursuant to employee
stock option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of the Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of the Common Stock without the prior written consent of Goldman, Sachs &
Co. and, with respect to the executive officers and directors of the Company,
the Company. See "Underwriting".
No prediction can be made as to the effect that future market sales of
Restricted Securities or the availability of such Restricted Securities for sale
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of Restricted Securities in the public market (or
the perception that such sales could occur) might adversely affect prevailing
market prices for the Common Stock.
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, former shareholders of
Innovex are entitled to certain registration rights in connection with the
shares of Common Stock received in the Exchange (the "Exchange Shares"). In
furtherance of the Registration Rights Agreement, an aggregate of 3,364,400
shares of Common Stock (plus an additional 720,000 shares if the Underwriters'
over-allotment options are exercised in full) are being offered in the Offerings
by such shareholders. The terms of the Registration Rights Agreement require the
Company to file a shelf registration statement to register at least 5,000,000 of
the Exchange Shares by March 31, 1997 for offerings of Common Stock to be made
by former shareholders of Innovex in the aggregate amount of no more than
500,000 in any 90 day period. The Company must maintain the effectiveness of the
shelf registration statement for a period of up to three years subject to
periods of suspended use in certain events. The Registration Rights Agreement
provides additional demand registration rights in the event that 2,700,000 of
the Exchange Shares are not sold in this offering. Finally, the Registration
Rights Agreement provides that in the event the Company proposes to offer its
securities, either for its own account or for the account of a selling holder,
the former shareholders of Innovex shall be entitled to include the number of
Exchange Shares in such registration which is at least 20% of the amount
registered. In connection with the Registration Rights Agreement, Dennis B.
Gillings has agreed that for a period of two years from and after November 29,
1996, he will not sell or otherwise transfer shares other than (i) to a private
transferee which agrees to be bound by this restriction or (ii) to the public in
an amount during any three month period not to exceed one-half of one percent
( 1/2%) of the then outstanding shares of the Company's Common Stock in
"broker's transactions" as defined in Rule 144 (f) of the Securities Act.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the U. S.
Underwriters named below, and each of such U. S. Underwriters, for whom Goldman,
Sachs & Co., Morgan Stanley & Co. Incorporated, Smith Barney Inc. and William
Blair & Company, L.L.C. are acting as representatives, has severally agreed to
purchase from the Company and the Selling Shareholders, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co......................................... 720,750
Morgan Stanley & Co. Incorporated........................... 720,750
Smith Barney Inc............................................ 720,750
William Blair & Company, L.L.C.............................. 720,750
Genesis Merchant Group Securities LLC....................... 95,000
Gerard Klauer Mattison & Co., Inc........................... 95,000
Hambrecht & Quist........................................... 168,000
Lehman Brothers Inc......................................... 168,000
Scott & Stringfellow, Inc................................... 95,000
Vector Securities International, Inc........................ 168,000
Wessels, Arnold & Henderson, L.L.C.......................... 168,000
---------
Total............................................. 3,840,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $1.50 per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and the Selling Shareholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 960,000 shares of Common Stock in an international
offering outside the United States. The offering price and aggregate
underwriting discounts and commissions per share for the two Offerings are
identical. The closing of the offering made hereby is a condition to the closing
of the International Offering, and vice versa. The representatives of the
International Underwriters are Goldman Sachs International, Morgan Stanley & Co.
International Limited, Smith Barney Inc. and William Blair & Company, L.L.C.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the International
Offering, and subject to certain
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<PAGE> 53
exceptions, it will (i) not, directly or indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b) to
any person who it believes intends to reoffer, resell or deliver the shares in
the United States or to any U.S. persons, and (ii) cause any dealer to whom it
may sell such shares at any concession to agree to observe a similar
restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
Certain Selling Shareholders have granted the U.S. Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 576,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the U.S. Underwriters exercise their over-allotment
option, the U.S. Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares to be purchased by each of them, as shown in the foregoing
table, bears to the 3,840,000 shares of Common Stock offered in the U.S.
Offering. Certain Selling Shareholders have granted the International
Underwriters a similar option to purchase up to an aggregate of 144,000
additional shares of Common Stock.
The Company and the Selling Shareholders have agreed that, during the
period beginning from the date that is 30 days prior to the closings of the
Offerings and continuing to and including the date 90 days after the date of the
Prospectus, they will not offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus) which are substantially
similar to the shares of the Common Stock or which are convertible into or
exchangeable for securities which are substantially similar to the shares of the
Common Stock without the prior written consent of Goldman, Sachs & Co., except
for the shares of Common Stock offered in connection with the concurrent U.S.
and International Offerings, and except, in the case of the Company, shares of
Common Stock issued by the Company as consideration for acquisitions of
businesses, properties or assets, provided, however, that each offeree,
purchaser or other transferee of any shares of Common Stock so issued in
connection with any such acquisition shall agree in writing for the benefit of
the Underwriters, in form and substance satisfactory to Goldman, Sachs & Co.,
that all such shares of Common Stock shall remain subject to restrictions
identical to those contained in this sentence.
The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
The Company and Innovex each engaged Goldman, Sachs & Co. ("Goldman Sachs")
to facilitate the share exchange between the Company and Innovex. Pursuant to
this arrangement, the Company paid to Goldman Sachs a fee of $6.5 million as
compensation for services relating to the share exchange and advisory services
in connection with a potential initial public offering of Innovex and reimbursed
Goldman Sachs for its reasonable costs and expenses incurred in connection with
its services. In addition, the Company agreed for Goldman Sachs to underwrite
shares offered in the Offerings.
The Company retained Smith Barney Inc. ("Smith Barney") to provide a
fairness opinion to the Company in connection with the share exchange between
the Company and Innovex. The Company paid a financial advisory fee of $800,000
to Smith Barney, plus reimbursement of Smith Barney's reasonable costs and
expenses, in connection with such services. In addition, BRI engaged Smith
Barney to provide a fairness opinion in connection with the merger between the
Company and BRI; Smith Barney was paid a financial advisory fee by BRI of
$800,000, plus reimbursement of Smith Barney's reasonable costs and expenses, in
connection with such services.
During and after the Offerings, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making (see below) and purchases
to cover syndicate short positions created in connection with the Offerings. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to
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<PAGE> 54
syndicate members or other broker-dealers in respect of the Common Stock sold in
the Offerings for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise, and these activities, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Exchange Act, Underwriters or
prospective Underwriters that are market makers ("passive market makers") in the
Common Stock may make bids for or purchases of Common Stock in the Nasdaq
National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common Stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.
VALIDITY OF SHARES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and certain Selling Shareholders by Smith, Anderson,
Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500 First Union Capitol Center,
Raleigh, North Carolina 27601, for the other Selling Shareholders by Skadden,
Arps, Slate, Meagher & Flom LLP, 25 Bucklersbury, London, England EC4N 8DA, and
for the Underwriters by Sullivan & Cromwell, 125 Broad Street, New York, New
York 10004. Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom LLP
will rely as to all matters of North Carolina law on the opinions of Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
EXPERTS
The consolidated financial statements of the Company provided herein as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon included herein which, as to the years 1995
and 1994, are based in part on the reports of other independent auditors. The
consolidated financial statements of the Company as of December 1995 and 1994
and for each of the three years in the period ended December 31, 1995
incorporated by reference from the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (as amended by Form 10-K/A) incorporated
herein by reference have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. The financial statements of Lewin-VHI as of and for the
year ended December 31, 1995 included in the Company's Current Report on Form
8-K dated April 16, 1996 have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements have been included herein and
incorporated herein by reference in reliance upon such reports given upon
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of BRI as of May 31, 1996 and for the
six-month period ended May 31, 1996 included in the Registration Statement on
Form S-4, as filed with the Commission under the Securities Act (File No.
333-12573) on September 24, 1996 and amended on October 15, 1996 (the "BRI
Registration Statement"), when such registration statement became effective and
incorporated herein by reference, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. The consolidated financial statements of BRI
as of November 30, 1995 and 1994 and for each of the two years in the period
ended November 30, 1995 included in the BRI Registration Statement when such
registration statement became effective and incorporated herein by reference
have been audited by Coopers & Lybrand L.L.P.,
53
<PAGE> 55
independent accountants, as set forth in their report thereon included therein
and incorporated herein by reference. Such financial statements have been
incorporated herein by reference in reliance upon such reports given upon
authority of such firms as experts in accounting and auditing.
The consolidated financial statements of Innovex included in the Company's
Current Report on Form 8-K dated October 6, 1996 and incorporated by reference
herein have been audited by KPMG, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements have been incorporated herein by reference in reliance upon
such reports given upon authority of such firm as experts in accounting and
auditing.
FORWARD LOOKING STATEMENTS
Information set forth in this Prospectus under the captions "Summary",
"Risk Factors", "Use of Proceeds", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and "Business" contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which statements represent the
Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology, such as "may", "will",
"expect", "anticipate", "estimate", "believe", or "continue" or the negative
thereof or other variations thereof or comparable terminology.
The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, considerations described in connection with
specific forward looking statements, factors set forth in this Prospectus under
the caption "Risk Factors" and other cautionary elements specified in documents
incorporated by reference in this Prospectus.
54
<PAGE> 56
APPENDIX A
REGULATED STAGES OF U.S. DRUG DEVELOPMENT ROUTINELY
OUTSOURCED TO A CONTRACT RESEARCH ORGANIZATION
PRE-CLINICAL RESEARCH (1 to 3.5 years)
In vitro ("test tube") and animal studies to establish the relative
toxicity of the drug over a wide range of doses and to detect any potential to
cause birth defects or cancer. If results warrant continuing development of the
drug, the manufacturer will file for an IND (Investigational New Drug), with the
FDA for permission to begin testing in humans.
CLINICAL TRIALS(3.5 to 6 years)
-PHASE I (6 mos. to 1 year) Basic safety and pharmacology testing in 20 to
80 human subjects -- usually healthy volunteers -- includes pharmacokinetic and
pharmacodynamic studies to determine how the drug works, how it is affected by
other drugs, where it goes in the body, how long it remains active, and how it
is broken down and eliminated from the body.
-PHASE II (1 to 2 years) Basic efficacy (effectiveness) and dose-range
testing in 100 to 200 afflicted volunteers to help determine the best effective
dose, confirm that the drug works as expected, and provide additional safety
data.
-PHASE IIIA (2 to 3 years) Efficacy/safety studies in hundreds to thousands
of patients at many investigational sites (hospitals and clinics) -- can be
placebo-controlled trials, in which the new drug is compared with a "sugar
pill", or studies comparing the new drug with one or more drugs with established
safety and efficacy profiles in the same therapeutic category.
TREATMENT INVESTIGATIONAL NEW DRUG (May span late Phase II, Phase III, and FDA
review)
When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the company to make the new drug
available to a larger number of patients through the regulated mechanism of a
TIND (Treatment Investigational New Drug). Although less scientifically rigorous
than a controlled clinical trial, a TIND may enroll and collect a substantial
amount of data from tens of thousands of patients.
NDA PREPARATION AND SUBMISSION (As soon as possible after completion of Phase
III trials)
Upon completion of Phase III trials, the manufacturer assembles the
statistically analyzed data from all phases of development into a single large
document, the New Drug Application (NDA), which today comprises, on average,
roughly 100,000 pages.
-PHASE IIIB (1 to 2 years) Studies conducted after NDA submission but
before regulatory approval is issued, often an extension of Phase IIIa studies
with an even broader patient population.
FDA REVIEW AND APPROVAL (2.5 years)
Careful scrutiny of data from all phases of development (including a TIND)
to confirm that the company has complied with regulations and that the drug is
safe and effective for the specific use (or "indication") under study.
POST-MARKETING SURVEILLANCE AND PHASE IV STUDIES (For the life of the brand)
Federal regulation requires the company to collect and periodically report
to the FDA additional safety and efficacy data on the drug for as long as the
company markets the drug (post-marketing surveillance). If the drug is marketed
outside the United States, these reports must include data from all countries in
which the drug is sold. Additional studies (Phase IV) may be undertaken after
initial approval to find new uses for the drug, to test new dosage formulations,
or to confirm selected non-clinical benefits, e.g., increased cost-effectiveness
or improved quality of life.
A-1
<PAGE> 57
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 58
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> 59
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.
/s/ Ernst & Young LLP
January 29, 1997
Raleigh, North Carolina
F-2
<PAGE> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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. There were no
open foreign exchange contracts or options relating to service contracts at
December 31, 1996.
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,
Preferred Ordinary Shares (the "Preferred Shares"), loan notes and cash. In
exchange for its holdings in Innovex Holdings Limited, the 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. Pursuant to an
F-9
<PAGE> 67
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment agreement, Innovex also issued 28,533,345 additional preferred shares
and created and issued 11 million 7.5% preference shares (the "Preference
Shares") and approximately $10.7 million of loan stock. In connection with the
Preference 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>
<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>
F-10
<PAGE> 68
QUINTILES TRANSNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 L13.0 million
(approximately $21.8 million), with payment due in December 1999. As of December
31, 1996, the Company has committed to purchasing approximately L600,000
(approximately $852,000) under foreign exchange 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.
F-11
<PAGE> 69
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> 70
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
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 79
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 80
=========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 3
Incorporation of Certain Documents by
Reference............................. 3
Prospectus Summary...................... 4
Risk Factors............................ 8
Use of Proceeds......................... 12
Price Range of Common Stock and Dividend
Policy................................ 12
Capitalization.......................... 13
Selected Consolidated Financial Data.... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 24
Management.............................. 37
Principal and Selling Shareholders...... 41
Description of Capital Stock............ 45
Shares Eligible for Future Sale......... 49
Underwriting............................ 51
Validity of Shares...................... 53
Experts................................. 53
Forward Looking Statements.............. 54
Appendix A.............................. A-1
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
=========================================================
=========================================================
4,800,000 SHARES
QUINTILES TRANSNATIONAL CORP.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------
QUINTILES TRANSNATIONAL CORP. LOGO
------------------
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
=========================================================
